HNI Corp (HNI) 2003 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to HON Industries fourth quarter and year end 2003 results conference.

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

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

Should you are require assistance during the call, please press star then zero on your touch-tone phone.

Today's call is being recorded.

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

Please go ahead.

Good morning and thank you for joining us for the HON Industries conference call to discuss our fourth quarter and year end 2003 results we announced earlier today.

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

If you have 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 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 welcome.

I'm going to start today and have some opening comments and I'll address the fourth quarter year end and then I'll go down to the two segments, the office furniture and then Hearth.

Then turn it over to Sam Askren, our President and he'll talk about the 2004 outlook.

So, lets get started.

First of all, we are very pleased with the results in both of our operating segments.

They both performed very well and very much to our expectations.

The office furniture in spite of being involved in the third year of a decline, we outperformed our peers by gaining market share and improving our margins.

Office furniture as a percent of the BIFMA which is our trade association shipments increased to 15.3% this year versus 14.4% last year.

On the Hearth side, the housing market remains strong, and we gained share and improved our margins.

In fact, our shares through the third quarter of this year increased from 29% to 31%.

We continued investing for the long-term value creation of our shareholders and our business simplification and RCI, which is our Rapid Continuous Improvement.

For those just joining the call, this is where we involve all of our members, which are really our employees but we call them members that are involved in our organization as many of you know, they own shares of the company, they're involved in profit sharing and they're also heavily involved in Rapid Continuous Improvement, which really says we are always searching for a better way at everything that we do.

And as part of the business simplification and RCI, as we previously announced, we had plant consolidations, we had two facilities within our Allsteel organization and they're virtually complete.

There will be a little bit of work left over into the first quarter this year, but it's very minor.

And above all, all of our results are thanks to our member owners.

As I said early they are members, they own shares, so we aligned everybody up with our shareholders to create value for the long-term.

Let's move on then to the fourth quarter results.

Sales were up 2%.

Office furniture was down 1.3%.

I want to touch on that when I get to the office segment.

On an apples to apples basis they were actually up and I'll explain to you how that came about.

The Hearth is up 11.4%.

Obviously a very, very stong quarter for our Hearth business.

Net income was down 1.9% to $27.6 million versus $28.2 million for the fourth quarter of last year.

EPS was down 2.1%, 47 cents compared to 48 cents.

However, I want to call your attention to what was included in the fourth quarter.

End of fourth quarter we had $2.4 million of pretax restructuring charges for the plant consolidations that I talked about earlier which represented 3 cents per share, plus we had $3 million or 3 cents per share due to charges for diventures, convertible diventures which were earnouts related to a previous Hearth acquisition, with actually our Hearth service acquisition going back some four years ago.

And also in the fourth quarter year ago, so when we are comparing here, it included the effect of reduction in our tax rate, if you recall, it when we went from 36% to 35% which resulted in a gain in that particular quarter of last year of 2 cents per share.

So if you look at fourth quarter '03 to fourth quarter '02, we reported 47 cents versus 48 last year, but we had the diventures and a restructuring which cost us 3 cents per share.

So if you add those back in, the real ongoing earnings would have been 53 cents versus the 48 cents reported last year less the 2 cents which was the full year tax effect when the tax rate changed versus the 46 cents.

In essence our earnings per share on an apples to apples basis would have been up 15.2%.

As you look at our gross profits, it increased from 35.1% fourth quarter last year to 37.2%.

That exceeds some earlier predictions that I had made a number of years ago, that I felt that maybe 32% to 33% might be the maximum we would be shooting for.

In fact, you can see how wrong I was.

We've actually far exceeded it and question will be as we go forward how much further can we go that's uncertain at this point.

But needless to say with our Rapid Continuous Improvement and business simplification, plus reinvesting in the business for the long-term, you know, we're not exactly certain at this point what level we will be at moving forward for a long-term target.

But the gross profit comes about by our restructuring initiatives, our Rapid Continuous Improvement program, new products and price realizations that we had this year which was approximately 1%, okay?

Our SG&A dollars increased.

This is where we're making investments for the future from $115.2 million to $128.2 million in the fourth quarter.

Fourth quarter this year included the pretax restructuring charge of $2.4 million.

At brand building and selling initiatives in the quarter of $5 million and had to charge for the diventure earnout of $3 million and we had increased freight of $1 million.

Okay?

So office furniture represented 72% of our sales and 61% of our operating profit before unallocated profits.

However, keep in mind that the restructuring charges that we talked about were all in our office furniture, none of it was in our Hearth and plus our Hearth was very strong this quarter.

