HNI Corp (HNI) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the HNI Corporation Third Quarter Results Conference Call.

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

Later there will be a question-and-answer session and instructions will be given at that time. .

If you need assistance during this call today, please, press the “*” followed by the “0”.

As a reminder, today’s call is being recorded.

At this time, I would like to turn the conference over to 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 third quarter 2004 results we announced earlier today.

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

If you have not received the 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 and Stan Askren, President and CEO.

Stan will review the results and then open the calls for questions.

Before we begin, please be advised the statements made by the Company during the call that are not historical facts are forward-looking statement.

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

Stan

Thank you, Melinda.

I am going to share an assessment and perspective of the business as we see it today and going forward, then I am going to turn the session over to Jerry Dittmer, our Chief Financial Officer, who will cover some of the specific financial details and then I will come back and share our outlook for the future and then finally we are going to open it up for questions from our listeners.

Here is our perspective, it was a positive but challenging quarter, we had strong top line growth, both organically and from acquisitions approximately 14.7%, and we had okay bottom line growth of 6.8%.

Our strategy has been to pursue aggressive profit growth, outperforming the industries we compete in, we believe this is happening; however, not to our full satisfaction on the bottom line.

Our investments to build market power, we believe, are paying off.

BIFMA shipments for the first 8 months grew 4%, compared to last year we have grown 19%.

For the third quarter, we achieved record sales, record net income and record EPS.

Year-to-date sales have grown 19%, net income is up 20.6%, and EPS is up 21.5%.

We are experiencing good organic growth in both the hearth and office furniture segments, virtually across the board with the multiple companies and multiple brands.

And we are seeing good growth from our acquisitions and they are performing to our expectations.

Our core business and operations we believe are solid and performing well.

Our customer service levels are at all-time highs with short lead time and completed on time shipments.

We are seeing solid productivity improvements, good leverage on non-material costs from higher volumes and ongoing cost reductions from our long-established rapid continuous improvement culture and focus.

Throughout the total organization, we believe all the companies and brands are focused and effectively executing our strategic plan to build market power, achieve best [tackling] enterprise and build on our culture and capabilities.

During the first -- excuse me, during the third quarter, we were able to realize price increases of approximately 2-3% for the combined businesses and we have continued -- we did continue to effectively invest shareholders' cash in strategic acquisitions, in our core businesses, and share repurchase.

All in all, we think it's pretty good performance, still in our spirit of constructed discontent, it did not meet our expectations.

So the challenge, as we indicated during the last call, our biggest challenge which is getting top line growth and solid core business improvements to the bottom line has been difficult due to rapidly increasing material costs across the board and most heavily impacted by steel costs and petroleum-related costs.

In June and July we put through the maximum price increases that we thought the market would bear, those increases became effective early third quarter.

However, we did not project, nor did most others, the steel and petroleum-related costs would continue to escalate at the unprecedented rates that we have experienced.

I'll give you a little reference here.

We have experienced steel costs going up 70% since the beginning of the year.

We are a very heavy steel user.

We use approximately 260,000 tons per year.

In 2003, steel costs accounted for 10% of our cost of sales and in 2004, steel has increased to 15% of our total cost of sales, so big cost impact.

Likewise, with the increase in petroleum costs, freight costs have increased from 6% of sales to 6.4% of sales, as I said, that through the increases in fuel surcharges associated with the record level petroleum costs.

As I indicate earlier, price increases were effective starting early third quarter; however, the price increases simply have not been large enough to offset these extraordinary and material cots escalations.

So the question is what are we doing to address these challenges?

As always, we are focused on productivity improvements, cost reduction, elimination of non-valued added ways throughout the total business and aggressive strategic sourcing on a global basis.

We are currently just beginning negotiations with steel suppliers for our 2005 steel buy.

Although, we are reluctant to predict pricing because steel prices continue to be very volatile, there are some indications of softening of fourth quarter steel pricing as a result of many market factors which I won't cover here.

While there are some early indications of favorable trends in the future, I will remind you a lot of risk remains in this whole category.

We are implementing additional price increases with the market we will bear in select segments of office furniture in our hearth business.

Let me remind you though of how we go to market and some of the associated difficulty in getting timely price increases.

We sell through to multiple brands and virtually through all of the office furniture channels.

Approximately 50% of our office furniture sales go through office products or supply-related channels.

These include national wholesalers, regional wholesalers, national supply dealers, regional supply dealers, independent dealers and retailers.

Their go-to-market processes rely heavily on catalog, mailers and retail planograms, which have fixed pricing for set periods of time.

