HNI Corp (HNI) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Hon Industries second quarter 2003 results conference call.

At this time all lines are in a listen only mode, later there will be an opportunity for questions.

Instructions will be given at that time.

If you should require assistance during the call, please press star, then zero, and as a reminder, this conference is being recorded.

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 second quarter 2003 results announced late yesterday.

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

If you've not received a copy of the release, please call 563-264-7043, and we will send one out to you.

Joining me on the line today from Hon Industries, it's 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 begin, 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 relying on them is subject to risks.

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 at 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 welcome.

My pleasure to have the opportunity today to tell you about our second quarter results.

As you know, the market and the economy continue to be difficult.

The office furniture industry obviously has not rebounded at this point, but we do see some stabilization occurring, particularly in the transactional and commercial type of business and Stan Askren will talk to you more about this in our outlook at the conclusion of my remarks.

We are pleased with our results in both of our core industries because we continue to gain share in both segments.

Both the office furniture as well as the Hearth products.

As far as office furniture is concerned as a percent of the BIFMA shipments, year to date through May were 14.8% this year versus 13.5% a year ago.

So, we are very pleased that we are able to continue to gain share, continue to maintain - what I would say, are good financial results.

Now what we would like to have of course, but still very sound financial results.

That comes in part, due to our increase in our gross profit.

We had another record quarter, on our gross profit percentage, and we are pleased with that, in fact year-to-date is a record as well.

A large part of that's due to our continued efforts and what we've talked to you about earlier in business simplification, 80/20 is part of that.

And our rapid continuous improvement programs, which we commonly refer to and all of our members use it as RCI.

As a result of that, it allowed us to close - announce the closing that two plants during that quarter.

We'll consolidate that production and to other existing plant.

And again that wouldn't be possible if we had not simplified the business as well as improved productivity, and freed our force base, etc., and rapid continuous improvement program, our RCI in other words.

So as a result, even after we've closed these plants, as well as the other plants that we have closed, our capacity will still be intact.

The one plant that we are already in the process of relocating its manufacturing process is in Milan, Tennessee, comes under all steel facility.

We are in union negotiations effective as of yesterday, with Hazleton, Pennsylvania, plan which is also an all steel location.

And that actually concludes the all steel restructuring plan.

For these restructuring our closing these plants, we've taken $4.4 m of pre-tax charges in the second quarter of '03.

Of that $1.6 m is an accelerated depreciation and that's in the cost of sales.

And there's $2.8 m with severance and other costs and that shown on a different line item on the P&L that was attached to the news release, that you received this morning.

We estimate that we'll have both of these facilities closed and production relocated by year-end and that the total cost will be in the order of $16 m to $18 m, and that we will have annualized ongoing reduced cost in the $13 m to $14 m area.

So we feel that, we're doing to right things for the long term maintaining capacity and all in our cost structure.

So we believe those will be good for our shareholders.

More specifically from term for the second quarter as you've seen our sales were up 1.9%, office furniture was basically flat and it was only up 0.3%, which has been good comparing to where the industry has been, and in fact where we've been over the last 2.5 years.

Parts (ph) is up 6.9%.

Our net income is basically flat at $20.2 m, same as the year ago in the second quarter.

EPS is up, however, due to our share repurchase program by 2.9% and therefore it moved from $0.34 a share a year ago to $0.35 a share this year, the analysts' consensus was $0.33 a share.

So, we beat the analysts' consensus even after taking the $4.4m pre-tax charge for closing the facilities.

Our gross profit was 36% versus 35.7% a year ago and included in this is the $1.6m that I referred to earlier as accelerated depreciation due to the shutdown.

That reduced our margins by four-tenths of a percentage point, in other words without it we would have been at 36.4% versus the 35.7%.

And again we are able to achieve these kinds of levels principally, not entirely but principally from our efforts in business simplification, our restructuring initiatives and obviously our continuation of our rapid continuous improvement program.

Our SG&A dollars increased 1.5% over $1.7m and that's what almost equally between our continued initiatives for long-term in brand building and our selling initiative, and our selling initiatives are our efforts to enter into some, new markets that still align with office furniture principally here and we are making good headway.

If you have any questions on those, you might direct them to Stan a little later as he finishes his outlook on - gives his business outlook.

As a percent of sales, our SG&A was 27.8% versus 27.9% a year ago.

