HNI Corp (HNI) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the HNI Corporation second quarter results conference call.

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

Later we'll conduct a question-and-answer session with instructions given at that time.

If you should require assistance during the call press star, 0.

As a reminder this conference is being recorded.

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

Please, go ahead.

Thank you.

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss our second quarter 2004 results we announced earlier today.

My name is Melinda Ellsworth, Vice President, Treasurer and Invester Relations for HNI Corporation.

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

Joining me on the line today from HNI Corporation is Jerry Dittmer, Vice President and Chief Financial Officer;

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

Stan will review the results and then open the call 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 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 assumed no obligation to update any forward-looking statements made during the call.

I know have I pleasure of turning the call over to Stan Askren.

Stan?

Good morning.

Thank you all for joining our call this morning.

No doubt, you've had a chance to see our press release that was released this morning that lays out much of what I'm going to cover here this morning.

But let me start offwith opening remarks and then we'll cover second quarter, year-to-date results, and then go into segment data, and then finish up with the outlook for the future, and then open up the session for some questions and answers.

First off, as we look at, sort of, how the second quarter went, we're pleased with the performance.

We think we had strong performance, good results.

We saw good performance from all of our operating companies and all of our brands.

So across all of the segments of our business.

We do believe we are gaining share.

The latest estimate data is not out yet, but basically, if you look at year-to-date reported BIFMA shipments are up about 7.3% and we're up significantly greater.

Certainly the improvements in the economy and the industry have helped us, along with our reinvestment into the front-end of the business.

As we have indicated to you many times, we have significant investment going into building brands, selling initiatives, and other growth opportunities.

It appears as if that investment is paying off.

Probably the dark cloud on the sky for us in the outlook is the increased cost pressure on the material side.

Certainly, as we look at steel, we have some real challenges, and we'll talk more about that later.

Moving to second quarter results, sales grew 25%, about 18.6% of that came from, what we call organic growth and about 6.4 percentage points came from our addition of Paoli, which accounted for about $26 million.

We did see as we indicated to you last session, we anticipated that we would get some pull-ahead of orders to, sort of, get ahead of the price increases that we announced that were effective in late June and early July.

What we saw is about $40 million worth of orders, of which we shipped about $21 million.

So that' s about 5.2 percentage points on the sales growth.

Gross profit improved to 36.1% from 36% last year in the same period.

We saw some nice productivity and leverage of fixed costs.

A lot of that offset by increased material cost, increased about $15 million, in particular, steel, which went up about $12 million in that same period.

Second quarter last year included $1.6 million of accelerated depreciation, due to plant shutdowns, and we did not have that same charge this year.

SG&A included, which includes restructuring, was 21 -- excuse me, 28.1% versus 28.3% last year.

That includes incremental investment in brand building, selling in initiatives of $5 million over and above last year.

We also had increase rate in distribution charges of $8 million due to volume rate increases and fuel surcharges.

And of course, with the addition of Paoli, we also have incremental SG&A costs of about $8 million associated with that operating company.

We did see some increased corporate costs associated with growth initiatives and investment in corporate resources to execute our strategy.

So we see an incremental charge of about $4 million in that particular area.

And those are areas related to acquisition activity and some other strategic growth initiatives.

Second quarter, '04 includes about $200 thousand of restructuring, versus second quarter '03 which included $2.3 million.

Net income increased 28%.

We went from 20.2 million last year to 25.8 million this year.

We have had some changes in our tax rate.

Our year-to-date tax rate is increased to 36.5% and for second quarter is 36.9%.

And we'll talk a bit more about that little bit later.

EPS -- diluted EPS increased 25.7%, and our EPS earnings per share increased from 35 cents last year to 44 cents this year.

So now I will move on to year-to-date results.

Sales grew -- have grown year-to-date 21.8%.

Again, Paoli contributed about 6 .4 percentage points or $51 million.

