HNI Corp (HNI) 2004 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Hon Industries first quarter result 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.

If you should require assistance during this call, please press * then 0 and as a reminder, today’s conference is being recorded.

I would now like to turn the conference over to our host, Miss Melinda Ellsworth, please go ahead.

Thank you.

Good morning and thank you for joining us today for the Hon Industries Conference call to discuss our first quarter 2004 results announced earlier today.

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

If you have not received the copy of the release, please call 563-264-7432 and we will send one out to you.

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

Jack will begin with brief remarks;

Stan will review and then open the calls for questions.

Before we begin, 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, 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 for the Securities and Exchange Commissions.

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?

Thank you Melinda, good morning.

We’re pleased to have you on our conference call today;

I think you have had a chance, no doubt, to read through or glance through the news release we put out this morning.

We’re very pleased with our first quarter results in many aspects and we’ll discuss those as we go through the call this morning.

As you can see we had strong volume in both of our segments, both our office furniture as well as our (inaudible) that speaks well we believe in what we are doing in terms of particularly gaining market share in the marketplace, we continued to gain share we only have investment numbers our trade association of office furniture for the first two months but we feel very confident that we have gained share for the entire quarter.

A lot of this has come about because of the improvement in the economy and everybody have to review on how well the economy is recovering, we believe that it is forward nothing dramatically but slowly and we believe that we are performing well in that economy.

We concluded the Paoli acquisition;

Paoli office furniture acquisition in early January so we had the benefit of that during the quarter and we will separate it out in the news release and we’ll talk further about that again this morning.

As we have always indicated to you that we continue to make investments for the long term shareholder value creation and we are continuing to do that we are investing in our grand building and our selling initiatives and we will continue to do that for this year and certainly into the future.

Obviously you have all read about certain costs escalating notably steel and there are other areas that we have had cost pressures during this quarter so those are my brief overall remarks about the quarter and I’m now going to turn it over to Stan Astrin our President and he’ll lead you through the more specifics of the first quarter results and then we will cover the outlook and I will conclude at the end.

Stan?

Thank you Jack.

As Jack indicated to you we did see some nice increases in total sales for the first quarter.

Our sales were up in the corporation 18.4% and Jack mentioned that we did add Paoli in January so if you look at the contribution from Paoli that is roughly about a third of the total increase.

Office furniture increased 18.6%, organic growth would have been about 12.1% of that and Paoli would have been about 6.5 percentage point of the increase.

First product showed healthy increase as well of 17.8 and as Jack indicated we are seeing the benefit of the economy, strong performance we think by all of our operating companies all of our brands and the addition of Paoli.

So those scales increases translated to a net income of plus 41.1% (technical difficulty) which then converts to an EPS increase of 40.7% that would give us a 38 cent EPS versus 27 cents last year.

On the gross profit side we saw an increase in improvement to 36.6% versus 35.5% last year, that’s due to our ongoing RCI efforts daily improvement, restructuring initiatives have come on full line and also the volume leverage that you said that we saw from the sales increase.

Those improvements that I just listed were partially offset by material cost increases that were somewhere between $2-3M in the first quarter and we’ll talk more about material cost later on in this presentation.

SG&A as a percentage of sales was flat compared to prior year.

The dollars were up $20M, contributors to that, key factors in the first quarter included the incremental investments in brand building and selling initiatives that Jack addressed.

We did see some increase freight and distribution cost that was driven by volume in part also by the rate surcharge hours of operations difference, and then we saw some changes in customer mix to some higher cost rate customers.

We did experience the final tail on our restructuring charges from last year of about $1/2M and then you’re also seeing the impact of the addition of the SG&A cost of our new Paoli acquisition.

So as you’ve typically seen office furniture determined about 75% of sales and about 75% of the operating profit before any allocated corporate expenses, obviously the Hearth was the remainder.

Cash flow from operations was $18.3M compared to $7.9M last year.