Again I want to come back and just kind of go through the second quarter net pre-tax restructuring charges of $2.3m, of that severance was $2.5m, other costs was $0.3m, but this was offset by a reduction in the 2002 reserve of a little over $0.5m due to an existing lease that we are able to exit at more favorable terms than we had originally anticipated.

So, that kind of gives you the break down of our second quarter, office furniture represented 75% of our sales and 72% of the operating profits before unallocated corporate expense.

Let me move on and talk about year-to-date results.

Our sales are basically flat.

Office furniture is down slightly, approximately about 1% but as I said we were up slightly in the second quarter.

So, hopefully we've seen the bottoming out of office furniture.

Hearth was up 2.5%.

Our EPS year-to-date was $0.62 versus $0.61a year ago, but again as I discussed earlier due to the restructuring charges we had, we absorbed $0.04 per share during the quarter.

But then to give you the good comparison, a true comparison what the year ago, we had pre tax-restructuring charges of $3 m, or roughly $0.03 per share in that period, so that gives you apples-to-apples comparison.

On a year-to-date basis office furniture represents 75% of our sales and 76% of our operating profit, again before on an allocated corporate expense.

Cash flow improved from operations, on year-to-date were $54.5m versus $45.1m last year, this is primarily due to working capital improvements.

We are pleased, to state that our annualized inventory turns move from 17.8 turns a year ago to 21.4 this year, and I think those are excellent accomplishments in this down market.

Our accounts receivable days outstanding year ago, we were 38.9 days, this year we are 35.5.

Again, I think it's due to- these are the excellent results in a difficult market environment.

Our capital expenditures are 23.7 million this year versus 9.3 million last year on a year-to-date basis.

We did purchase leased Hearth plant for nearly $4m.

We are continually making improvements in our operations in part, through some IT improvements for roughly of $4m and the remainder of the $23.7m is primarily for new products, tuning (ph) equipment and some for general maintenance.

We retired some long-term debts actually occurred at the tail end of the first quarter of 5.6m which is an industrial development revenue bond.

And our depreciation and amortization is 33.7m, our stock repurchases on a year-to-date basis, we have repurchased 762,300 shares for approximately $21.5m.

Let me break down our two segments of our business; first the office furniture segment, let me just make a comment about what that the office furniture trade associations has said, that shipment to date over the five months are down 9% and orders were also down 9%.

As I said earlier, we are gaining share our sales were up slightly as I indicated earlier in the second quarter and year-to-date down approximately 1%.

So again, just to re-emphasize, that we are - we continue to gain share as we have, over the past several of years.

Operating profit as a percent of sales, decreased to 9% in this quarter versus 10.5% a year ago in the second quarter.

However in this quarter, we had charges related to the shutdown, which decreased our margins by 1.3 percentage points.

In other words, we would have been at 10.3% without those special charges versus 10.5%, and that difference is primarily due to the fact that we are spending more money and investing heavily, as I indicated earlier, in our brand building and selling initiatives.

We are pleased to announce that during the [NeoCon] Show, the Office Furniture Dealer Alliance association makes (ph) awards, and we won five of the eleven awards.

HON Company was the manufacture of the year;

Allsteel was the manufacturer of the year last year, so we feel very good that our distributor partners feel that strongly about, us taking care of them basically.

Also in office furniture, we introduced several new products, during this quarter, notably at the NeoCon show in Chicago.

The HON Company introduced its perpetual desking system and related products.

This is an exciting flexible product line, flexible in terms of offering to the end-user and his ability to be able to move it easily throughout the work environment, and it also won an Innovation award in the Builder magazine.

We introduced also to sell our conference furniture, some Nuance, this is the name of an executive seating line we introduced, we had another seating line called Unanimous, and we introduced a new Flex factor that received a great deal of attention.

At Allsteel we introduced training furniture called GetSet (ph) , not only is this an exciting new furniture, but has new innovative messages and introduction into the marketplace, similar to what we do with number 19 seating that continues to meet our expectations.

We have also introduced a new Taurus (ph) product line called 2.6.

This product will match up with the existing Taurus (ph) product, but it is a product that offers basically the same features at a lower price point.

Gunlocke or Wood our high-end introduced a new line of Casegoods called [Inaudible] , received a great deal of attention and it won a silver award for a seating line called [Inaudible] .

In the Hearth product segment, turning to it, now sales are up 6.9% in the second quarter, year-to-date we are up 2.5%.

