HNI Corp (HNI) 2005 Q1 法說會逐字稿

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss first quarter 2005 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, 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, 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 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 result are discussed in the Company's news release and its Form 10-K and other periodic filings with the Securities and Exchange Commission.

The Company assumes no obligation to update any forward-looking statements made during the call.

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

Stan?

Thank you Melinda.

I’m going to share an assessment of the business for the first quarter of 2005 and then turn the call over to Jerry Dittmer, our Chief Financial Officer to review some of the specific financial details for the quarter.

I’ll then come back and share some thoughts about the outlook after Jerry’s comments, and then finally we’ll open the session up for questions.

The key point for the quarter -- stronger-than-anticipated top-line growth drove record first quarter performance.

Sales were up 21.2%; net income grew 16.6%; and earnings per share increased 23.7%.

Sales were driven by solid organic growth, contributions from acquisitions that we completed in the second half of 2004 and early 2005, the effect of pull-ahead orders and sales in advance of price increases, along with a strong market dynamic.

As we previously shared with you, we continue to adjust to a higher material cost environment.

During the first quarter, gross margins were negatively impacted by higher steel and other petroleum-based product cost increases.

The good news is that we experienced good leverage while we continued to invest in our brand building and core growth initiatives.

We are pleased with the continued strong market performance across our multiple brands, channels and businesses of our office furniture segment.

Our Hearth business experienced good top-line growth but did not meet our expectations as they struggle with some softness in certain retail markets and some unfavorable SG&A expenses for the period.

Overall, it was a very solid quarter, and we are pleased with the results.

Now, I'll turn the call over to Jerry Dittmer to review some of the specific numbers for the first quarter, and then I will come back and finish up with the comments regarding the outlook.

Jerry?

Jerry Dittmer.

Thanks Stan.

I’ll go over the numbers now and I’ll start with the first quarter consolidated results.

We experienced solid sales growth in the quarter of 21.2%.

Strong organic growth across our brands contributed $76 million or 16.4% and acquisitions accounted for approximately $22 million of the increase.

Price realizations to partially offset higher steel and other material costs represented about $23 million of the total increase.

In addition, we also recorded $20 million of sales in advance of price increases that will become effective during the second quarter.

As Stan previously mentioned, and we shared with you during our fourth quarter conference call, we continue to be negatively impacted by higher material costs during the quarter.

Gross margin decreased from 36.6% to 34.8% due to $27 million in higher material costs, particularly steel and other petroleum-related products.

SG&A as a percentage of sales decreased from 29.1% to 27.6% but did increase $20 million as a result of acquisitions, higher freight and distribution costs and continued investment in brand building and selling initiatives.

During the quarter, we completed our review of the impact of the American Job Creation Act of 2004, and as mentioned during our previous conference calls we were able to reduce our effective tax rate from 36.5% for fiscal year 2004 to 35.5% primarily due to the new tax deduction on the qualified production activity.

Diluted earnings per share for the quarter was $0.47, an increase of 23.7%.

Earnings per share increased approximately $0.02 due to shares repurchased during the quarter.

We continued our share repurchase program during the quarter and bought back 512,500 shares for a total 21.7 million.

At the end of the quarter, we had approximately 124 million remaining under the current repurchase authorization.

Now let’s move to our segment results starting with office furniture.

Sales for the quarter increased 22.3%.

We experienced good organic growth across all brands representing $64 million or 18.3 percentage points of increase, of which $14.8 million, or 4.2 percentage points related to price realizations partially offset the higher material costs.

Our strategic acquisitions represented $13.9 million or 4 percentage points in incremental sales for the quarter.

In addition, we also recorded $20 million of sales in advance of price increases that will become effective during the second quarter.

Operating profit margin was unchanged at 9.1% during the quarter, as $29 million of increases in material costs and freight, combined with the additional investments in brand building and selling initiatives offset the impact of price increases, productivity improvements and higher volume leverage.

Moving to our Hearth segment, for the first quarter, sales increased 17.8%.

Organic growth represented $12 million, or 10.5 percentage points of the increase, of which $8.3 million related to price realization to partially offset the higher material costs.

Acquisitions represented $8.3 million or 7.3 percentage points of the increase.

Operating profit margin decreased 1.5 percentage points as Stan mentioned earlier.

Now let’s look at some other financial metrics.

The first quarter is seasonally our largest cash utilization quarter.

Operating cash flow was $18.7 million during the quarter, essentially flat with the prior year.

During the quarter, we utilized $23 million of our revolver to fund acquisitions and meet seasonal cash requirements.

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

As you look at the balance sheet, you’ll see that the increase in accounts receivable from year-end is primarily volume driven.