Our capital expenditures were $6M for the first quarter versus $14.5M last year.

We had an unusual capital expenditure last year.

We purchased a lease plan to start up our Hearth business for about $3.6M.

We continue to expect our full year capital expenditures to be in the range of $35-40M.

Depreciation and amortization was $17.3M and other uses of cash well Jack addressed the Paoli acquisition, $85.5M for Paoli and for a small Hearth distributor and we paid off some convertible debentures $26.1M related to a previous Hearth acquisition and we purchased stock, we repurchased 441,200 shares for approximately $16.5M.

We continue to flow as though we have a strong position of approximately $85M going forward.

We did increase our dividend effective in March 7.7% taking it from 13 cents to 14 cents for the quarter.

Now I’m going to shift with you to the overall office furniture segment.

As I indicated sales were up 18.6%.

The organic growth on the office furniture side was 12.1 percentage point, Paoli represented 6.5 percentage point.

We believe we gained share in all brands, all of our markets and all of our segments were strong.

One of the things we want to share with you is the Paoli profitability is similar to our existing office furniture segment, so as you factor that in use that as sort of your benchmark.

The operating profit increased 25.7% in office furniture due to increased volume, the restructuring initiatives are ongoing rapid (inaudible) program and those increases or improvements were offset by increased investments in the brand building and selling initiatives and that’s approximately $2M on the office furniture side and increased freight in material cost that’s approximately $4M to the office furniture side.

The Hearth product segment sales grew 17.8%, we had a very strong housing start climate.

We saw growth in both of our channels those being new construction channel and also the remodel retrofit channel.

Introduced several new innovative proprietary products and were able to experience a1.8% price increase.

We saw some excellent operating profit improvement of 83% due to an excellent job by the members of the Hearth group, they’re able to leverage their fixed cost over higher sales volume and it was contributed through a stronger mix of sales through our own distribution which gives us better leverage.

So looking forward the outlook we remain positive about the revenue outlook for the total year.

We see good momentum on all fronts on the order side and the activity side however we will tell you that we believe the second quarter is going to be a challenge to project.

We have several factors that are working together that make this a little bit abnormal.

The first is, factor, we anticipate volume will continue to be strong, the increases seen in the first quarter we anticipate will continue and we will see potentially somewhat of an up-tick due to stronger sales and customers pulling up orders from third quarter to be our June, July announced price increases.

That could be as much as $15m - $20m.

That factor along with the material costs increase makes this a challenging profit situation.

Material costs have increased since the beginning of the year due to pressure on all commodities.

We are working hard to manage costs and eliminate waste with our suppliers but some of these increases in particular steel has come hard and fast due to the acceleration of the economy.

In fact steel has become the greatest challenge for us and I think also for the general economy.

Our total fuel costs are up 25% since the beginning of the year and I’ll share with you, we talked about total steel costs and we don’t distinguish between the surcharge and the base price increase.

What we’re seeing is the steel producers are aggressively attempting to convert the surcharges to base price increases and in some cases in fact off-setting the surcharges at an even higher level and there’s been some press in the Wall Street Journal and other economic news that talked about different suppliers and what they do in that area.

I think it’s important to note that we believe that the supply and demand fundamentals are very dynamic at this time and the steel producers are selling their capacity for much more money than they have in the past.

The result of all that is there’s lots of questions even about supply and the ability to get steel in an accelerated economy.

So lots of uncertainty as the steel market sorts itself and the supply and demand looks for a new equilibrium.

As a result of our anticipated steel costs we anticipate our gross profit percentage will be comparable for the second quarter to last year’s second quarter gross profit percentage.

We’re planning to continue to increase our investments in SG&A that’s incremental strategic investment and brand building and selling issues as we have in the past.

We continue to be focused on investing for the long term future of this corporation.

Starting third quarter, we will see the effects of our announced price increases which become effective in the June and July timeframe.