To support these customers in their programs, we are required to give advanced notice of the increases as well as fix specific times of the year for increases.

For instance, they typically require 90-day notice of price increase with effectivity on a quarterly break point.

In addition, some of our entry-level price point products face low price competition from both imported and domestic sources.

So it's difficult and we typically do not implement across the board increases in those categories.

The result of all of this is we anticipate a temporary gap between material costs and price realization or pass-through similar to the just completed third quarter until early 2005 unless, of course, material costs, in particular, steel comes down in the interim.

And, obviously, we will update you at the end of the year on the status of this challenge.

Now I am going to turn it over to Jerry Dittmer, our Chief Financial Officer, to cover some of the specific numbers and then I will come back and finish up with comments on the outlook.

Jerry

Yeah, thanks a lot, Stan.

I am going to start with our third quarter consolidated results.

We experienced solid sales growth in the quarter, we are up about 14.7%.

And as you're going to hear me talk about several times here, the prior year quarter included an extra week due to our 52-53 week fiscal year.

So on a comparable basis, the 14.7 -- if we include the 52-53 week basis the increase would have been 23.5%.

Acquisitions accounted for approximately 40 million of the increase and the price realization was 14 million for the quarter.

Now let's talk about gross margin.

Our gross margin decreased from 36.7% to 35.9%, it was impacted by 26 million higher material costs that you heard Stan talking about, steel in particular, and this -- obviously it was more than -- price increases, the leverage from higher volume and productivity improvements.

Also, gross margins were negatively impacted in the third quarter 2003 due to accelerated depreciation related to plant shutdown.

SG&A including restructuring costs as a percentage of sales decreased from 26.3% to 25.8%, but did increase 16.3 million as a result of the acquisitions, higher price distribution costs, and continued investment in brand building and selling initiatives.

As discussed in our second quarter conference call, our annual tax rate increased to 36.5% from 35% in the quarter last year.

This is due mainly to additional state tax obligations.

Our diluted earnings per share for the quarter was 65 cents, which is an increase of 10.2% and during the quarter, we repurchased 1,345,500 shares for a total of 53.9 million.

Now I am going to move to our consolidated year-to-date results.

Sales year-to-date increased 19% and again, as I previously mentioned, due to our 52-53 weeks a full year, year-to-date we reported 40 weeks year-to-date versus a 39 in the current period.

The increase on a comparable basis was 22%.

Also, remind you that our acquisitions of Paoli, Omni and Edward George accounted for approximately 91 million of the increase and the price utilization year-to-date was 16 million.

Our gross margin year-to-date increased slightly to 36.2% from 36.1% year-over-year and remind again, our gross margin was negatively impacted in 2003 due to accelerated depreciation related to plant shutdowns, as I previously mentioned.

SG&A, again including our restructuring costs, as a percentage of sales decreased slightly from 27.8% to 27.5%.

Year-to-date SG&A was impacted $27.1 million as a result of acquisitions, $19.8 million as a result of higher price and distribution costs, in addition we had $11 million of incremental investment in brand building and selling initiatives.

Our earnings per share year-to-date is $1.47, which is an increase of 21.5% and year-to-date we purchased 2,469,800 shares for a total of 97.7 million.

We do have $43.6 million that’s remaining under our share repurchase authorization.

Now I am going to move to our segments, I am going to office furniture first.

Sales for the quarter increased 15.2%, acquisitions represented $32 million and price realization approximately $9.5 million.

Adjusted for the extra week in the prior year, sales increased 24%.

Operating profit margin decreased during the quarter as increases in material costs and freight combined with the additional investment in brand building and selling initiatives exceeded the impact of price increases, productivity improvements, and higher volume leverage.

On a year-to-date basis, still in office furniture, our sales increased 19.7% as a result of market share gains and the benefits of our price realization, acquisitions contributed $83 million of this.

And this as compared to BIFMA, which Stan had mentioned, reported an increase in shipments of 4% for the eight months ended August 2004.

Operating profit margin was flat year-over-year.

Now move to the hearth segment, sales increased 13.2%, also reflecting healthy market share gains.

Adjusted for the extra week in the prior quarter, sales increased 22%.

Operating profit margins decreased 1.6 percentage points as higher freight material costs offset the price increases, higher volume leverage, and stronger mix of sales to our own distribution .Another cause of the reduction in operating profit margin was our acquisition of Edward George, which contributed -- although it contributed $8 million in sales, the profit contribution was not significantly due to the impact of acquisition adjustments in the current quarter, basically we are taking about the elimination inter-company profit in inventory.