So move on to the year end results.

Sales were up 3.7%.

Office furniture was up 2% and Hearth was up 9.2%.

Keep in mind that we are now in the third quarter that we had one additional week but the one additional week really resulted if you look at number of days we had three additional days so wasn't a complete week, okay?

Just to clarify that.

Our earnings per share, we had $1.68 per diluted share versus $1.55 last year.

Due to the appreciation in our stock price, the outstanding options that we have now have a diluted impact of 1 cent per share, for your information. 2003 include the net pretax restructuring charge for the total year now of $15.2 million or approximately 16 cents per share.

In 2002 included a net pretax restructuring charge of $3 million or 3 cents a share.

So on an apples to apples comparison for the year, we reported this year $1.68.

Add in the restructuring charge which, you know, was a one time hit, would bring us to $1.84 compared to last year we reported $1.55, you add in the 3 cents for the restructuring charge last year, $1.58. $1.58 last year on an ongoing basis versus $1.84 or an increase of 16.5%.

Gross profit increased from 35.4% for the year to 36.4%.

Again refer back to my earlier comments on gross profit.

Included in the 2003 is $6.7 million of accelerated depreciation related to the plant closings that I previously discussed which reduced gross margins by 4/10 of a percentage point so we would have been at 36.8% versus the 35.4% again.

Again for the full year, we made major investments in our SG&A, again for creating long-term shareholder value.

We increased our investments from $457.2 million to $489.3 million.

And included in 2003 was $8.5 million of net restructuring charges.

We also had $14 million included for brand building and selling initiatives and we had $7 million of increased freight costs which was due to surcharges and the rate increases plus obviously our volume increases.

Comparing to 2002, we had $3 million of net restructuring charges that I previously discussed with you.

Office furniture for the full year was 74% of our sales and 70% of our operating profit before unallocated corporate expense.

Again, keep in mind that office furniture absorbed, in these numbers, restructuring charges of $15.2 million for the year.

Cash flow from operations was $141.3 million versus $202 million, $202.4 million to be exact, in 2002.

Now this reduction came about because of the timing of vendor and marketing program payments plus we funded the retiree medical portion of the post retirement benefit obligation and that was $10.3 million of cash that we used.

Our cash position continues to remain very strong at the end of the year we had included in our cash plus our short-term investments we had $204.2 million.

I'll call your attention that early January, we used approximately $80 million for the acquisition of Paoli, okay?

So we are still a very healthy and very strong cash position.

Our capital expenditures increased from $26 million a year ago to $37.5 million this year and the major, the three major areas we previously informed you that we purchased the lease facility in our Hearth business was Lake City, Minnesota, that was $3.6 million.

We spent additional monies in our IT and obviously we had new products which resulted in tooling and equipment expenditures.

Our long-term debt reduced to $2.7 million due to an earlier retirement of an industrial development revenue bond.

Our depreciation and amortization was $72.8 million and during the year we purchased 762,300 shares of stock for approximately $21.5 million.

Let me move on then to the office furniture segment.

Sales, as I previously indicated, were down 1.3% in the fourth quarter versus fourth quarter a year ago.

The fourth quarter '02 sales were impacted by a January 2003 price increase resulting in earlier orders into that fourth quarter.

The fourth quarter of this year is impacted by a decreased number of working days, actually two days, due to the timing of holidays as a result of the 52-53 week year, in other words, the two days were the two days around New Year's, okay?

Now again, of I look at apples to apples comparison for sales considering that we had a full forward fourth quarter '02 that we didn't have this year, we believe our sales would have been up in office furniture approximately 2.3%.

Okay?

Year to date sales were up 2% for the year, primarily due to the extra week but also some of it we would on an apples to apples comparison, slightly little more due to comparison I made for you for the fourth quarter.

This compares to BIFMA shipments which were down 4.3%.

So again, back to our earlier comment when I had my opening remarks, obviously we continue to gain share which is our trend for the past several years.

Our fourth quarter '03 operating profit was 9.9% versus 9.6% in the fourth quarter of '02.

Again the fourth quarter '03 includes $2.4 million restructuring for the plant closings I discussed earlier which reduced our operating margins by 0.7 percentage points.

So we would have been at 10.6% versus 9.6% on an apples to apples basis. 2003 operating profit for the full year obviously was 10% versus 10.2 %in '02.