We anticipate the net price realization will be in the 2 -3% annualized range.

So we focus a lot on the second quarter as always there’s a new twist, new challenges, we’ve been successful in the past and managing through the effects of challenges and we anticipate we will again.

We continue to stay focused on our long term strategy of aggressive profit growth, focused on building our market power, maintaining our best cost position and strengthening or culture and our capabilities.

So with that I’ll turn it back to Jack Michaels.

Thanks Stan.

Well as I said at the beginning we were very pleased with our first quarter results.

We have some challenges we’re faced with particularly as we get into the second quarter and in certain area on the cost site for the entire year but we’re up to the challenge and we think we’ll do well through these economic times.

So with those few remarks made I think we’ll open it up to Q&A at this point for any questions you might have.

Thank you sir and ladies and gentlemen if you wish to ask a question please press * then 1 on your touch tone phone.

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

If you are using a speaker phone please pick up the handset before pressing the numbers.

Once again ladies and gentlemen if you have a question please *1 at this time, and one moment please for our first question.

And our first question comes from the line of Susan McClarry with UVS please go ahead.

Good morning guys, congratulations on a great quarter.

In terms of steel could you just give us a sense for maybe the volume that you see and what percent of you cost if it’s sold it is?

Basically, this is Stan, it’s typically about 10% of our cost if it’s sold.

Last year we purchased about $125m worth of steel.

Okay, and with raw materials rising quickly and RCI being such an imperative and its obviously done a great job for you guys especially in the past quarter, can you give us a sense of maybe any developments that you’re doing there or how you’ll be making any changes in the Paoli area?

Well I think your question Susan is what are we doing to help offset the cost, escalation?

Yes

We’re attacking costs on all areas, one is to make sure that our utilization of our materials is as good as it can be so we’re attacking scrap.

Second, we’re obviously investigating alternative materials and then third, we’re making sure that we’re buying as effectively as we can and help me out with the question regarding Paoli?

I just wondered, how are you going to be doing any changes there, will there be any kind of cross, bringing things across into that?

Right I understand.

First, our objective is to help Paoli with their operations by leveraging our rapid continuous improvement expertise and they’re well on the in that regard.

And they have, I think they’ve trained over 50 people in our processes.

They have lots of project on their way.

We have several of our folks that have been through training and have many years of experience in our culture and they’re working with them and they’re well on track.

And we’ll continue to believe that our best approach with Paoli is for them to pursue their distinct and separate markets with a distinct with separate selling sort of effort, so we feel good about our progress there and are right on track.

Okay.

And just one last question, can you give us a sense for ---are you seeing any changes in demand in terms of the kinds of projects or the types of customers that are coming up and have you seen even more acceleration in your higher end lines maybe as oppose to more than mid to lower price product.

We’re strong across the board Susan.

Okay.

Okay thank you.

And thank you and our next question comes from the line of Bud Bugash [ph] with Raymond James, please go ahead.

Good morning Jack.

Good morning Stan.

Good morning Jerry.

Just if you would kind of characterized what you seeing in office furniture in the segments between off steel and I’ll take whatever you give me quantitatively but I’ll love it qualitatively too if you don’t want to give us quantitative.

You say you’re taking share and I just would like to hear a little bit more about what you’re seeing in the project business?

Bud actually (inaudible) both of Dunlop and with Allfield and with Paoli.

But the small businesses is also very strong with Hon company and Maxon [ph] as well, and so there’s not a whole lot to share with you other than we’re pretty consistent across the board.

I’ll just share with you that there’s a good building going up here near us and you have the entire building so I’m seeing your product go into that building that you’re just open up.

I think this week

You’re making us smile Bud

Alright, on the steel front we have seen some moderating in scrap over the last couple of weeks so you---what are you seeing on that score---any other indications from your suppliers.

Bud this is Jack.