The contribution from Edward George on an ongoing basis will be accretive to earning as we do [inaudible] behind us at this point.

Sales on a year-to-date basis were up 16.9% reflecting share gains, acquisitions, and price realization.

Operating profit margin year-to-date increased 1.1 percentage points, primarily as a result of leveraging higher volume combined with a stronger mix of sales to our own distribution .We continue to generate very strong cash flow and it increased 16.3% to 110.1 million.

After funding our strategic initiatives and operating cash requirements, we are redeploying cash back to shareholders doing an active repurchase plan.

During the year, cash balances and short-term investments combined with cash from operations is used to fund 131.9 million in acquisitions, repay debentures of 26.1 million, and repurchase 97.7 million of stock and those were all year-to-date numbers.

We will continue to maintain significant capacity to fund our future growth.

As you look at the balance sheet, inventory accounts receivable increased due to acquisitions and higher volumes in our business, also impacting inventories our increased foreign sourcing, which while reducing inventory turns it does have a favorable impact on our total cost.

With that, I will turn it back over to Stan.

Thank you, Jerry.

Let me summarize then our perspective of the business going forward.

First off, we believe the core fundamentals of our business remain strong.

We think our strategy is effective and we believe that we are building long-term shareholder value.

We expect to see moderate growth in our core businesses and a continuation of these current trends through fourth quarter.

We do plan implement increases and cost pass-through where the market will allow.

We do expect to continue to be challenged in the short-term with this gap between material cost and pricing effectivity.

I will remind you that this is an organization that has a strong track record and experienced managing cost and challenging time and that we will continue to work to aggressively offset rising material costs.

Likewise, we remain focused on investing for the long-term as we have in the past and executing our strategic plan to invest in building market power, enhancing our strong member-owner culture, and remaining focused on our longstanding rapid continuous improvement effort to build best total costs.

And I at this time would like to thank our member-owners for their outstanding work year-to-date and last quarter.

With those comments complete, we are glad to open it up to questions from the listeners.

Thanks.

And ladies and gentlemen, if you wish to ask a question please press the "*" followed by the "1" on your touchtone phone.

You will hear tone indicating have been placed in queue and you may remove yourself from queue by pressing the “#” key.

Using a speakerphone you may need to pickup your handset before pressing the “*” and then “1’.

So once again, if you have a question, please press “*” then “1” at this time.

And our first question comes from the line of Margaret Whelan with UBS.

Please go ahead.

Good morning.

It's actually Susan for Margaret.

Can you give us some sense of what you are seeing medium terms of demand across your different office furniture companies?

Yeah, Susan.

As I said in my comments, our demand as it has in the past it is consistent across the channels, across the brands, across the operating companies.

So we are strong in all of those segments.

Okay.

And can you give us any sense of -- are there kinds of customers that have become active over the last 6-9 months maybe willing [inaudible] over the past few years?

Well, I think, you know, we look at our business simply small business and large business.

Certainly, the small business was active through the, you know, probably more consistently through the downturn than large businesses, but when the economy goes up both of them kind of raise the level and come alive.

So, I would say our trends are consistent across our types of customers and probably no significant difference.

Okay.

And them one last question, can you just give any more details on the price increases that you are now starting to put through in addition to the ones you did earlier this year?

Well, in the hearth business, we just put through approximately 9% price increase that was announced.

And in the other businesses we are in the process of developing those price increases and putting them through and it's probably too early for me to really state what those are.

We are sorting through the steel price impact as we indicated and won't have a firm fix on that till we get through that.

Okay, thank you.

Thanks.

We have a question then from Bud Bugatch's line with Raymond James.

Please go ahead.

Good morning.

Actually this is Chris Thornsberry on behalf of Bud Bugatch.

Couple of quick questions for you guys.

As a follow-up to Susan's question, the price increases you guys are putting through, are those going to be effective in this next quarter?

What's the timing to be expected of these price increases going forward?

Well Chris, as I indicated to you, the timing is going to very based on our businesses.

Okay.

So, we will get price increases when we can and so for some of our businesses that, you know, as I said, the hearth industry that's right now or some of our other business that will be early -- very early in the first quarter of 2005 and for the business that I talked about that are driven by the office supply channel is going to probably be the latter part of the first quarter 2005 before they are effective.

Okay, and your revenues that you stated, you had about $14 million in revenue growth coming from price increases in this current quarter, is that separated from the acquisition benefit or this also includes price increases on those sales?

Yes, Chris, basically there is -- when you look at for the quarter and if you're talking about the 14.7%, about 6.7 of that increase, which includes price, is organic, and about 8% of it is acquisition; and if you look at the one we used in 52-53 weeks year, which is at 23.5, about 14.9% of that is organic, which would also include the price increase, and 8.6% would be from acquisition.

