HNI Corp (HNI) 2003 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the HON Industries Third Quarter Results Conference Call.

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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As a reminder this conference is being recorded.

I would now like to turn the conference over to your 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 third quarter 2003 results announced late yesterday.

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

If you have not received the 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, is Jerry Dittmer Vice President and Chief Financial Officer;

Stan Askren, President, and Jack Michaels Chairman and CEO.

Jack and Stan will begin with brief remarks and then open the call up 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 obligations 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.

It's a pleasure to have you all on this call with us today.

I would like to start my remarks by saying we are very pleased with our third quarter financial performance.

We are beginning to see our corporate profitability here in North America and business capital spending to show positive signs.

We think that will be good moving forward.

Office furniture orders have stabilized, but I would say to you that there is certainly no significant increase at all that we have seen yet in the marketplace.

Our Hearth segment, our sales looks strong.

We're very pleased to see that [clearly], this is our most important part of the year, because there is seasonality to that business, and above everything else we continue to gain share on both segments.

As you look at the office furniture and look at the percent of the industry shipments as reported by BIFMA year-to-date through August, we've actually increased our share from 13.8% last year to 15.2% this year.

So we are pleased with those results.

On the Hearth product side again this is latest available data from the trade association which unfortunately is back to the second quarter this year, but our share increased from 30.9% to 33.4% for shipments.

So, again very pleased with gaining marketshare, so, we believe we are taking good care of our customers.

I will caution you that the third quarter was a 14 week period rather than normal 13 week period due to the- - this year will be 53 week year versus 52 on a normal basis obviously.

And this impacts our, you know, volume by approximately 8%.

We continued to increase our gross profit which we are very pleased with and that's primarily due to our continual efforts to simplify business and our RCI or Rapid Continuous Improvement initiatives.

Keep in mind we started these in 1992, I get a lot of questions asked when will they be finished, they will never be finished.

There is always opportunity to eliminate waste, and that's primarily what happens in our RCI programs.

And plus, you know, we continue with our plant consolidations and we will talk further about that as it relates in our third quarter results.

All of this is only possible due to our member owners and we are very thankful that they are very much in tune with our business, they work very hard, they are dedicated, and they are really the ones who get these strong financial performance results.

Let me move then over to our third quarter results.

As you have seen from the new release that our sales were up 12.1%, again I want to draw your attention that approximately 8% is due to the additional week during this third quarter.

Office furniture sales are up 9.8% again if you took out the 8% you could see they are up roughly 1.8% year-over-year.

Again, back to my earlier comment that we see some stabilizing occurring but we don’t see any significant increases at this point.

Hearth products are strong, as I said earlier, strong performance.

We are up 19.6%, again it has the additional week in it.

Net income is up 26.7% to $34.4m compared to $27.2m in the third quarter of last year.

So, obviously we are leveraging well to the bottom-line.

So all those things that we have talked to you about in the past, from business simplification, Rapid Continuous Improvement, and plant consolidations, obviously has -- you see that showing up in our net income.

EPS was up 28.3%, 59 cents compared to 46 cents and then the 59 cents includes $9m or approximately a .1 percent per share for plant consolidation expenses.

Gross profit for the quarter was 36.7% versus 35.9% in the third quarter a year ago.

Again due to the plant -- this also includes $5.1m due to accelerated depreciation as a result of the plant consolidation, and that reduced our margins by approximately 1 percentage point.

Again, business simplification, rapid continuous improvement, restructuring initiative, and our positive hearth impact, as I indicated earlier all of these led to outstanding results in the third quarter.

Our SG&A dollars increased to $131.4m compared to $117.3m in the prior year.

However, let me explain to you where that increase comes from.

The third quarter this year, again due to restructuring charges had cost to good of $3.9m, $700,000 of that was for severance and $3.2m of it was for facility exit production and relocation and other expenses.

If you exclude the restructuring, our SG&A is up 8.7% which again is mainly due to the extra week that I referred to earlier, okay.

Office furniture was 76% of sales of our total sale that represented 72% of our operating profit before unallocated corporate expense.

Again, if we exclude the $9m that I outlined to you previously in our shutdown cost, which was all in our office furniture's segment.

The 72% would move up to 76% of operating profit, so in line with our sales.

So in order words, the easy way to look at it is our office furniture and our hearth product are -- you know, have basically the same profitability returns to us as a percentage.

Let me move on to year-to-date-results.

Sales were up 4.3%.

Office furniture was up 3.1.

Hearth was up 8.4%, again it has one extra week in it in these results.