The effect of FAS 123R, share-based payments, as it relates to expensing of stock options has been changed for the first reporting period in the fiscal year that begins after June 15, 2005.

Therefore, we will begin expensing stock options in 2006.

We project that this will affect our EPS approximately $0.03 to $0.04 in 2006.

That wraps up our financial results for the quarter.

Now I’ll turn it back over to Stan.

So as we look forward, our order trends are solid across our multiple brands and we believe we are well positioned in each of our markets to continue to experience strong market performance.

However, there continues to be economic uncertainty.

The market remains very competitive, so it’s difficult for us to forecast the business with great accuracy.

Our best estimates, we expect sales growth to remain at healthy levels but to moderate somewhat during the second quarter due to less-heated market conditions and the pull-ahead impact of $20 million sales in advance of the price increase recognized in the first quarter.

As we discussed during our previous conference call, price increases for our office products and supply-related channels become effective April 1.

The full effect will not be felt though until the latter part of the quarter as we work through orders placed prior to the price increase.

Steel costs appear to be moderating at this time; however, they remain at high levels.

We continue to experience cost pressure in freight, distribution costs, petroleum-related costs, and other raw materials.

So as we move forward, our strategy continues.

We remain focused on productivity improvements, cost reduction, elimination of non-value added activity throughout the total value stream, and aggressive strategic sourcing on a global basis.

We are committed to continuing to invest for the long term, focus on the front of the business, taking advantage of opportunities that could create positive economic profits and are consistent with our strategy of aggressive profitable growth.

We believe our operating philosophy of pursuing multiple and distinct market segments with separate, focused companies, business models, brands and products will continue to result in solid market performance.

To all of our member owners at HNI, once again I want to thank you for your commitment to our success.

Our unique member-owner culture is the key differentiator continuing to drive our results.

With those comments, I would like to open it up now to questions.

Thank you sir. (OPERATOR INSTRUCTIONS).

Budd Bugatch, Raymond James & Associates.

Please go ahead.

Good morning everyone, this is Chris Thornsberry on behalf of Budd.

Congratulations on a good quarter.

I had a couple of quick questions if I may.

The first one is what amount of the revenues came from the 4 small acquisitions you guys made in Q1?

I know you gave a total number of about $22 million.

How much came from the small acquisitions versus Edward George and the other acquisition that you made that were prior to the first quarter?

Chris it’s a small number.

So maybe less than 1 million or 2, less than 5?

It’s more along the lines of 5 -- less than 5.

Okay, all right thanks.

And with regard to the price increase that’s effective on April 1, are you expecting that as it becomes fully in effect towards the end of the quarter, do you expect that to offset raw material price increases you’ve see up to this point and freight distribution cost increases you’ve seen up to this point?

So if we assume say, which is a big assumption, but if we assume that raw materials stay relatively flat from here on out and freight distribution costs remain relatively flat except for growing with volume that those price increases would offset most of those cost increases?

That’s what we anticipate Chris.

Okay, that’s helpful.

And looking at the office segment, the operating margin for the quarter was 9.1%.

It looks like if you -- if we kind of did some math and took out some extenuating circumstances such as the price increases, the raw material costs, the net effect of that and some other things, we get to close to around 12% margin, kind of a “normalized” margin I guess, what is your thought for this?

Is this kind of a level we could look at going forward at this type of level of revenues?

Or is it something that maybe you’re shooting for going forward, and when do you think you could hit that?

Is our thinking wrong looking at that part of the segment?

First off, your analysis to get to 12% is accurate.

Okay.

We hesitate to speculate on sort of what it can be and where it’s going.

We’re -- you know it’s a very dynamic market.

We’re in this for the long term focused on creating economic profit and so our hope is it’s going to be at that level and we can improve it in the future.

We’re focused on continuous improvement but I hesitate to speculate beyond that Chris.

Okay but if all things being equal, if things start to stabilize we could start to see that creep up towards that level and even higher than that.

You would say that, right?

That’s a possibility.

Okay.

Just a couple more real quick questions, more housekeeping-type issues.

How should we look at the tax rate going forward?

You’re at 35.5%.

I know some of that was due to the American Jobs Creation Act, and you had some other things involved in there as well.

Should we look at being close to 35% or 36%, well around that level, 35.5% going forward?

The thought right now Chris is that 35.5% is what we think the rate will be for this year unless there are any other changes.

At this point, the 35.5% would be a good rate to use.

Okay, and let’s see here one more question for you, and then I’ll yield to others.

What was the incremental spending on brand building and selling and new product initiatives for the quarter?

And I know you’re doing that in both office and in Hearth.