So, we've segmented the base business price increase and then we're just accounting the acquisition with acquisition.

There isn't a double count here.

Okay, so the price increase that mentioned in the release was basically off of the organic sales.

You probably do have some price increase on the acquisition [sales], but that's not included in that number?

Well, as the answer theoretically to that question is yes, but -- you go back and say we are not accounting for price increases for the acquisitions, they are what they are because we didn’t own them last year.

So –

Sure.

Okay.

Got you.

You mentioned in hearth that Edward George gave you about $8 million in sales and it was probably flat as a profit contributor basically because of some inter-segment eliminations.

What about the other acquisitions you have in office furniture, whether they contribute to operating profit this quarter?

We don't break that out, Chris.

Okay.

One final question for you, could you break out the raw material prices, the steel and the 4 million in other bi-segment, what you saw on office versus what you on hearth?

It's consistent across all the segments really from a sales price standpoint, we can talk about the contributions here, I believe.

We are looking here, Chris, through this --

Okay.

Yeah, so steel would be about, you know, somewhere between -- around 15 million.

The other material costs would be about 4 million for office furniture, then the remainder that we talked about would be in the hearth side.

So, about 6 million in hearth, not the steel.

About 6 million for hearth.

Correct.

Okay, thank you very much.

Thanks.

And we are showing a question then from Craig Kennison's line with Robert W. Baird.

Please go ahead.

Good morning everyone.

Good morning Craig.

Relative to steel costs and the price increase, imagine it's easier to get a price increase when steel costs are still rising.

If steel prices begin abate as you suspect they could, do you think it will be more difficult to get the price increase you are seeking in early 2005?

I don’t think so, Craig, because they are at unprecedented levels and they are not likely to come down in a dramatic fashion.

Secondly, we are seeing cost pressure across all the categories, petroleum-related costs are significant as well and that includes all the way from plastics, resins, our fabrics, the high pressure and laminate transportation cost etc.

So we don’t anticipate that's going to hinder our ability to get price.

I certainly appreciate the cautious tone you are striking despite the good performance.

And I know that you don’t provide guidance, but do you think the analysts have it right in the near-term or is there more steel pressure or cost pressure that we have not yet incorporated into our Q4 estimate?

Well if you look at -- Craig, this is Jerry, if you look at what we put it even in the press release, I mean, sort of fourth quarter, obviously, we are going to continue to have this pressure.

We have just put our price increases in during the third quarter.

We will see the full effect of what we did put in, in the fourth quarter.

But as we have stated, it's not enough to cover all of the steel and other price increase that we have seen.

And to speculate beyond that, Craig, would be probably you are responsible on our part.

Yeah, but it does sound like may be we collectively have a high number there, one way to have been able to offset that has been share repurchase activity which has been very aggressive.

You have got 43 million less, you could exhaust that apparently in the fourth quarter if you wanted to be aggressive, what are the plans for continued authorization there?

Obviously, we always look at that, but I, you know, our plans would be to continue to repurchase shares where we think it creates value for our shareholders in the future.

And then finally, if you could just could just take a step back and you made some strategic tuck-in acquisitions recently, can you just highlight what you expect them to do for HNI Corp.?

Thanks a lot.

Okay, Thanks, well, there are several of these and in the hearth side we are doing a lots of strategic tuck-in acquisitions, primarily on the distribution side and that's the continuation of a strategy we had in place and so we expect those to perform and they create value and continue to help us grow our share in that industry.

Likewise, we've acquired some office furniture-related companies and we expect the same with those, to be fully contributing economic profit generating components of our business.

Any further question, sir.

No, Thank you

Thank you.

We do have a question then from Scott Heliniac's (phonetic) line with Ferris Baker Watts.

Please go ahead .

Hi, good morning

Hi, Scott.

Question on the international side, international revenues are typically a small percentage of your sales, is there any more plans to expand what you are doing internationally and as far as going into that business and also can you gives an update on where you stand as far as import and where you see that headed if you are going to be active in that or you are going to kind of stay the course?

First off from the international standpoint, we continue to look strategically where can enter the international markets and really generate a return.

As I think you know that's been challenging in this office furniture industry for the major players to go international and really recover their cost to capital .We've a consistent and diligent effort to look for those particular opportunities market by market basis that we can enter and really make a difference there.

Regarding the imports, that is a significant part of our sort of sourcing effort and that is growing relatively aggressive.