Again, 2003 includes $15.2 million of the restructuring costs which reduced our operating margins by 1.1 percentage points. 2002 included, for the full year, $3 million as I indicated earlier restructuring which reduced our operating margins by 2/10 percentage points.

On apples to apples basis for the year, our operating profit would have been 11.1% versus 10.4% a year ago.

And our improved operating margins are due to again restructuring initiatives.

You know, this is -- we closed the two facilities but we closed facilities in prior years.

Our ongoing Rapid Continuous Improvement programs, our new products and increased price utilization.

Now being offset by additional investments in brand building and selling initiatives for the full year and increased freight costs.

We estimate that the branding and the selling initiatives were roughly $10 million in office furniture and freight costs was roughly $6 million.

Okay?

I'll move now to our Hearth product segment.

Sales were up 11.4% in the fourth quarter and up 9.2% for the full year.

This is primarily due to strong housing markets.

Keep in mind that roughly 70% of our sales are to new construction and remaining 30% is for what we call retail but basically remodeling, if you will.

Our growth in market share with both segments, both new construction as well as retail channels and it is also due to our strength and alliance with key distribution and dealers.

And we had some excellent focus new product introductions during the year.

We improved our margins for the year.

Let me touch first of all on the fourth quarter though.

Fourth quarter moved from 15.3% to 15.9% this year and for the full year we went from 10.8% to 12.1%.

Again, I come back to the point I made earlier, we are very pleased with both segments of the business.

We are leveraged our fixed costs over higher sales volume and we increased sales through our own distribution which has higher margins to us.

Okay?

Now that concludes my comments.

I'm going to turn it over to Stan to talk about 2004 outlook.

Stan?

Thank you, Jack.

As we look at office furniture, we are beginning to see some indications as you do that the economy is recovering.

We are cautiously optimistic that the office furniture industry will begin to rebound primarily in the second half of 2004.

Global Insight which is the BIFMA forecasting group has office furniture up for 2004.

They just recently increased it from 2.6% now to 5%.

I do want to point out to you that the first quarter Global Insight is actually forecasting it down slightly so we see improvement but are guessing it is going to be primarily the second half.

On the Hearth side, I think housing market is going to continue to be strong.

May see some slight decline but if you look at mortgage applications and you kind of listen to the demographic drivers and the interest rates, we should be in good shape as that proceeds on.

We also will have the benefit this coming year 2004 of the acquisition of Paoli, we are about a month into that and pleased with what we see.

That management team there is the strong team and executing their plans well and we feel strongly we're going to create some good value out of that acquisition.

There are some challenges for us.

The challenges primarily are around the cost side, specifically steel.

We're seeing the market very dynamic right now with surcharges due to scrap prices, capacity issues.

The second issue would be around freight.

We recently seen changes in the duty hours of drivers which is being passed on, that higher cost is passed on.

We are not necessarily accepting all those.

In fact, we are aggressively working to limit the impact and in fact lower overall material cost but a lot yet to be sorted out in that area.

In addition our tax rate as we indicated to you on the press release appears to be going to increase from 35% to 36% in 2004.

Primarily around the issue of state, tax entities, we are seeing a lot more aggressive activity there and we run out of good news is we run out of our NOLs that we've had in the past.

And then finally, until demand more closely aligns with capacity in this industry in the office furniture industry, we expect to continue to see challenging discount pricing as it relates to the contract side of the business.

I will conclude with saying as part of our long-term plan, that is we will continue to aggressively re-invest as we indicated on our press release a large portion of our cost savings from our consolidations in RCI programs back into the business.

Our objective has been and will be to look at creating long-term value for all of our shareholders and for our stakeholders.

And the investment, as Jack indicated to you, will follow along the same lines as we have in the past in the areas of brands, solutions, selling resources, selling models, product development, things like that.

So that concludes my comments.

At this point we'd like to go ahead and open it up for questions.

Ladies and gentlemen, at this time it if you would like to ask a question, please press star then one on your touch-tone phone.

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

If you are using a speaker phone you may need to pick up your handset before pressing the numbers.

Again, to ask a question press star then one.

We'll take our first question from the line of Budd Bugatch with Raymond James.

Please go ahead.

Good morning.

Hi, Budd.

A couple of questions if I could.

You touched on some of them, Stan.

Steel looks like it's going to be a pretty serious challenge going forward.

Any way to help us quantify the impact of that?

I hear scrap is up like 100% over a recent period and obviously factors into a lot of cost.

What do you see, how much of steel is a portion of your raw materials or your cost of goods?

Budd, this is Jack.