EPS is $1.21 versus a $1.07 in 2002, but included again in the '03 net pre-tax is a restructuring charges and accelerated depreciation of $4.8m or 14 cents per share.

Included in '02, as we have a, you know, apples-to-apples comparison, net pretax restructuring charges were in that quarter as well of $3m or 3 cents per share.

Again, year-to-date office furniture is 75% of our sales, 74% of the operating profit before unallocated corporate expense, again if you exclude the restructuring cost it would be right at 75%, okay, on the profit side.

Cash flow from operations on year-to-date is $94.7m versus $103.2m last year.

We are very pleased with our inventory turns on an annualized basis, we had moved from 19.2 turns a year ago in the third quarter up to 24.5 turns.

So we continue to manage this component extremely well and continue to see good improvement.

Our accounts receivable days outstanding had dropped from 37.8 days to 36.6 days, again due to you know our members managing well with our customers.

Excess cash invested in the short-term investments during the quarter and you have seen that in the balance sheet that we forward to you in the press release.

Our capital expenditures on a year-to-date basis have been a little over $32m versus $16.8m last year.

There is a relatively large extraordinary items or I wouldn’t say extraordinary, in other words, they don’t happen every year.

In that sense we did purchase the leased hearth plant in Lake City, Minnesota for $3.6m this year and we had significant IT improvements that were roughly $5m.

And the balance of our capital expenditures, obviously are in for new products and that is principally for tooling and equipment.

Our long-term debt decreased to $2.7m, and has a retirement of $5.6m of IDRV bond that we had, so you can see we have basically no debt.

Depreciation and amortization is $56.4m and year-to-date we have repurchased 762,300 shares for $21.5m and none of those shares were purchased in the third quarter.

Let me turn to the office furniture overview and then I will move on to Hearth and then Stan Askren will talk about the outlook.

BIFMA shipments are down 7% for the first 8 months and we don’t have the 9 months yet and orders are down 5%, so it's just as a reference shipping and BIFMA [inaudible] is our industry reporting and trade association.

Sales of office furniture in the third quarter, as I said earlier, is up 9.8% and year-to-date were up 3% again mainly due to the extra week on a year-to-date basis and as I said it was 8% of the 9.8 roughly in that third quarter was due to the extra week.

Operating profit as a percent of sales decreased to 12% from 12.2% in the third quarter of '02; however, in the third quarter again we had the charges related to the plant consolidation that decreased our margins by 2.3 percentage points.

So, on an apple-to-apple basis our operating profit would have been up.

Again, keep in mind that our plant consolidation and all of our other initiatives are to create long-term shareholder value, so we believe we are doing the right things and we continued, obviously, to focus on new products and work place solutions for our end users.

Excuse me, on the Hearth product side; sales were up 19.6% in the third quarter or 8.4 on a year-to-date basis.

We have a very strong emphasis on aggressive profitable growth through I would say more focused on our selling channels by our own sales force and we have seen that paying us, you know, very positive results.

We have also strengthened our alliance with our key distributors and our dealers and obviously that's lead to our growth and the market share gain and we continue to be focused on new product introductions with some new innovated technologies that will be introduced in the future in the marketplace.

Operating profit as a percent of sales was 14.3% versus 11.5% in the third quarter a year ago.

So, we continue to leverage our fixed costs, you know, obviously in part due to our higher volumes and we are increasing sales through our own distribution.

As you know, we own some of our own distribution, which creates greater profit margins for this segment of our business.

Now, I am going to turn it over to Stan for the outlook and then following that we will take any questions that you might have.

Stan.

Our outlook for the fourth quarter is basically a continuation of what you have seen in the third quarter.

We did have, as Jack indicated very nice performance and as we've covered several times here partly due to this extra week in the quarter.

But I will remind you as well that the third quarter is typically the strongest for the Hon office furniture business due to seasonality and the customer and type of requirements.

The fourth quarter office furniture is still predicted to be soft by Global Insight, which is the BIFMA forecasting consulting group.

They are predicting shipments to be down minus 2.9% in the fourth quarter and they have recently revised their forecast for '04 saying that shipments are going to be up 2.4 and that's a significant change of where they were at.

We do expect for Hearth to continue their strong order cycle here, their strong order performance, and as long as we continue to see good interest rates and solid demand for new construction, we should expect to see them do well.

We indicated to you that pricing pressure is, especially in the contract side of our business is significant and we expect that to continue through this period.

We will remind you again that the expectation for fourth quarter '03 is that there are less working days.

There are two less working days compared to fourth quarter of last year due to where the holiday falls on our fiscal calendar and as Jack has indicated there are 7 less working days compared to third quarter '03, the quarter that we just completed.

