HNI Corp (HNI) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thanks for standing by, and welcome to the Hon Industries’ first quarter 2003 results.

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

Later, we will conduct a question-and-answer session, and instructions will be given at that time.

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

As a reminder, this conference is being recorded.

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

Please go ahead.

Good morning, and thank you for joining us today for the HON Industries’ conference call to discuss first quarter 2003 results announced earlier today.

I also want to apologize for the error in the dial-in number, and, hopefully, all were able to be patched in without [inaudible].

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

If you have not received a copy of the release, please call 563-364-7043, and we will send one out [inaudible].

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

Jack will begin with brief remarks and then 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-looking 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’m going to start today and give you some overview and then more details about the total corporate results and then break it down by office furniture and hard products, and then I’ll conclude with my outlook.

Let me start by saying the market is still very tough out there.

We still have the global [one][ph] economic uncertainty and the geopolitical concerns that are affecting, you know, our general economy and certainly – and most importantly, our office furniture industry.

However, having said that, we continue with strong financial results, and we continue to gain market share, in fact, in both of our core business segments, both the office furniture as well as our hearth products.

Office furniture as a percent of BIFMA shipments through February -- and we only have through February of this year for the industry.

We do not have March yet – we were at 14.3 percent of those BIFMA shipments this quarter ’03 versus 13.3 percent last year.

So, clearly, one percentage point gain of market share, and we’re pleased to see that occur.

We believe, as I said earlier, although we don’t have the industry data at this point, that we continue to gain share in the hearth products segment as well.

New products continue to be a major thrust of the corporation.

We introduced several new products during the quarter.

We have a new panel system for Allsteel called the 2.6 System.

We’re pleased with this launch, and early indications are that it’s going to be another successful new product for us.

We also introduced some learning furniture.

We call it Get Set.

It’s under the Allsteel brand.

And, again, early indications are positive.

We introduced a modular desk system called Cadence at Allsteel.

So, again, early on, that looks very positive.

On the wood side, we have new conference furniture under the Park Avenue brand, and that sold well.

It’s actually under the Park Avenue name.

It’s sold through the HON brand, both brand new products for us.

We have a very high-end nesting furniture, suite furniture, called [Kensington][ph], that we have just launched under the Gunlocke brand.

In the fireplace side, we introduced several new products, many of which won awards at the two recent shows held during this first quarter.

I’m also happy to report that we had our highest gross profit percentage since the early 1980s.

We have continued to be able to reduce our cost structure and contain costs, and with our new product introductions that have given us higher margins, we’ve increased our overall margins again, and we’re very pleased to see that happening in a very difficult market.

As far as growth is concerned, obviously, you’ve seen that we haven’t had any growth, but we are expanding into new markets, new market coverage.

We have more emphasis now placed on GSA.

We’re entering a larger degree into hospitality and education, and as we previously reported, we have now opened – had the official opening of our Fireside Hearth and Home, our new store format, in a suburb of Minneapolis, in Eagan, Minnesota, and we just had that in the last couple of weeks.

Early indications have been very successful launch, and we’re pleased with that endeavor.

We also announced our new President, who’s on the phone today, Stan Askren.

We’re pleased to have Stan moving in as President of HON Industries.

Stan’s been with us 12 years and has been part of our ongoing success in planning programs that our board of directors have undertaken a number of years ago, so we’re pleased to have Stan in his position.

His accountability is such that he has all operating units reporting to him directly, and he, in turn, reports to me.

Let me go back now and recap our first-quarter results.

As you have seen from the news release this morning, our sales were down 1.8 percent – actually, were down 1.8 in both of our core business segments, office furniture as well as hearth.

Our net income was flat year over year in the first quarter at $15.9m.

So with sales down, net income flat, obviously our percentages have improved.

EPS at 27 cents a share was flat with the prior year, and just for your information, the analysts’ range was 25 to 30 cents a share for this first quarter.