What's really happening is the surcharge, and those become published by the various manufacturers, there's an index printed every month on the surcharges being applied.

What the steel companies have done is in order to offset the scrap for the integrated -- or for the mini mills and the increased cost and lack of availability for both scrap for the mini mills but also iron ore, Coke and natural gas, they just added the surcharge.

What we're really finding is that it's pretty compelling to get to accept it because you get into this issue of supply then.

As you know, steel is our most -- our largest commodity that we purchased in terms of total impact to the corporation.

We have never disclosed that and don't intend to disclose that.

If you think about it, I say it's the largest but it's not overwhelming to us.

All you need is to look at our product mix.

You'll see what's steel and obviously what's plastics and wood and other materials.

I would encourage, we're all looking at these surcharges that are being applied.

We have accounted for some going forward, but we don't know the full impact.

I'll be honest with you, we don't know at this point.

I think you said you had a 1% positive price realization in 2003?

That's correct.

That's corporate or office?

Well, that would be corporate.

Because we had it in both segments.

Okay.

And the discounting is still a major factor particularly in the office side.

The contract side.

Contract side, right.

Having said that, we don't see, it's been there and Stan and I were visiting on it this morning.

We don't think it will get more severe at this point.

But it is a fact of life.

Oh, yeah.

Are you taking a price increase in contract or in office?

Obviously looking at all that right now but we do not have one plan.

As Jack said, we are sorting through the whole steel price issue and have some things we're working to mitigate the impact of that, and until we understand it a lot better, until it develops a little bit more, it's hard for us to comment specifically on what may be the outcome.

Okay.

Just seems to me that your margins have got to be -- I don't think you have the pricing power in office, or in contract that you might have in Hearth.

You have some more in Hearth, I think.

I just worry that how do you maintain your margin gains of the last couple of years?

I think that's a fair assumption, we said regarding office furniture versus Hearth at this point.

Again, these uncertainties, Stan talking steel and what's going to happen to the freight costs.

Let me go to a couple other quick questions.

Any forward restructuring plans that you can share with us and quantify?

No, not at this point, Budd.

Any plants you plan to close?

No, not a this point.

I don't want to mislead you.

This is something we continue to evaluate but we don't have plans right at this moment.

Okay.

The Paoli, you basically paid, I guess, $1.00 per sales, $1.00 per sales dollar, any projection on whether it's going to be accretive this year?

How do you look at that?

It will be accretive.

Accretive to earnings?

Yes.

Can you quantify it for us?

Not able to.

Sorry to hear that.

And one last question, any accounting changes, I think 4 cents or your option expense if you booked it, have you adopted a prospective option?

Budd, this is Jerry.

At this point we have not adopted anything for options.

We are going to be accounting for it the way we have done it in the past.

I wouldn't really call it an accounting change, guided by tax rate is going up 35% to 36%.

Okay, I do understand that.

As I understand the accounting pronouncements now if there is a change in options, you're going to have to fully cost it in the next year?

Probably be '05 before we have to do that.

And what we're really waiting for, Budd, is more clarification.

We're going to follow whatever the board -- follow the guidelines but waiting on the guidelines.

Clarification of the guidelines.

I think they're coming soon.

That's what we hear.

Our next question comes from the line of Susan McCleary with UBS.

Good morning.

I wonder if you guys could tell us, as demand improves and we head into '04, have you seen changes in your Gunlocke or Allsteel business?

I think the contract side we are seeing improved activity on the contract side.

Now how that translates to final orders is still the question but that segment of the market appears to have improved activity.

Okay.

And then are you doing anything in terms of now that you've done a lot of your own cost-cutting, improving your dealer network possibly extending some of your RCI principles to them?

Yeah.

I'll make a comment and then Stan can make further comments.

Obviously we've been doing that for a number of years.

This is nothing new to us.

We've been working mostly with our dealers as well, our distribution partners as well as suppliers.

Jack is hitting on it.

We do invest resources.

Our resources and share our expertise with members in our whole supply chain.

So as Jack said, it can be our key suppliers.

Also is our important customers that we will go in and work side by side to figure out how do we eliminate waste out off the total value stream and not just out of our production process.

Okay.

And then just finally I know that you don't give any formal guidance but if you look sequentially from the first quarter to the fourth quarter, it seems like sales tend to drop about 2.5% for the past few years or so.

Is that consistent with what you're seeing this year?

Yes, Sue, this is Jerry In seasonality, we don't see change in it sequentially from quarter to quarter.

I don't have the 2.5% in front of me but if that's what it has been, we forecast this is the same thing.