We have had strong shipments in both our builder and our dealer channels, and we have had good growth in our product line extensions that we have reviewed with you in our pervious calls.

Operating profits in the quarter were up 19.7%, so we are very pleased to see the trends there, and on a year-to-date basis we are up 6.8%, so you can see we are getting good leverage.

For example, in a year-to-date our sales were up 2.5 and the other operating profits were 6.8, so that speaks well of what that organization has accomplished and we will continue to accomplish.

As you know, we have now launched our Eagan, Minnesota, it was a [Inaudible] of Minneapolis gallery, store - it's got a great acceptance.

We are very pleased.

This is the first of the stores that we have launched.

We are now in the process of our second store - a little different format, we have an A, B and C, different size formats, different focuses and that store is going up in Charleston, South Carolina.

So, we are pleased, excited about - this is a new venture for us, getting closer to the customers.

As you recall we entered into this gallery store concept in order to maximize our sales as well as our revenues by providing greater value to the end-users.

And now I am going to turn over to our new company president, Stan Askren.

He will give us the outlook for the year.

Well, as Jack indicated to you, the office market industry is still soft.

Business is predicting in the third quarter that the industry will be a minus 10.6% and is indicating for the year, they are anticipating that the industry will be down 8.5% for the year.

As we said earlier, we are seeing some stability though, in particular, in the commercial and transaction sides of the business.

We are seeing orders that are sort of solidify and stabilized.

The project side of the business is still challenged, although we have seen improvement there, it's still I think, more volatile and until the economy starts to show, I think and improve job recovery and also we see vacancy rates come down on commercial office space, that will continue, I think to be more of a challenging inside of our business than the others.

On the [Inaudible] side we are seeing continuously solid demand for residential construction.

[starts] are continuing to be up in our economy at near record levels.

If you look forward, at sort of, mortgage apps, but they are improving and so we believe as long as the interest rates are low and stable that we should continue to see some good performance out of that segment of the business.

Regardless of all that, we continue to be committed to out perform our industry, regardless of how they do.

And our objective, our plan is to keep charging on with the long-term sort of a value creation strategy that Jack has laid out for you in the past.

Around the whole concepts of building brands, understanding and responding to the end-users, improving our cost structure, improving our processes through business simplifications, RCI and then generally improving our capabilities and then [cultured] to keep this thing going for the long-term.

So, that concludes our formal portion of this presentation.

We'll be happy now to take any questions that you might have and Stan or I or Jerry will be delighted to respond to them so we'll turn it back to you.

Thank you, ladies and gentlemen if you would like to ask a question please press star then one on your touchtone phone.

You'll hear a tone indicating you've been placed in queue; you may remove yourself from queue at any time by pressing the pound key.

If you are using a speakerphone please pick up your handset before dialing.

Our first question comes from Margaret Whelan with UBS please go ahead.

Good morning it's actually [Susan] for Margaret.

Can you guys talk a little bit about, what kind of a pick up you're seeing, is it strong, what price points?

Well I think, Stan and I both allude to the fact that, where we are seeing from stabilization and when we say stabilization we are taking about in orders basically being flat a year ago and that has been primarily in the lower price points which is the transactional and commercial market.

Okay, and so there hasn't real - been any real change in the product mix or the kind of customers that you are seeing?

No, no not at all.

Okay, was there any impact from higher energy in raw material prices during the quarter?

No, nothing of any significance.

Okay, thank you.

Thank you.

Thank you, our next question comes from Budd Bugatch with Raymond James please go ahead.

Good morning.

Hi Budd.

If I heard you right Jack, and I think I did the same math I get about a $0.04 differential between what you reported to the operating number excluding the reversal plus and tax effecting the charges.

Yeah, that's correct Bud.

And do you tax effect in - Jerry at the same rate that the overall rate is or?

Yeah.

Okay.

Secondly you did talk about gross margin improvement, was there a difference in the gross margin improvement between Hearth and Office?

No, this is basically the same.

There wasn't anything significant in difference in terms of improvement.

Okay, and even when we do the reversal and I look at the operating margin of the office I came to 10.2% this quarter and if I look at last year second quarter I was also at about 10.2 may be a basis point or two differential in your number and my number.

Yeah.

When do we see some improvement in that - I am going to start seeing it, as much as - as early as the third quarter?