Gross profit, pleased to say, was 35.5 percent versus 35 percent last year, and we received this improvement from our restructuring initiatives that we had previously discussed with you, our rapid continuous improvement where all of our members – member owners are involved in continuous improvement on a daily basis, and obviously the hard work of our members.

Our SG&A dollars were flat with the prior year.

However, as a percent of sales, they were 29.2 percent versus 28.6 a year ago, and this is obviously due to the lower sales volume.

However, I would call your attention to some extraordinary items that occurred in both of the first quarters this year as well as last year.

This year, in our SG&A expense we had a total of $4m of charges.

One was due to increased freight surcharges, which is primarily fuel costs.

We had a reserve for a preferential payment claim from a customer, and we had an additional impairment charge on a facility that was closed in 2001.

So that all totaled to $4m.

Last year during the same quarter, first quarter of 2002, we had the $3.9m of cost due to the Jackson, Tennessee plant shutdown.

So you can see that the charges were basically offset – extraordinary charges were offset quarter over quarter.

Office furniture represented 75 percent of our sales and 81 percent of all operating profit before unallocated corporate expense.

Cash flow from operations totaled $7.9m.

We did call your attention in the news release, and I’ll talk just a moment about it here, that typically our first quarter we have heavier cash outflows for two primary reasons.

One is our annual marketing program payments to our customers; and the second one is the funding of our profit-sharing retirement plan.

Capital expenditures totaled $14.5m this year versus $5.3m a year ago in the quarter.

The large amounts that occurred here one week we purchased a leased plan in Lake City, Minnesota.

That was for a total of $3.6m.

We also had some IT improvements.

New products, obviously, continues to be a major for us, so in the new products there is tooling and equipment, and then there were minor but several productivity improvements that come about as a result of our rapid continuous improvement activities program.

Depreciation and amortization was $16.2m.

Our long-term debt decreased due to the fact that we retired $5.6b of [IDRV][ph] loan that we had.

We’re pleased to see our inventory turns on an annualized basis continue to improve.

They improved from 20.1 turns a year ago to 21.7 this year.

On the stock side, we repurchased 406,000 shares of stock during the quarter for $10.8m.

We have $52m remaining of the board-authorized amount for stock repurchases.

Also during the quarter, we increased our dividend by 4 percent to 13 cents a quarter.

Now, I’ll move on to the segment reporting.

Office furniture segment – as I indicated earlier, sales were down 1.8 percent but operating profit was up 3.9 percent.

For your information, for BIFMA, which is our freight association on office furniture, for the first two months, shipments were down 8 percent, so you can see that where we’re only down 1.8 that we did, in fact, gain the market share, as I indicated to you earlier, and orders were down 11 percent.

And I’ll talk in the outlook about how we see orders for the balance of the year at the industry level.

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

That was primarily due to discontinued products that occurred late last year, and obviously, we do not have those this year.

And so that skews the comparison.

We sold Cleveland, Ohio distribution operation, so that reduced our sales during this first quarter.

And we had a backlog buildup due to weather.

Now, those sales will be picked up in the second quarter.

Operating profit was down 10.6 percent, but I want to call your attention to the fact that in the first quarter of this year, we had two major [inaudible].

The largest trade shows occurred in the quarter, where they normally occur in the second, so we incurred about a $1.2m cost in this quarter that normally we would’ve had in the second quarter.

And if you made an apples-to-apples comparison, our profits would’ve been slightly higher as a percent of sales by adjustment for the show expense.

Moving on to our outlook, I think we’re going to continue to see a tough market.

I think, as I said earlier, the global economy and the geopolitical uncertainty in the world is still with us.

I don’t see anything that’s going to occur to a major extent, you know, to have major turnarounds, although I would say to you that during the quarter we – our orders – incoming orders started picking up a little bit in March and then continued somewhat into April, but, you know, a few weeks don’t make the year or a quarter, but at least I feel good to see, you know, some turnaround.

Office furniture industry is still soft.

BIFMA has put out a forecast that they hired to be done by an outside firm that’s predicting that shipments will be down 11 percent the second quarter, down to 8 percent for the year.