We’ve seen some slight moderation but as Stan indicated earlier that’s on the surcharge and now many of the mills are looking at moving the surcharge into their base price and that’s underway right now.

So we’re in several different discussions on different fronts of to what is taking place there.

Obviously the steel mills are taking advantage of a supply demand situation to improve their old profitability which as we all know have suffered over an extended period of time.

So I think we’ll see that to continue to be a real challenge for us moving forward.

You know, we got the supply demand on one side and then we got the weak dollar on the other so that really prohibits a lot of import but you can import but again it’s the question of the price.

So I think those dynamics will continue to be with us.

I think the articles will shift in the news papers, you know, regarding what’s happening to the surcharge.

I think you’re gonna see more of it into the base price.

And my final issue I’d like to kind of vent for us or at least bring us up to date on is –I get a lot of questions from clients about imports in this segment and you’ve been probably more as active as anybody in some of that area, can you kind of give us an update of where that is and what your thought process is

Yeah we continue to believe that imports are going to be a factor in the entry level price point.

But certainly as we talked before some of the structural characteristic of the contract business make that less attractive due to further high model complexity and the lower volume and the fact you ship whole projects and not just discrete items.

We continue to be aggressive in the offshore sourcing, sort of optimize our best total cost position and sort of execute what we do very well and particular the Hon Company with the whole furniture fullfilment model.

So we’re aggressive in that area, we’re seeing increases in our business and we’ve introduced a product line actually a sub-brand called Basics that is really targeted towards an entry level.

We’re getting great reception with our large customers in that area.

Okay thanks.

Thank you sir and our next question comes from the line of Craig Kennison with Roberts W Baird, please go ahead.

Good morning

God morning Craig.

And congratulations on your execution in this challenging environment.

First question, you know, the 10% furniture growth that we saw organically how much of that was volume?

How much was pricing?

It was almost all the volume Craig in fact it was all volume.

We’re seeing ---continue to see some real pricing pressure even on the contract side ---project side of the business.

Okay, and on the price increase that you have announced, can you comment on whether that’s affecting both Hearth and furniture equally?

It’s more on the furniture side of the business.

Hearth did have a price increase that was announced earlier in the year.

I think we mentioned in my comments that we had 1.8% price utilization.

So, they do have a - - they are tracking a steel surcharge but most of the price increase is on furniture.

And this question was asked a bit before, but what really explains your market share gains and how do you feel the price increase that your are announcing will impact that trend?

First off, I think we - - you know, the economy has improved and I think we have invested previous - - in the last year - - last two years and as we talked about in previous calls in strategic selling and branding initiatives and new product development.

So, I think we are seeing the results of those previous investments.

The price increase - - our price increase is not - - is right in line, I believe with kinda the overall market movement in pricing.

So, we don’t anticipate any impact in market share due to the price.

Okay, thanks and then with respect to the model, one of the difficult numbers to predict here will be SG&A as a percentage of sales because you are going to get maybe the negative impact of these investments that you are making but in the second quarter you are going to have, perhaps more revenue.

So, in the second quarter, are you actually forecasting an increase or decrease in that SG&A line as a percentage of sales?

As percentage of sales, it is going to attract second quarter about the same as it has first quarter.

Okay, and then also on the interest expense line that’s been an income - - a slight income for you but I know you paid off some debt.

Will that number change materially?

It will not - - Craig like it was in the first quarter.

That’s helpful and finally, just curious how your Fireside, Hearth & Home business is doing at the Minneapolis site and whether you have enough data to maybe increase you investment in that area?

It’s gone well.

It exceeds our expectations as we beginning to move out in some other locations.

Will that entail a significant CapEx or - -?

No. - - No.

Terrific, congratulations.

Thanks.

Thank you for your question and we do have a question from the line of Scott Heleniac [ph] with Ferris Baker Watts.

Please go ahead.

Good morning.

Good morning.

Quick question on the Hearth side.

You guys - - what sort of newer products do you have in coming on line in Hearth besides Fireplace?