As I indicated to you, in the second quarter we also benefited from the pull-ahead sales due to the price increase of about 21 million, or 2.6 percentage points.

Gross profit for the year has increased to 36.3 from 35.7 last year.

Similar sort of story of what I shared with you earlier, we've had some productivity improvements and we've leveraged fixed costs that have been offset, in part, by higher material costs, again, largely steel.

And we talked about the change in the accelerated depreciation, which year-to-date would account for about 2/10ths percentage point.

SG&A for the year including restructuring, is 28.6% versus 28.8% last year.

Year-to-date we have invested incrementally in brand building and selling initiatives about $8 million.

Increased freight and distribution costs are about $15 million.

And the SG&A cost that we've added associated with Paoli is about $16 million.

And again, as we talked, the increased corporate cost associated with growth initiatives and other corporate resource additions is added about $4 million to our cost.

And year-to-date '04 includes $700 million of restructuring, versus year-to-date '03, which was $2.3 million.

The result of all of that is net income has increase 33.8%, $48.2 million net income, versus 36.1 million last year, and our effective tax rate this year is 36 and a half percent, versus 35% in 2003, primarily due to increased state taxes.

The states are aggressive in making sure they get their cut of the tax.

EPS diluted has increased 32.3%.

And so our EPS for the year is 82 cents versus 62 cents last year.

Moving over to the segment data, I'll start with office furniture.

Sales in the second quarter for office furniture are up 26.6%.

And Paoli accounts for about 8.6 percentage points or 26 million, and we talked about the pull-ahead on the sales price avoidance, or -- excuse me, the price increase avoidance of 21 million.

Year-to-date office furniture sales up 22.6%.

Paoli is about $51 million of that, or 8.5 percentage points.

And again, we had the impact of the price increase pull-ahead.

As I've said to you, we've seen growth in all of our brands across the board, all the companies.

We're seeing consistent up-performance in not only the project business, but also the day-to-day, or the transactional business.

So strength and in virtually all of the markets.

Our operating profit prior to unallocated corporate expenses for second quarter is 9.7% versus 9% last year.

Year-to-date is 9.4% versus 8.8% last year.

And increases in margins are due to the volume leverage, the benefits received from the restructuring initiatives, and RCI efforts.

And then, as we talked, have been offset by increased freight expense, increased material cost, and our continued investment in brand building and selling initiatives.

Moving over to the Hearth Product side of the business, of the sales for the second quarter of '04 are up 20.5%, year-to-date '04 sales up for Hearth 19.2.

Certainly we benefited from strong housing starts.

In addition, the Hearth Products Group has seen growth in market share in all of their channels.

Virtually all of their product categories are showing some nice growth.

That growth comes from a lot of new product introductions, as well as our investment back in the brands and selling initiatives.

The hearth group did benefit from a price increase of about 1 and a half to 2% for that period as well.

Operating profit for the Hearth Group before unallocated corporate expenses is 12.6%, versus 10.3% last year.

Year-to-date, 11% operating profit percent, versus 8.2% last year.

And their story is similar.

Increases in margins are due to leveraging their fixed cost over higher volume, stronger mix of sales through our own distribution, where we get a better yield, and then price increase, and again offset by higher steel and freight costs.

So now we'll move over to the cash flow balance sheet.

Cash flow from operations year-to-date, 56 million, versus 54 and a half million last year.

Looking at working capital, inventories up over year-end and prior year due to Paoli and higher sales volume.

Accounts receivable are higher than year-end and prior year due to Paoli and strong sales volume in June '04.

Our capital expenditures were 15.8 million, year-to-date, versus 24.4 million last year.

And '03 included a purchase of a Lake City manufacturing operation of $3.6 million in IT improvements.

As you see here, we have a very low level of debt.

We paid out debentures related to previous Hearth acquisitions during the first quarter of this year.

Stock repurchase.