As you recall, their prior forecast, I think, was up 5 percent.

I told you in my last call that I didn’t feel that that was realistic.

I hope these numbers are somewhat more realistic, although disappointing, but I don’t think we’re going to see any turnaround perhaps until maybe later in the year or maybe even early in 2004.

But having said that, I think we’ll continue to outperform the industry as we have for the last several quarters, and I don’t think there’s any doubt about that.

Our plans are to continue to increase long-term shareholder value, and as I indicated to you in our last conference call and we have in our annual report, we said there are four major initiatives there.

One is to continue to aggressively build our brands, get our brands better understood and in the minds of our customers as well as the end-users.

We need to understand – the second one is to better understand and respond to the end-users, meet their needs every day, and we believe we’re doing well, but we need to continue to improve.

That’s one of the reasons we’re obviously gaining share.

We need to continue to streamline our processes and operations, you know, through our rapid continuous improvement and some new initiatives that we have in procurement.

And obviously continue to reduce our cost structure, while at the same time, to grow our business in markets that we cover, as I indicated earlier in my opening comments.

So with those few comments, I’ll be happy to sign off and take any questions you have.

But before I do that, I’d like to ask Stan Askren, who’s on the line – he’s not in our office today.

He’s out traveling with customers and visiting our operations.

Stan, would you like to say a few words?

Yes, Jack, I just want to express how pleased I am to have the honor and privilege to help lead this organization.

It’s a strong company with a strong management team and a values-based culture that is tough to beat.

And I think Jack has done a great job over the last 12 years of putting our organization on a solid foundation for long-term success, and I’m just looking forward to continuing that same strong record of success into the future.

Thank you, Stan.

And now we’d be happy to take any questions that you might have.

[Caller instructions.]

And we do have a question from [Dennis Blyly][ph] with [Martin Capital][ph].

Please go ahead.

Good morning.

It sounded like you were going after some of the new markets, some of the newer markets, with internally launched products versus acquisitions.

I was wondering what the acquisition environment was like and whether prices had become more realistic?

Dennis, thanks for the question.

You know, obviously, at this point we are continuing to pursue acquisitions.

I have nothing to report at this time.

We continue to look for new opportunities through acquisitions, and where we’re not able to come to financial arrangements that are attractive us and our shareholders, then we’ll look at launching products internally.

But at this point, you know, we are active, but as far as pricing, there may be some moderation, but I think, you know, there’s still great concerns out there based on the economy and maybe some overpricing for some of those.

But, yes, we’re still active.

Okay, thanks.

[Caller instructions.]

And we do have a [Craig Kenneson][ph] with Robert W. Baird.

Please go ahead.

Hi, thanks a lot, and nice execution in a tough market.

Maybe you can start just at a high level and explain again what the key is to your market share gain.

Is it price?

Is it the value that the customer’s getting?

Is it the channels you’re operating in?

Is it some form of execution?

Maybe you can just add some color on that.

Craig, it’s about all of those things.

I think it starts, number one, with the products that we offer.

You know, we certainly strive to offer greater value to the end-user than competition.

The second point is the channels that we serve, how we get to those customers.

You know, we have split in focus in such a manner that, you know, we’re able to go directly at those individual customer segments, not only in the total industry segments but within those, to understand the customers and what their needs are and respond to it.

And then I think it’s execution.

I think one of the things that we’re very good at, we believe, is what we call our “rear wheel of our bicycle,” which is really our ability to perform from the operations side, which includes the complete and on time, the quality, the logistics, deliver when we say we’re going to deliver it.

All of those metrics we track, and our trend lines have been very, very good improving, and I think all of those add to our ability to have greater sales and, therefore, gain share.

Great.

Just a couple of quicker questions.

With respect to the preferential payment, could you give us [inaudible] on what that actually is and whether any of those--?

Number one, it’s not reoccurring.

And, no, I really should not be talking about any our customers.

But just in general without mentioning the customers’ name, what is the preferential payment?

Hey, Craig, this is Jerry.