I know you talked outdoors and the outdoor products, what are you seeing on that side?

Not a whole lot.

We continue to be primarily focused on the core Hearth categories.

We do have some products - - some interesting products that tie into the HVAC system that provides sort of heat exchange fresh air but our emphasis is really focused on core Hearth but not so much on the lifestyle outdoor product.

Okay.

Fair enough.

Any sign of the Hearth business slowing?

Do you think that’s going to continue track sort of where it is at this point or at least next couple of quarters?

We have seen any signs of it slowing.

In fact, it continues to operate at a high level.

Now, obviously, the big question here starts there - - at a record level.

Interest rates are - - lots of discussion about where those go, given some fears of inflation.

My guess is, starts will moderate some but based on our sort of look and researches, it is going to continue to be - - starts are going to continue to be at a high level.

We have got some really - - very solid and a core economic factors going in our favor demographics and those sorts of things in our economy to keep it solid.

And how much luck did you have on the remodeling of - - in Hearth?

Is that - - I know you had mentioned that.

Is that something where you think it’s just beginning or it’s continued or - - where do you think you are in that?

No, I think in our businesses, basically that the whole Fireplace business is roughly - - is roughly 70% new construction, 30% remodeled retrofit.

There may some minor shifts over time and economic cycles but it’s not much.

Okay, and on the share buy-back, how much do you have left authorized on that?

We have about $24m left.

$24m, okay and last question.

The restructuring, is it fair to say it’s pretty much done for ’04, nothing else planned at this point?

Yeah no we are - - we have a few little minor clean-up sort of things from previous - - previous moves but for the most part we are - - have nothing on the boards but I will tell you that we will always be looking at ways that we can eliminate structural costs as part of whole rapid continuous improvement initiative.

So, don’t be surprised down the road that there is more, but we have nothing planned at this point.

Okay.

Great.

Thanks.

Thank you for your questions and ladies and gentlemen, if there are any further questions please press *1 at this time.

And we do have a follow-up question from the line of Bud Bugash [ph] with Raymond James.

Please go ahead.

Yeah, just one quick, make sure I’ve got it clear.

You did say - - the press release said that Paoli was responsible for 8.5% of the increase in office and I thought you said 6.5% when you were talking.

[multiple Speakers] - - It should be 6.5 percentage points.

So, the total Paoli was what, about $20m then or $25m.

Hang on there Bud, let us back-up here.

Was it 6.5% [Inaudible]. 6.5 is the total, 8.5% of office furniture Bud.

Right, yeah. 8.5% of the office furniture, 6.5% of the total?

Right.

So, it was about $20m - - I calculated about $25m, just eye-balling there.

Yeah.

Okay.

Thank you very much you guys.

Thanks for calling that to our attention.

Okay.

And thank you for your question.

We do have a follow-up question from the line of Craig Kennison with Robert W. Baird.

Please go right ahead.

Following up on that Paoli question, $25m, is there seasonality to that business or is that a decent run-rate to consider for the rest of the year?

It follows our overall office furniture business Craig.

Thank you and one more question if you would.

Unallocated corporate and other expense was a little bit lower than anticipated.

That tends to be a difficult number to forecast, what would the seasonal pattern be expected throughout the rest of the year on that number?

Yeah.

Craig, it will really follow just like it has in the past year.

It will follow pretty much the same.

Okay and maybe $34m for the year, is what you’ve talked about in the past I think?

Right.

Thanks again.

Thank you sir and there are no further questions in cue at this time.

Please continue.

Alright.

We would just like again to thank you for joining us this morning and as I said, we are very pleased with our first quarter results.

We think we are off to a good year, bar the cost ratios that we are having but we will work through those as Stan indicated and look forward to our next conference call.

Thank you.

And ladies and gentleman that does conclude our conference for today.

We thank you for participation and for using AT&T Executive Teleconference.

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