We repurchased year-to-date 1 million, 124 thousand, 300 shares for approximately 43.7 million share repurchase, or that breaks down to about $38.91 per share.

As you know, or have maybe seen, the Board authorized, the Board of Directors authorized an additional $100 million for share repurchase program on May 4th of 2004, and we have about almost $98 million remaining of Board-authorization to continue to repurchase stock, going forward.

So, let me come to the outlook, we believe that we're going continue to see positive sales growth momentum, consistent with the current quarter.

We will see the impact of the price increases that we put in in late June, early July, in third quarter.

Some of that is offset by some of the pull-ahead orders that are under the old pricing, which is about $20 million.

Our greatest challenge here is steel.

The market is very volatile.

And as we've talked in the past, there's some significant market dynamics around supply and demand.

It's very difficult to predict, virtually from any place, as to what exactly is going to happen with steel prices.

We do believe that they're trending up, and that we're going to need to continue to work aggressively to offset those costs.

We're taking lots of initiatives to manage that process through our sourcing, through our material utilization, through our yield, and things like that, but that is the wild card, I think, going forward.

I will remind you that last year, third quarter '03 included an extra week due to our 52-53-week year situation.

That extra week, obviously, will not be in third quarter '04.

We have recently completed a couple of acquisitions.

The first would be Omni, which is really comprised of two business, one, office furniture services, the second would be a remanufacturing business.

The second acquisition is Edward George, a fireplace distributor, that's part of the Hearth and Home Technologies Group.

Those account for combined annualized sales of about $75 million.

Combined purchase price was about $47 million, and those details are broken out in previous news releases.

And those business have comparable margins to our existing operations, so you can get a handle on how they're going to contribute, going forward.

I will tell you that the third quarter profit contribution will not be significant from Edward George due to acquisition adjustments.

Basically they were a customer and so we have to eliminate the inner company profit going forward, and so, there's a bit of an adjustment in third quarter, but both of those should contribute positively in '04 and then obviously, ongoing.

So with that, that really, kind of -- that concludes my comments, and we'd like to open it up for questions.

Any questions?

And, ladies and gentlemen, if you'd like to ask a question, please press star, 1 on your touch-tone phone.

A tone will indicate that you've been placed in queue, and you may remove yourself from queue at any time by pressing the pound key.

And if you're using speaker phone, please pick up your handset before pressing the numbers.

Once again press star, 1 if you'd like to ask a question.

And we'll take a question first from the line of Margaret Whelan with UBS.

Please go ahead.

Good morning.

It's actually Susan for Margaret.

Can you guys talk a little bit about how the Edward George acquisition that announced fits into your plan, compared to maybe opening more Company-owned stores in your Hearth segment.

Sure.

The Edward George actually slides in very nicely to the strategy and the structure that we have in place right now.

As you may recall, we have a, you know, a significant amount of Company-owned distribution Company stores now.

What we had is an opportunity to acquire a significant-sized business in a market that fits very nicely in with our Midwest strategy.

So we're able to purchase it, slide it in, and then we'll continue to grow and develop that very similar to the distribution that we have in place now.

Okay.

And then given the strength of the balance sheet and the cash flow that you have, would you consider doing acquisitions that are slightly larger, or do you prefer smaller, more bolt-on kind of deals?

We are always constantly looking at both.

And we really are -- evaluate them, sort of, on their stand alone merits.

We look at large ones, and if we believe we can create value for shareholders, then we'll do them.

Obviously we announced several of these smaller ones.

They fit very nicely, and we think that they support our strategy and they are going to create value for shareholders.

So open to both.

Okay and one last, kind of, housekeeping question.

I noticed that your inventories increased sequentially.

Is that related to the Paoli acquisition still, or --

Susan, this is Jerry.

It's two things.

One it is -- a big piece of it is because of Paoli.

And the other piece is just because of our volume increases and needing more inventory to run our business.

Those are really the two main reasons.

Okay.

Okay.

