HNI Corp (HNI) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the HNI Corporation fourth quarter and year-end fiscal 2004 results conference call.

At this time, all the participants lines are in a listen-only mode, however, there will be an opportunity for questions.

Instructions will be given at that time.

If you need any assistance, please press star and then zero and an operator will assist you off-line.

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

I would now like to turn the conference over to 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 fourth quarter and year-end 2004 results we announced earlier today.

My name is Melinda Ellsworth.

I am the Vice President, Treasurer and Investor Relations for HNI Corporation.

If you have not received a copy of the news release and would like to receive one, 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 CFO, and Stan Askren, Chairman, President and CEO.

Stan and Jerry 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 but 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 risks.

Factors that could cause forward-looking statements in the conference call to differ materially from actual result are discussed in the company's news release and its form 10-K and other periodic filings with the SEC.

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 Stan Askren.

Stan?

Thank you, Melinda.

Good morning to all o four listeners.

I am going to share an assessment of the business for the full-year 2004 and then I will turn the call over to Jerry Dittmer, our CFO to review some of the specific financial details for the fourth quarter 2004 and for the full year 2004.

I will then come back and share some thoughts about the outlook and then finally we will open the session up for questions.

2004 was a record year for sales, net earnings and earnings per share.

Sales for the year were up 19.2%.

Net income grew 15.8%.

EPS increased 17.3%.

We were successful in achieving our key objectives set out at the beginning of 2004 of outperforming the market, achieving aggressive (ph) proper growth, building our brands, staying focused on our best cost lean enterprise, and building our capabilities and enhancing our culture.

We also made several strategic acquisitions that are delivering economic profit and strengthening our strategic position.

We experienced good organic growth.

In both the Hearth and office furniture segment across the board through our multiple channels with our multiple companies and multiple brands.

The shipments for2004 were up approximately 5%.

HNI grew organically 11.5% and 19.2% of total.

We took market share.

On the Hearth side we strengthened our very strong market position during the year.

We successfully acquired companies that generated $136 million in sales in 2004.

All of our acquisitions are performing well in meeting our expectations.

We returned $178 million of cash back to shareholders through dividend and share repurchase during the year.

All that after funding our strategic growth initiatives, operating cash requirements, and funding a 135 million in acquisitions I talked about earlier.

While 2004 was a very good year, we did experience a major new challenge of rapidly increasing material and fuel costs like we have not seen in the recent past.

In 200, we experienced unprecedented increases in steel and other material costs placing significant pressure on our margin.

Steel increased over 70 percent between the beginning of the year and year-end 2004,causing the company to pay $73 million more in total raw material costs in 2004 than in 2003.

Total steel cost increased to 15% of our cost of sales compared to10 % in 2003.

We also saw a significant other material and fuel cost increases as well.

While we normally have been able to offset material and other business cost increases through our (inaudible) or rapid continuous improvement efforts, we were not able to cover these extraordinary increases during the year.

In an effort to adjust to a higher material cost environment, we announced price increases and have seen some positive impact in the fourth quarter of approximately 4%.

Subsequently, we have also announced additional price increases that will begin to take effect in the first quarter 2005.

Our fourth quarter reflects the price material cost gap with our sales up a strong 19.8%, net income up 3.5%, and EPS up 8.5%.

As we shared with you during our previous conference call, approximately 50 % of our office furniture goes through office products or supplies related channels.

Our channel partners go to Market strategy relies heavily on catalogs, mailers and retail planograms which have fixed pricing for a set period of time.

To support these customers and their programs, we have to give advance notice of price increases as well as hit specific times of the year for the increases.

For instance, the typical required 90 days' notice of a change with affectivity on a (inaudible) break point, the price increases for these channels will generally become effective on April 1, 2005,with some lag of realization as we work through pre-price increase orders.

Typically we see some increase in orders as our customers shoot to beat the price increase.