We have a significant number of people on the ground worldwide and it's a core part of our strategic plan as we look at the future.

And how many countries would you say you have people in right now?

Is that something you can comment on or --

We have -- it's multiple -- I don't think I can give you an exact answer.

Our concentration right now is in Asia, you know, mostly all of the countries in Asia we have either full time people or we have people that are spending a lot of time traveling through.

Okay, alright.

And as far as your capacity utilization rates for office versus hearth, where exactly are you?

We have plenty of capacity to handle future growth, you know, in the several years based on current sort of run rates to handle the growth without any major capital expenditures.

Okay.

So we -- try to say you are in maybe 80% range, somewhere in there?

That's probably a little high.

That's, you know, we cannot look at it because part of it is -- one of the difficulty of the question is our continuous improvement effort drives such a -- we are freeing up capacity all the time.

It's always a moving -- it's a moving number.

And obviously the sourcing activity frees up capacity as well.

So, best thing to say is we have adequate capacity for the next couple of years.

Okay.

And then lastly, can you talk about the most strength you are seeing in ceding versus systems versus storage.

Can you talk about any one that's maybe little bit stronger?

No, it's -- as I say, it's consistent across the board for us.

I mean, we don't have any particular brand company or systems or -- excuse me, product category that just stands out above the rest.

We are pretty broad-based, multiple channel, multiple brands, multiple product companies, multiple product lines, multiple price points, and that's really one of our strengths and they are all performing at a good and a consistent level.

Okay.

Congratulations, thanks.

Thank you, Scott.

Thanks and we have a question now from Matt McCall's line with BB&T Capital Markets.

Please go ahead.

Thanks.

Good morning.

Good morning.

First, if I look at the gross margin line, I take out to the $5.1 million in accelerated depreciation which could be considered now in occurring, gross margin was actually flat year-over-year.

Given what you are talking about price increases and what you have experienced or recognized so far should we looking out to Q4 consider something similar on a year-over-year basis?

I think that would be fair.

Okay.

And I know you don’t breakout different brands or companies, but you were telling a little bit more about Paoli in the past, Paoli's Q3, was that pretty much in line with the previous few quarters?

I think that’s -- that would be accurate.

Okay.

If I take out the price increase in the Omni acquisition, it looks like hearth revenues are only about 3.1% year-over-year, but if you look at housing starts although they have slowed a little bit I think on a 2-year basis accounting for the difficult comp last year, it looks like they actually accelerated on a 2-year basis in Q3; can you talk a little bit about the disconnects or any trends that you are seeing in hearth?

One thing, Matt, first is when you look at adjusted account for the extra week [multiple speakers] take that hearth number out, that comes into double-digit.

Okay, may be that’s where I lost it, okay, what was double-digit on an adjusted basis?

I don’t have it right here in front me, if you calculate –

I can work on -- anyway, can you just talk about the trend you see there, they are pretty much in line -- I mean, obviously you have grown double-digit, that's better than starts, but --

We believe we continue to take market share with hearth.

It's a very strong business.

It's a competitive industry, starts are continuing to grow up and we are tracking whence that -- if you kind of look at the year-to-date core business.

So, it's solid, they are market leaders, and we anticipate they are continuing to do well.

Okay, and finally, can you just gives an update on the store rollout, any color on new store plans and others -- one Charleston coming up?

Yeah, we are executing the store strategy.

Quite frankly what we are doing right now is going back to existing stores and making sure that we have them up to snuff, that we've re-branded and we've in some cases relocated some of those stores.

So we are kind of taking care of what we have on our plate today before we start rolling through, but next year we will start to see new store rollouts in a more aggressive fashion.

Okay ,Thanks a lot, good luck.

Alright , thank you.

Thanks and we depending on those having question please press the "*" followed by the "1" at this time.

And I would like to turn the conference back over then to the host side for any closing comment.

Closing comments are we, as we said, we are positive about third quarter, it didn't meet our expectations, but we feel like our business is very solid and we continue to be focused on creating shareholder value and managing costs aggressively.

So, we appreciate you taking the time to listen in and your interest in HNI Corporation and have a good day.

Thanks.

Thank you.

And ladies and gentlemen, this conference will be available for replay starting today, Thursday, October 21, at 1:30 PM Central Time and will be available through next Thursday, October 28, that's midnight Central Time.

You may access the AT&T executive playback service by dialing 1-800-475-6701 and then enter the access code of 749522.

That number once again is 1-800-475-6701 and again enter the access code of 749522.

And that does conclude our conference for today.

Thank you for your participation and for using AT&T's executive teleconference.

You may now disconnect.