Thanks.

Craig, it deals with a bankruptcy of a couple years ago, and the statute of limitations came up whereby what they were doing they had to do within two years.

They have done that, and basically we’ve evaluated the claim that – in the early stages of it, and we’ve set up a reserve up [so we can see] what our exposure is.

That, at this point, is really all it is.

It’s just a preferential [inaudible] payment.

It’s just, you know, the previous 90 days for the payment there.

Okay.

And then so none of the $4m that we saw this quarter should appear in the subsequent quarters?

Well, the only thing that could would be the freight charges.

Freight charges.

Because that’s really going to depend on fuel.

Right.

And how much of the $4m was freight?

About $800,000.

Okay, that’s helpful.

And what happened there is last year the surcharges in the first quarter were about running one cent, and right now, they’re running about nine cents.

So I mean they’re fairly high right now.

We’ve already actually seen them come down a little bit in April.

They’ve been down.

But that isn’t one that could [refer on us][ph].

Sure.

And the how much revenue was lost in association with the pruning that you undertook in the hearth business?

On an annual basis, about $11m.

In this quarter?

I don’t have that in front of me.

[Inaudible].

It’s probably about a fourth of that.

It’s probably [around] $3m.

And at what point do we get beyond the pruning and we have sort of apples-to-apples comparison?

That’s next quarter?

Next quarter.

Okay.

And then can you help us with corporate and other expense?

That tends to be a fairly volatile line, and maybe you could just tell me what’s involved in that line and what we should consider going forward for that number?

Is there a particular line item that you’re looking at?

The corporate and other expense.

This one I don’t think really changed much at all this quarter.

We went from $5.9m to $6.5m.

You know, that’s probably fairly representative --

Okay.

Yeah, what you’ll see is – [op ex][ph] $6m range.

Okay, thanks.

I had a higher run rate and—

Okay.

And just a couple other thoughts here.

Just maybe give us an idea of what you’re planning with respect to some of these new product initiatives in the hearth business.

And exactly – I understand there’s some seasonality impact to undertaking some of these new businesses, but what do you feel is your core competency that allows you to pursue, let’s say, the central vacuum and the outside grill market?

Well, first of all, in our hearth business, we’ve been – a really concentration on innovation, providing – thereby providing products that have feature, appearance, books that clearly are more appealing to the end consumer, and at the same time, reducing our cost structure.

So we believe that because about 70 percent of our sales are to new construction, we believe that gives us an opportunity to leverage our selling process and our relationships with developers to install products in new home construction that will be beneficial in the terms of quality, you know, living quality, mainly air quality, you know, in their homes.

And so that was one initiative that we undertook, and that underscored not only the central vac but also the heat recovery system and other products that will be coming in the future.

On the other side, in the retail side, we’re able to leverage our contacts with end-users and our brands to offer an outdoor living environment, and that’s where the outdoor fireplace and other products fit.

And so we’ve leveraged the Heatilater brand and the Heat-n-Glo brands in attacking these two various new market segments for us.

Does the outside grill market – does that opportunity for you relate at all to what you’re doing on the retail side with the Fireside Hearth and Home concept?

No, obviously, they’ll be selling those products, but it’s more than just, you know, a grill outside.

I mean, number one, this is a large cooking system, so it isn’t just a barbecue grill.

But beyond that, it involves an outdoor fireplace and other accessories to have a living room outdoors, if you will.

I guess I’m wondering to what extent does the success of the retail strategy bear on the success of the product line?

In other words, if the retail strategy works great, then that product strategy would work well.

If the retail strategy didn’t work out—

Oh, it will go well beyond just our own retail.

Okay.

It will go into, you know, our other distributors that are in the retail.

And then, finally, if you could just get into the costs related to this particular pilot program and if it were successful, maybe outline how you might expand that and what the costs might be associated with that?

Thanks.

Craig, let me say that in fact the plans that we have are to – we’ve launched this one pilot program --

Right.