We continue to expect to be challenged with a gap between material costs and price affectivity until the price increases take full effect, which should be the latter part of the second quarter.

As I'll remind you, this is an organization that has a strong track record at experience in managing cost in challenging times.

We believe strongly that the actions we have taken will close the gap and improve our overall profitability.

Now, I'm going to turn the call over to Jerry Dittmer to review some of the specific numbers for the fourth quarter 2004 and year-end 2004 and then I will pick it up again and finish up with comments on the outlook.

Jerry?

Thanks Dan.

I will go over the numbers now and start with the fourth quarter consolidated results.

We experienced solid sales growth in the quarter, up19.8%.

Strong organic growth across our brands contributed 46 million or 10% and acquisitions accounted for approximately 45 million of the increase.

Price realization to partially offset higher steel and other material costs, represented about 20 million of the total increase.

As Stan previously mentioned, we continue to be negatively impacted by higher material costs during the quarter.

Gross margin decrease from 37.2% to 35.1%.

The margins were negatively impacted. 1.4 percentage points as a result of 28 million higher material costs, particularly steel and other petroleum related products which were only partially offset by the 20 million realized from price increase.

SG&A as a percentage of sales, decreased from 28.1% to 26.9% but did increase 90 million (ph) as a result of acquisitions, higher freight and distribution costs, and continued investment in brand building and selling initiative.

Fourth quarter 2003 included approximately 2.4 million of the restructuring costs into (inaudible) earnout of 3 million from a prior Hearth acquisition.

Excluding these costs, our SG&A as a percentage of sales would have been 26.9%.

Diluted earnings per share for the quarter , was 51 cents, an increase of 8.5%.

Earnings per share increase approximately 2 cents to the shares repurchased during the year.

We continued our share repurchase program during the quarter and bought back 1,171,600 shares for a total of $48 million

In November, our board approved an additional 150 million for the company's share repurchase program.

At the end of the quarter, we had approximately 146 million remaining under the current re-purchase authorization.

Now let's move to our fiscal year-end 2004 consolidated results.

Our sales increased 19.2%, sales for the year were up due to strong organic growth of 11.5% and the benefit of strategic acquisitions that contributed approximately 136 million or 7.7% to top line growth.

Price realization, reflected in the total organic growth, represented approximately 36 million or 2% for the year.

Gross margins for the year decreased from 36.4% to 35.9%, reflecting the impact of 73 million of incremental costs for steel and other materials which were only partially offset by the price increase of 36 million that I mentioned earlier.

SG&A for the year as a percentage of sales decreased slightly from 27.9% to 27.4%.

For the full year, as SG&A was impacted 39 million as a result of acquisitions, 26 million of higher freight and distribution costs in addition to . 15 million of incremental investment in brand billing, and selling initiatives.

Fiscal 2003 included 8.5 million of restructuring charges compared to 0.9 million in 2004.

Diluted earnings per share for the year was $1.97, an increase of 17.3%.

Diluting earnings per share increased approximately 3 cents due to shares repurchased during the year.

For the full year 2004, we returned 146 million of cash to shareholders through our stock repurchase program.

Total shares purchased in 2004 were approximately 3.6 million, an average price just under $40 per share.

Now, let's move to our (inaudible) results starting with fourth quarter office furniture.

Sales for the quarter increased 22.6%.

We experienced good organic growth across all brands, representing 12.1 percentage points of the increase of which four percentage points related to price realization partially offset by higher material cost.

Our strategic acquisitions represented 34 million in incremental sales for the quarter.

Operating profit margin decreased 0.4 percentage points during the quarter, as increases in material costs and freight combined with the additional investments and brand building and selling initiatives, exceeded the impact of price increases, productivity improvements, and higher volume leverage.

The bottom line, we just were not able to offset our cost increases completely.

For the full fiscal year-end 2004 our sales increased 20.5%, organic growth represented 11.5%, reflecting a solid market share gains.