And so, you know, in summary stable performance in the office furniture side, good performance in the Hearth expected.

Then I will conclude here with our strategy is to continue the strategy we had in place here for some time, which is to invest for the future, pursue our 6 key strategic initiatives, which are build brand power, understand and respond to end users, implement our profit and aggressive growth strategies those are primarily around our core businesses, respond to global competition, continue emphasis on RCI and procurement initiatives which have generated some tremendous cost savings for us over the years, and finally and probably the most important is to continue to focus and enhance the culture and values in this whole member owner type of advantage that we have here at Hon Industries.

So with that that concludes the formal portion of our presentation and we'd like to open it up to questions from the audience.

Thank you.

Ladies and gentlemen if you wish to ask a question please press "*" then "1" on your touch-tone phone.

You will hear a tone indicating you've been place in queue.

You may remove yourself from queue at any time by pressing the "#" key.

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Once again if you have a question, please press "*" "1" at this time.

One moment please for our first question.

And our first question comes from line of Justin Mara from Lord Abbott.

Please go ahead

Good morning guys.

Good morning.

Just talking about your six initiatives one of the ones that of course has a lot of [plans] on the residential side is this whole issue of sourcing products to offshore.

To what extent have you guys seen that at all in your product line, particularly on the office side?

This is Stan Askren, we are seeing significant impact on the entry level price point product, primarily in our transactional commercial side of our business our retail side of the business.

Certainly as you move up the stream to the contract side there is less, we are -- have a significant focus both from a people resource sampling in the component area beginning to imports of finished goods sold under our brands and we are working hard at identifying qualifying good global sources to keep our cost competitive.

And what would you guess you know if you can a split of -- kind of contract business versus retail if you will.

Just meaning how much of your business do you think is open game to competition from sourcing at this point?

Well, I hesitate to guess at this point I think it's we are going to see significant competition through the whole chain as time goes on.

But right now it’s primarily focus on that retail entry level price points as I indicated.

Got it.

Okay.

And then, secondly on the margin side you did a good job of quantifying what that extra week meant to you on the sales side but on the profit side when you look at margins I presume you know just can't take 9% deduct to the operating profit growth because you probably would have gotten greater leverage on the profit side versus those sales.

Is that fair?

Well, you would see a little bit most of our systems, you know, most of those dollars are going to be payroll depreciation, those things are all done in weekly buckets.

Okay.

You'll see a little bit maybe like from an utility bill or something that is a monthly.

So, would you see some, yes you'd see a little bit of extra absorption, but for the most part most of our cost are captured on a weekly basis.

Alright, so you think that operating profits if you take out the restructuring is 14.3 and EBIT as was Hearth, do you think those were sustainable level margins on the current tone of business?

I think -- this is Jack -- I think in today's market they are, you know as Stan indicated, we continually have pricing pressures.

It is nothing new to us but where we are today, we believe that they are.

I would just like to add one other comment to what Stan said on the global competition, you know, you can see it as a threat, you have got to turn the threat into an opportunity and that’s exactly what we are doing, so -- and we have been doing it for the last 10 years.

We have been sourcing components.

As Stan indicated to you, we've moved to some finished goods particularly in the lower segment of our market, in other words, the transactional commercial segment.

So, I think it will be an opportunity for us as well.

So, I am not concerned.

Our margins are on those products, you know, are holding up quite well those would be [important].

Okay, and just lastly on that score, you know a lot has been made at also about you know what you guys have done and what Herman Miller has done and taken a number of plans out commensurate with the drop-off in demand on the office side.

Do you think at least in your case that you guys have gone the extra mile as well to take out additional capacity for what you guys see as either finished product or component sourcing opportunities coming offshore?

Or is it merely just plants coming out to match what demands has been doing?

No -- this is Jack again.

Joseph, I would say through our Rapid Continues Improvement efforts over the last 10 years as.

I said we started actually 11 years now, we started in ’92.

We’ve been able to free up floor space and [inaudible] just eliminating waste, getting the inventory out as you saw from our inventory turns.

So, we’ve been able to consolidate you know businesses plus we’ve been -- or our plans, -- plus we’ve done you know business simplification.

Really focused in on the 80/20 and as a result, I don’t believe that we have materially changed at all our going forward capacities.

Okay.

Great job, keep it up.

Thank you.

Once again ladies and gentlemen if you wish to ask a questions please press “*” “1” at this time.

And it looks like we have a question from the line Margaret Whelan from UBS.

Please go ahead.