-- pilot store, and with that, we incurred the cost of that particular store, but also there was cost that will be leveraged across other type of operations that will go on to the Fireside Hearth and Home store outlet.

We will be evaluating various models.

We have different sized stores.

We have basically an A-B-C-type concept that we’ll be evaluating.

Each of those will have different cost parameters, so it’s pretty hard.

You know, basically this first operation is an A-type store, and probably in terms of capital and so forth, we have probably about $2m just for that store.

But there were other expenses that we incurred for that store, probably around $1m that will be leveraged into other stores, retail operations, as we move forward.

But right now, we just have the one store.

We have on the planning stage several other locations, but we’re not ready to announce any of those at this time.

And I know I said I was done, but one more follow-up if I could.

You know, you’ve outlined BIFMA’s numbers for Q2 and ’03 being down significantly, almost double digit.

Can you just give us a sense – I know you expect to gain share, but there’s a pretty big range that we’re left with as to what your expectations are, at least for the subsequent quarter?

No, I – you know, we don’t do that.

We don’t give any outlook in that regard.

We just know that we’ll outperform, you know, the industry as we have in the past, and so we don’t give any forward statements regarding the next quarters or for the full year.

Okay, thanks.

And congratulations to you, Stan.

Thank you.

[Caller instructions.]

And we do have a question from Margaret Whelan with UBS Warburg.

Please go ahead.

Good morning, folks.

Good morning, Margaret.

Congratulations.

Great quarter in a very [inaudible].

And I wonder, would you talk about a couple of things?

First of all, just – you’ve done such a good job of managing the gross margin.

Can you explain to us not just on the manufacturing side what you’ve been doing but what you’re seeing on the cost side, everything from energy to plastics to steel and so on and what the trends are at the moment?

Well, let me take [inaudible].

Steel, obviously, as you mentioned, is one.

We incurred costs during the quarter of probably in the range of roughly $4m of increases during that quarter.

Those are going to stay with us probably due to second quarter, and as you know, the tariff starts coming down later in the year, so I would think that we might see some relaxing of pricing, maybe some price reductions later in the year, but it’s really too early to tell at this point.

On the fuel surcharge as Jerry talked about earlier, you know, we’re seeing it at the local gas pumps now prices coming down, but that will – you know, we’ve had a significant penalty for costs incurred, if you will, during this first quarter, and that will vary all over the map.

Beyond that, there aren’t any major increases.

You know, our procurement people continue to work diligently with our suppliers.

In fact, we use rapid continuous improvement with our suppliers and even with our larger customers as well to leverage how you take waste out, so I don’t think there’ll be any – I mean plastics are always a concern as oil prices increase, but I think it’s been temporary.

I think what occurs in Iraq here keeping them onstream online, all of those have major impacts, and I think that’s why you’ve seen in the last week or so some reductions in fuel prices.

And I think on the plastics side, I think we’ll be able to hold our own for the balance of this year.

Okay.

And what about any of the components that you’re bringing in from Asia?

Are you seeing any delays there or any higher shipping rates?

No, not really.

No, we’ve not seen anything noticeable.

You know, obviously earlier, we had the strike on the West Coast, but that didn’t really have any major impact on us.

It was getting close to having some significant impact but really, you know, we had foreseen because obviously it had been announced that it looked like there would be work stoppages by the dockers, and we just increased some inventory at that time.

So, no, we have not seen any major issues at this point.

Okay.

Thanks very much.

Thanks, Margaret.

And there are no further questions at this time.

Well, I would just like to conclude by saying thank you for joining us this morning.

We’re very pleased with our financial results in spite of a tough economy.

We’re obviously anxious to see the rebound, and we know that it will be there.

We know we’re in two good long-term growth core businesses, and so we feel very good about the future, and we’re pleased with our current operating results.

So thank you very much.

Ladies and gentlemen, this conference will be available for replay after 1:30 today and run through Tuesday, April 29 at 11:59 PM.

You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 680242.

International participants dial 320-365-3844.

Those numbers again are 1-800-475-6701 and 320-365-3844, access code 680242.

That does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.