Probably closer to the fourth quarter again its really going to depend on our increased spending you know in our initiatives of brand billing and our selling initiatives.

Well look Jack, last years third quarter you were - you posted a 12.2% operating margin at that time and are we?

Well you know our third quarter is always a stronger quarter comfortable volume, but.

Right, it should be about 20% higher than the revenues in the quarter, right?

And typically last year?

I hope you are right.

Well last year it was about I guess about 11 or 12% higher?

Yeah, I mean, historically, I mean, for many, many years you know you will see you know enough up-tick in incoming over the second quarter resulting in third quarter volume increases, and so by leveraging we should, you know hopefully we'll bring more to the you know, to the bottom line.

So, Jack, you've seen the orders, how was that we've seen that traditional pattern or are we-?

Yes, we have seen that.

We've seen the initial, again because we got quick lead times.

We are down into two to three weeks basically timeframe.

So, you know, we have seen the seasonal, historical pick-up and we anticipate that it will continue.

That, we've got yet to prove it to ourselves.

So, if we look at that then traditionally we should think we are between a 11% and 20% sequential gain?

I Apologize for that. 11% to 20% sequential gain in revenues in Q3 over Q2 in office.

That's correct

Okay, and Q2 typically we would expect to see some gain in Hearth products over the prior two quarters.

Q3 is usually relatively flattish.

That's correct.

All right.

So, that gives us a feeling of where we can get some [Inaudible] .

I am sorry that you had to try and draw that out of you.

We just need some help as to know whether the landscape has changed or landscape is the same.

And steel placing, as you've kind of [Inaudible] all that.

We don't have that issue it faces.

So, are we getting any benefit of that right now?

No, it's basically same, where we've been Budd.

All right.

Good work on the quarter.

Thank you.

Thanks Budd.

Thank you and if there are any further questions or comments, please press star, then one.

We do have a question from Craig Kennison with Robert W. Baird.

Please go ahead.

Good morning everyone.

Good morning Craig.

A quick question on the restructuring charges, how will that be allocated over the next couple of quarters?

Craig, looking at, with the remaining part, will be about two thirds of what we did for third quarter and the other third we will hit the fourth quarter.

In terms of cost.

Yeah, okay, that's helpful.

And Stan you were going to mention what you were doing on the brand side to establish the Hon brand beyond where it is today?

Yes, first, obviously, more than the Hon brand it's basically all of our brands in the Office/Furniture side as well as in the Hearth side and we have of initiatives going on and they are around selling models, new selling models, we were after a different segments of the market.

We still would classify them as within our current domain, but we've placed additional emphasis on government for instance and additional emphasis on different segments.

We've increased our selling sales force in some of our businesses and we have increased our selling resources in the way of show rooms on companies, open up a couple of new show rooms.

Jack alluded to the whole [Inaudible] store sort of research and development experiment we have going on and we've invested more in sort of our overall brand building as far as how we present ourselves to the market in the way of literature and it's those sort of things, kind of covering the broad wider fronts.

Okay, thanks.

And with respect to cash it continues to build, can you just comment on your plans for that and where your current share re-purchase authorization is and dividends in acquisitions as well?

Thanks.

Well, obviously cash is king; we are pleased to have the cash.

We obviously have cash to carry out acquisitions.

We continually look for good acquisitions.

We don't have anything to announce at this time, but we are continually on the search at both of our core businesses and as far as the share re-purchased, we continue to make purchases as we deem it's appropriate to create long term shareholder value, we still have roughly 40 million or maybe a little more of the board authorization to carry that out, so hopefully that's answered your questions.

On the dividends' side, any interest in pumping that?

That's a Board of Directors discussion and question, we just announced an increase effective February that gets you reviewed at each Board meeting.

I personally would think that we would have some guidelines that we honor and I suspect that the board will stay within those guidelines.

Great, thanks a lot.

Thanks Craig.

Thank you.

And we have no further questions at this time.

Please go ahead with your closing remarks.

Well again we’d just like to thank you for joining us this morning and hopefully the dialogue that we have had has been helpful to you, I know it has been to us and that, we were disappointed on one hand that the economy is still, particularly in the office furniture industry, has not rebounded but we're, on the other hand we are very pleased to see how well we've done in terms of profitability and at the same time gaining market share while carrying out investments for the long term.

All of which we believe will lead for long-term shareholder value creation.

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

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