The industry grew 5% as reported by (inaudible).

On an organic basis, we more than doubled (inaudible).

Acquisitions also contributed $117 million.

Moving to our Hearth segment.

For the fourth quarter, sales increased 12.8%,acquisitions represented 8.1 percentage points.

Organic growth represented 4.7 percentage points.

Operating profit margin decrease 3.3 percentage points due to concentrated brand initiatives to aggressively pursue market share.

Sales for the year were up 15.7% reflecting healthy levels of growth and the benefit of strategic acquisitions.

Now, let's look at some of our other financial metrics.

We continue to generate strong cash flow during 2004 as it increased 37.5% from 141million to 194 million.

Improved net income and working capital were the main drivers that increased our cash flow.

During the year, cash balances and short-term investments, combined with cash from operations was used to fund 135 million acquisition, repay the ventures of 26 million, and repurchased 146 million of stock.

As mentioned earlier, we recently completed a new 150 million revolving credit facility that matures in 2010.

The facility can be increased up to a maximum of 300 million during the life of the deal.

We continue to have significant capacity to fund our future growth.

We anticipate capital expenditure to be in the range of 40 million to 45 million in the year ahead.

Inventory returns, as of the year in 2004, decreased from 23 turns to 21 turns due mainly to acquisitions and foreign sourcing.

Accounts receivable days outstanding as of year- end decreased from 38 to 36 days.

That wraps up our financial results for the quarter and year.

I will now turn it back over to Stan.

Thank you Jerry.

Let me then move on and highlight our perspective and outlook for the business going forward.

We believe that our 2004 results are a strong indication that our strategy is sound and our direction is correct.

Our unique strategy of pursuing multiple and distinct market segments through multiple channels with separate and focused companies and brands we believe will continue to contribute to our performance and drive market share gain.

The core fundamentals of our business are solid.

Order trends are strong across our multiple brands and channels.

The first quarter of 2005 we anticipate comparable organic growth rates to that which we experienced during fourth quarter 2004.

However, profitability will remain a major challenge for us in first quarter 2005.

Gross profit margins will continue to be negatively impacted in the first quarter by higher material costs, specifically steel, and other petroleum based products until our price increases become fully effective.

Although I am always reluctant to predict, material cost increases because of the volatility, we do believe the rate of material cost increases will moderate as the year moves on.

As we look at first quarter 2005, we anticipate growth from profit margins will be approximately two to three percentage points lower quarter over quarter. first quarter 2004 compared to first quarter 2005.

We anticipate full year gross profit margins will be comparable to 2004 as material cost increases moderate and we achieve additional price realization.

And as always, we continue to be focused on productivity improvements, cost reduction, the elimination of non value-added activity throughout the total value stream, and aggressive strategic sourcing on a global basis.

We will continue to invest for the long-term and we will focus on the front end of our business, taking advantage of opportunities that we think can create positive economic growth and are consistent with our strategy of aggressive profit growth.

We do anticipate SG& A as a percentage of sales however, will remain comparable to 2004 levels.

So overall, we're optimistic about the year and anticipate we will post record results again in 2005, assuming overall market conditions remain strong, material costs stabilize, and our incremental price increases are realized.

In closing, to all of our member owners, I want to thank you for your commitment to our success.

Our unique member owner culture is a key differentiator driving our strong results.

With those comments complete, I will not open it up to questions from the listeners.

If you would like to ask a question-- [Operator instructions] we first go to a line of Budd Bugatch with Raymond James.

Good morning.

This is actually Chris (inaudible) on behalf of Budd this morning.

A couple of quick questions.

One regarding demand.

I want to get an idea of what the composition of demand was in 2004 and kind of going into 2005.

In terms of the International versus domestic and then secondly in terms of your commercial-- corporate and non-corporate end customers.

Good morning Chris, this is Stan.

Our demand in 2004 as it relates to international domestic is-I think, you probably realize, we have a relatively small presence on the international side.