Thank you, very much.

Thank you.

And next we'll hear from the line of Budd Bugatch with Raymond James.

Please go ahead.

Good morning, Stan.

Good morning, Jerry.

Good morning, Budd.

Jack.

Talk to me just a bit about big picture on operating margins.

We're in a situation where demand is improving in office furniture, you're improving your relative share in the industry.

I realize that pricing has become a challenge.

But I go back in history, and I think back in the late '90s you peaked out for a year margin at something over 12%.

What's different now, structurally, or is there a difference?

Your RCI has been in continuous fashion for a whole number of years.

When do we see a return to those margins?

Do we see a return to those margins?

What do you think is the sustainable margin level for the industry, and for you in the industry?

That is a big question, Bud.

A good question.

I think that what we're -- we believe that margins will continue to improve, obviously, as the industry improves.

Certainly, some of these material cost increases are challenging, along with, still working through, sort of, excess capacity in the industry.

Because there is excess capacity.

So our ability to go, sort of, fight off the inflationary pressure on material cost, and also get price, as long as there is excess capacity, limits us.

The third point is we're also, really looking at long-term, and investing more aggressively in the front end of the business to make sure that this thing has a long leg to it.

So, I think the best thing I could say is you should expect to see margins improve.

Where they ultimately go, you know, I'm not -- I'm not sure.

I think there's still a lot to be played out, sort of, in the economy and the industry and with the competitors.

Well, help us if we can, Stan.

When I look at the structure of the business, what is different at this point in time is a layering on of essentially an aligned-office strategy with the all steel and moving into the -- into that strategy of the HON -- of HON product.

Have you looked at where -- what the variances are, and I'm sure you have, but will you share us what you've seen, between the margin differentials of what was the old business, to what is the remainder of that old business, to the aligned-office strategy side of the business?

We don't break out those numbers, Budd.

You know, again, you're talking about, you know, several businesses, as you, kind of, roll all this together.

And what I would say is, is that we're really looking at how do we create shareholder value here?

We are always focused on margin percentages, but we really focus on how do we create a positive economic profit for the shareholders?

And I will say that we generate positive economic profit in the contract side of the business, as well as our traditional side of the business.

We generate positive economic profit, you know, in the office furniture side, and in the Hearth side.

And that's probably the extent of what I can share.

I have no doubt that you have -- you're well above your cost of capital in both sides of the business.

That doesn't -- I'm just trying to see where is -- what is the earnings potential down the road here when we get into some -- we're into a -- into an improving economy and improving environment for your business, which we haven't had for a number of years.

You have been able to do an exquisite job in the face of that difficult climate, but then where is -- what's the -- how should investors think about what is the potential here, and how we get there?

And that's what I'm trying to get to, and I'm wrestling with that question.

You have done an excellent job in giving us a lot of good data points as to what has impacted your business.

I'm just trying to figure out, okay, what's the upper bound today?

Yeah.

And I think, I, and you know, again, here, what my commitment, or our commitment is continuous improvement in that area.

So I think there is a lot of upside.

The challenges for us are -- is, in the mid-term is the excess capacity, the cost pressure, and then we're, as I said, we're committed to reinvesting in the front end of this.

So, you know, where's the upper bound?

I think that's yet to be determined.

We are -- we are positive about the trend and positive about the improvement.

Do you see 12% margin potential in the business again?

Is that --

I think it's possible, yeah.

Am I ready to commit to it, here?

No.

You know, again, I think there's a lot of things to play out.

Okay.

All right.

Thanks.

I'll let somebody else have the floor.

And ladies and gentlemen, if you would like to ask a question, please press star, 1 at this time.

And speakers we have no one else queueing up for questions at at this time.

So please continue.

Okay.

Well thank, you very much.

We appreciate you joining the call.

We're pleased with our performance, and excited to see what the rest of the year has to bring.

So have a good day.

Thanks.

Thank you.

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