Okay.

Thank you.

You're welcome.

Ladies and gentlemen, as a reminder, if there are additional questions press star then one at this time.

We do have a follow-up from Budd Bugatch.

Please go ahead.

Yeah, Stan.

Can you talk a little bit about what's going on with the retail strategy at Hearth and Home?

Good question, Budd.

We continue on that process that we call experiment for some of you not aware, we, we've put up a prototype very large retail store in the Minneapolis, St. Paul area to really improve the whole Hearth purchasing experience to see if we can -- what we could do with that whole process to start to pull more sales through, sell up, et cetera.

That experiment, Budd, is going well.

Right now our working plans to continue to roll that out in similar fashion of what we talked about before, of really looking at some different format stores, different sizes for different markets, sorting through how do we share that with our distribution so they can benefit from it as well.

And that will, you'll see that roll out, I think, a little more aggressively in 2004.

How many stores, then?

That's still being sorted through, but probably another four stores in the next 12 months.

And locations or geographies?

Still sorting that through, Budd.

Okay.

And I know we've quantified, I think, for the corporation if I got the number right, $14 million of brand building this year in expense?

Is that above last year?

Did I get that number right?

Correct.

What is brand building?

Tell me what you mean by that.

Give me the pockets or the kinds of expenditures.

Sure.

It's in selling resources.

It's in things like showrooms.

It's in merchandising programs.

It's in new product development, product launch, those types of items.

Is it people?

Absolutely.

Feet on the street.

Okay.

And buildings and depreciation, the Allsteel headquarters in there or something like that?

That's some of it.

Showroom sort of things, that's not a huge part of that.

And this is the delta this year versus last year, $14 million?

That's correct.

So what would the delta be next year 2004 versus 2003?

A similar sort of scale.

So it's going to grow again by $14 million?

Maybe even a little greater.

Depends on what happens during the year, the economy and so forth, don't be surprised that we come during the year we'll be reporting to you how much we spent each quarter that it isn't even a little greater than the $14 million.

I take it that was a delta for the year, that was additional expenditure?

Right.

We continue to spend the $14 million plus the delta that could well be in success of $14 million.

I got the got the point.

I got that.

And the $7 million of freight delta, that was primarily energy-related or is there much mileage?

How does that break out?

Primarily fuel surcharge.

It's a fuel surcharge so that's going to stick around for a while, too.

But that may not grow as well.

The issue more than anything Budd, is hours of duty for the drivers, this new reg put through.

And no way around that, is there, Stan?

It's just being more efficient with where we are shipping and how we are shipping, Bud.

We'll have to offset it, that's correct.

That is a DOT reg, right?

That's correct.

Thanks.

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

Please, go ahead.

Good morning.

Just one quick follow-up question.

The cash balance of about $140 million still substantial.

What would your plans be for cash?

To invest it in perhaps internal investments as well as external investments.

Acquisitions to create long-term shareholder value.

We have nothing to announce.

I want to say that up front at this point.

Clearly we continue to look for those opportunities, that are creative to our earnings, just like we did with Paoli.

If I can just ask you to be specific on your priorities for share repurchase activity and then maybe comment on the acquisition pipeline and whether you would at least characterize it as active?

Always active.

The question is how active?

I mean, we continue to look at the share repurchase when we believe and make repurchase when we believe that it creates value for the shareholders for the long-term.

Acquisitions, we have opportunities that we are currently evaluating.

But again, we have nothing to announce at this point.

Our priorities are, I'd say they are fairly equal.

We don't try to do one and then move to the other.

We continually look at both the share repurchases as well as acquisitions.

And are your acquisition candidates in either of the two businesses or would look elsewhere as well?

Basically our initial emphasis is with our two core businesses but we do not exclude looking at other opportunities, but our primary focus is on our core businesses.

And just a follow-up on Paoli, is the margin profile of that business similar to the HON office furniture business?

As we announced in previous, it tracks similar.

Wonderful, thank you.

You're welcome.

And ladies and gentlemen, if there are additional questions at this time press star then one.

Ms. Ellsworth, I'll turn the call back over to you at this point.

This is Jack again.

I'd just like to thank you for joining us this morning.

As I said to start the call, we are very pleased with our fourth quarter and 2003 total results.

We're anxious about 2004.

As we've discussed here on the call, there are certain uncertainties out there, but nonetheless with the economy rebounding, we feel confident that we'll continue to perform perform better than our peers.

With that I would conclude today's call.

Thank you very much.

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