Our demand, what we did have, was very strong international, comparable to what we saw domestic.

But it is not a major sort of impact on our financial.

And then, moving on to your second question, commercial versus corporate -- we have seen, I think as I said here, a relatively consistent level across channels, across segments, across companies, across product categories.

We're probably the most diversified and we have seen overall strong growth in all those areas.

No particular areas stand out, like government or anything like that?

No particular area stands out.

OK.

Also, how about your backlog levels?

Could you give us that information as to where you were at the end of the fourth quarter and how it looks sequentially versus year-over-year?

We do not track backlog in a meaningful way.

We are a relatively short cycle business.

We do not think it is a great predictor of orders or sales activities going forward.

OK.

I have a question about the inventories in the quarter.

I think you touched on inventories were higher.

The inventory turns decreased because of acquisitions and also due to the foreign sourcing.

What should we expect going forward into 2005 in terms of inventory?

I noticed that inventories were up year over year about 50% versus sales up about 20% and the days cost to get (inaudible) was about 20 days in the fourth quarter.

What should we look for going forward?

Is it going to stay around those levels?

Chris, this is Jerry.

I think from the acquisitions, those inventories will remain higher.

As we continue to more foreign sourcing and also (ph), so I think the level that you see-- obviously we will continue to work to bring those inventories down, but I think we are at a more normalized level at the end of 2004.

OK.

Just a couple of more quick questions if I may, then I will yield to other questions.

I wanted to understand the incremental brand building.

You had some this quarter.

Your forward guidance, outlook for2005, you expect SG&A to remain level as a percentage of sales versus last year.

Do you have any incremental brand building built into that as well, and could you quantify that?

We really don't have a quantified, but our SG&A, has -in one if our calls I think we talked about that, we're going to continue to increase our SG&A as we did a lot of these incremental projects.

And what we are doing going forward is going to try to keep our SG&A at a flat percentage.

The dollar obviously will go up per acquisition, but plan to increase anymore is not what we're planning to do.

Just one final - more of a housekeeping issue, tax rate, up 36.5%.

Are you looking for that the state level?

There is a new tax deduction on the qualified production activities that is provided by the American Job Creation Act of 2004.

We are redoing that right now.

Our tax rate could come down anywhere from 1/2 point to a full point but we're still reviewing that at this time.

Thank you very much.

Our next question is from Matt McKroll (ph) with BB&T Capital Markets.

Good morning.

Good morning, Matt, how are you?

Fine.

A couple questions here.

You purchased Paoli in Q1 last year.

Are you going to see-- did you have Paoli for the whole quarter?

If not, or you going to see some incremental revenues from Paoli that wasn't there in Q1 last year?

We purchased it at the beginning of the year, so we had a full 12 months.

Year-over-year we will not have incremental in 2005.

OK.

Edward George-- I don't know if I had some bad information but it looked like 10 million was a little lighter than what we were expecting.

I think you said 4.7 percent organic growth.

How is that performing?

What is your outlook there?

Do you still think you're taking share in Hearth?

Yes, we do believe we continue to strengthen our position in the Hearth side of the business.

Ed George had the impact-- whenever you acquire customer then we have to go through and eliminate the profit on that inventory.

That accounts for some of that difference that you perceive.

The 10 million was for quarter.

On an annual basis, it would be in the $40 million range.

That's in line.

For some reason, I was in the 12 or 14. 10 million is in line for the run rate.

OK.

Let's see.

Did you mention what your outlook was for the pace of share repurchases?

You slowed down a little bit this quarter.

Any plans or any color you can add their on what your plans on doing from a pace standpoint?

Matt, we look at that on a regular basis and it is really driven by what we perceive as acquisition opportunities, what we perceive as sort of happening in the market.

Overall, we should see generally a comparable level as we did in 2004,but that is subject to change based on what we see as opportunities to invest in cash and elsewhere and the overall market.