Hi this is Susan actually for Margaret.

Can you guys comment a little bit about how October has trended so far?

Well it’ll -- it’s just a continuation.

I mean it’s pretty typical.

This is Jack, it's pretty typical of our October a year ago in terms of incoming orders.

You know I don’t think there is anything significant that’s currently, as Stan said, you know it’s pretty much as business as usual.

As he said in our Hearth business will be you know strong in the fourth quarter and our office furniture will show some slight declines compared to third quarter and that’s just -- that’s a seasonality to our business.

So I don’t -- there is nothing that we’ve seen that is alarming to us, alarming [debt].

We are seeing drop offs or a pleasant alarm that it’s picked up significantly.

It’s just hasn’t occurred.

Okay, so last year you saw that about a 4% decline sequentially and that’s about what we should be expecting for this quarter?

Yeah, you know keep in mind there are less days this quarter then there were a year ago.

As Stan indicated to you earlier, that we'll have two less working days compared to the fourth quarter a year ago and so I would say that based on what we know today you will see some drop off -- and I think your numbers are within a range.

Okay.

What about -- receivables were up 21% sequentially, can you tell us if there is any thing specific in that?

No, most of those are because our stronger sales are obviously later in the quarter, you just seeing those in September.

Okay.

And your CAPEX is up about two times what it was last year year-to-date, what kind of levels can we expect next year?

Hi, this is Jack.

I would say about the same level going forward, as you will see when we finish this year.

You know the fact is that we don’t need bricks and mortar, so it will be primarily for – there will be some replacement but primarily for new products.

Okay, thank You.

Thank you.

Our next question comes from the line of Craig Kennison from Robert W. Baird.

Please go ahead.

Good Morning.

Hi.

Hi Craig.

Congratulations on the strong performance.

Could you provide us an update on your hearth and home concepts?

Well, we continue to evaluate that research and development experiment, right now I would tell you that the store concept is exceeding our expectations.

We are right now on what is fondly called the burn season in the hearth business which is when the really heavy activity is taking place and so we want to get through this period to really make sure that we have a good handle on the capability and that we have learned our lesson so that we can expand that concept.

But we do anticipate continuing to roll that concept out to the next phase for additional evaluation.

Thanks, and corporate and other expense picked up again in the third quarter, I assume that is seasonality, but what should we assume as a run rate going forward?

It would be pretty well where it is at now, Craig.

Is there any seasonality we should anticipate, or is this level -- a good level to begin with?

It’s a good level.

Okay.

Cash is up again, you have more cash than you probably need.

What are your plans from an acquisition standpoint or a share repurchase perspective?

This is Jack speaking.

Obviously, we continue to evaluate Board of Directors and we have investigated some acquisitions, so obviously there is nothing to report at this time.

So that’s ongoing and we review that with our Board at each Board meeting, so I have nothing to report at this time.

Any reason why your share repurchase activity might have slowed down recently is it related to the price of the stock or more keeping your powder dry for acquisition?

Well -- I would – a little bit of both no doubt.

You know, obviously we are always opportunistic in terms of buying back shares when we think it’s going to create long-term shareholder value, but that’s only one element, obviously improving our business, expanding our business.

Stan said that one of our priorities is aggressive profitable growth and when those opportunities present we want to be in a position to take advantage of it, so that’s basically it.

Great, thanks again and congratulations.

Thank you.

Thanks Craig.

Thank you.

Once again ladies and gentlemen if you do wish to ask a question please "*","1" at this time.

And we are showing no further question -- I am sorry we do have a follow up question from Craig Kennison from Robert W. Baird.

Hi, one quick follow up.

Regarding your cost of goods sold what percentage of that is labor roughly?

Yes, basically, Craig it’s about 10%.

Yes, okay.

And where would that have been maybe 10 years ago, when you began your sourcing initiative roughly?

Maybe at closer to 12 to 15.

Okay, thanks again.

You are welcome.

At this time, we are showing no further questions from the phone participants.

Well, again we'd like to thank you for joining us this morning; hopefully, we've answered your questions.

Well, as I said, I want to repeat again we are pleased with our financial results in spite of a soft economy that we are seeing -- the industry has not shown signs of rebounding.

We are hoping that next year we'll see some of that rebound but obviously as I said earlier we haven't seen it yet in the office furniture side.

On the hearth product side -- you know, housing starts have been strong, so we have benefited from a robust market and continue to gain share on both category.

So we are -- I would say generally we are very pleased with our performance and again we look forward to visiting with you during our next conference call.

Thank you and have a good day.

Thank you.

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