Matt McKroll;

I think that is all I have for now.

Thanks very much.

Good luck.

Next we go to Scott Heleniak with Ferris, Baker Watts.

Go ahead.

Good morning.

First question is acquisitions.

You guys seen anything that might spark your interest?

Can we expect to see possibly a couple of acquisitions in 2005?

Obviously Scott, we do not comment on acquisitions.

We continue to be looking for acquisitions that we think we can invest shareholders cash and through our efforts create economic profit.

There is really nothing we can comment on here.

OK.

All the price increases you should realize them by-- everything by April 1?

All of the price increases in this round?

Alan-- .

We really have--

Negative.

What typically happens in our business is we get orders ahead.

Our customers attempt to beat the price increase by ordering ahead and we have to work through that backlog before we get the full impact of that price.

It should be April, May.

Probably May would be more accurate as to when we will see the full effect.

As far as capacity, where --do you feel like a lot of capacity left, where are you operating at now?

We feel we of all the capacity we need in general to handle the growth that we foresee in the future.

OK.

The last thing was, are you seeing any competitive pricing pressure?

Can you talk about that type of environment both in the office contract side and the office retail business?

I think it remains a very competitive environment.

That is one of the risks to our price increase realization.

We still have to meet the market on price.

All our competitors are just as interested in growing their market share and profitability as we are.

We anticipate we're going to continue to see price pressure from the corporate side, commercial side, and retail side.

Nothing has changed in that regard.

That is all I have.

Thanks.

as a quick reminder-- [Operator instructions] we have a question from Craig Kennison from Robert W. Baird.

Good morning.

Could you do me a favor and just review the history of your recent price increases?

I know earlier last year you raise prices and that was effective.

I guess I am looking for the date when that was effective and how much you realized.

Then going forward, what type of price increase you expect to realize this time.

Because we have these multiple companies and multiple channels and even multiple industries, there is not one day.

Generally the price increases were effective first quarter, early second quarter for the office furniture side.

For the year-- Hearth had an early price increase and then has had one in the October timeframe, as well.

For the year, we're going to realize somewhere a little bit less than 2% price realization.

For the fourth quarter realized about 4%.

Several of our companies are in the process of implementing price increases now.

The folks who are in more of the corporate environment have price increase going through.

Hearth (ph)is put through a price increase that they're just realizing now.

The retail channel impact really hits us as a retail and supplies driven channel I should say, is most impact all in the April timeframe.

And as I said, there will be a lag into May.

Can you quantify the price increase you're seeking an office furniture for the Q1 time ?

No, we can't.

Thank you.

Relative your market share gains, any sense from whom you are taking that share?

But,

I think, Craig, it is across the board.

Because we're so broad-based from the standpoint of our channels and our companies and our brands, we're seeing that virtually all the way through.

No one company in particular are we taking it from.

And then Finally, this is for Jerry.

Jerry, do you know what the impact of stock option accounting would have been in 2004?

What do you expect it to be when we move to FAS123R.

Our plan is to adopt FAS123R at the beginning of the third quarter.

For this year, it will be about a 2 cent impact on us.

For 2006 going forward, it will be about 4 cents per year.

It is about a penny a quarter.

That's it.

OK, thank you very much.

We have a question from Margaret Whelan with UBS.

Please go ahead.

Margaret Whelan, your line is open.

Please take yourself off mute.

Once again, ladies and gentlemen, if you do have a question, please press star, one.

To the presenters on the call, no further questions in queue.

Thank you very much.

We appreciate your interest in HNI Corporation and look forward to talking to you following the first quarter of 2005.

Have a good day.

Ladies and gentlemen, this conference is available for replay, it starts today, February 14, at1:00-- At 1:00 central will last until February 21 at midnight.

You may access the AT&T executive playback service at any time.[Operator instructions].

That does conclude your conference for today.

Thank you for your participation.

You may now disconnect.