If you can, if you could you break that out in the 2 segments?

But if not could you give us a general feel for what you spent in terms of incremental spending that was included in SG&A, if you could give us that information.

We’re no longer breaking that out Chris, because it’s become sort of our ongoing model of reinvesting back into the business.

And so it’s going to be at a comparable rate as it has been in the past.

I think it is fair to say that our objective is to hold our SG&A percent constant.

So, and it’s going to change, it’s going to be different year-by-year, quarter-by-quarter based on the investment opportunities we see.

Okay, thank you very much.

Matt McCall, BB&T Capital Markets.

Please go ahead.

The 4 small acquisitions, could you just run through those by name and provide any more color?

I know they’re small but, and maybe if you could say, you said it was less than a $5 million impact, what you see maybe lump them together going forward as kind of a run rate once things get up and running.

Basically what there is is there are 2 small service ones; one small Hearth one, which I think we’ve talked to you about before and then there was one dealership.

That’s really what the 4 of them were.

Okay, there was I think a service – in the K, I think you talked about the service provider in Atlanta.

Is that in addition to these other two?

Yes.

Okay, so there are 2 more, okay.

They’re both very small.

Right, right okay, so the $5 million, that’s a ballpark number going forward for the impact for those guys?

Correct.

Okay, and Jerry I think you mentioned the $23 million in debt, it looks like the acquisitions only cost $10 million, or at least that’s what it showed on the cash flow statement?

What’s the delta there?

The real change there is the first quarter, as I mentioned is our seasonally highest cash flow usage time of year so it’s really just timing.

Okay.

That’s really all it is.

Okay.

Let’s see, the demand trends, the housing start numbers that came out the other day weren’t that strong for March.

Can you talk about really in both segments what the demand trends were like in each month of the quarter?

We don’t break that out Matt, so I can tell you that certainly starts for March look like they took a big dip.

I think a lot of that is related to weather we believe.

Certainly housing starts are going to we think moderate slightly is our perspective.

There’s still a lot of big demand.

It’s still at high levels, and it’s plenty early because of the weather to kind of sort out exactly where it’s going to go.

It depends on where mortgage rates go, and I think we’re in a good position in that market to maintain our strong performance, although it’s likely to be less than it has been in the last several years simply because of starts.

On the office furniture side, and I’m going to cover some of this as I covered some of this in the outlook, we expect that office furniture is going to continue to be solid.

Where it goes is tough to forecast.

Certainly in the first couple of months out of the box, this industry is seeing some numbers that it hasn’t seen for a very long time.

And where it goes from here is going to depend on sort of capital investments, CEO confidence and all the things that you guys watch every day.

And there is lots of uncertainty there.

We think it’s going to be solid through the rest of the year, but beyond that it’s difficult for us to I think comment intelligently.

Sure, you mentioned weather, and you commented in the call and in the press release about retail softness due to mild winter weather.

Normally, I think, mild winter weather is associated with good retail numbers.

In this case I guess you talked about maybe it being a regional thing and maybe you can explain that a little more.

So you’re saying that bad winter weather makes more people want to go out and get a new fireplace?

I mean is that the (multiple speakers)?

Yes, basically our challenge in the retail has been in the colder climates in the Midwest let’s say.

So the way the Hearth business works on the retail side is really cold, crummy weather makes people think about buying a Hearth appliance or upgrading, not only just because they’re inside more but just because of the heat utility value.

So when it’s sunshine and things are looking good, people are outside working in the yard, their outdoor activity, and there’s just less sort of impetus for people to make that discretionary purchase on a Hearth appliance.

And would that be the case more so in those cold regions whereas in some of the other regions that you would sell these products in, we would probably want to look at new home sales or housing starts, something like that as a better indicator?

Yes exactly, I think and the point is in those warmer climates it’s not as impacted by weather.

There’s sort of a flat line based on kind of consumer demand and other factors.

The housing market still drives 70% of the Hearth business, so that’s always the place to look first.

Okay, and then finally, Edward George I think we’ve spoken in the past is probably about a $50 million business.

Is that kind of what you’re talking about that it looks like even if you apply the entire $8 million from acquisitions in part to Edward George, it would still run a little bit below that $50 million run rate on an annual basis.

Is that kind of that regional dynamic you’re talking about that’s causing that, or is my $50 million number too high?

Your $50 million number is a little high, but your analysis of sort of the regional issue and the seasonality of that business is I think you’re accurate in that sort of portrayal.

Okay, thanks a lot and congratulations.

Thanks Matt.

Susan McLowry [ph], UBS.

Please go ahead.

Good morning, can you talk a little bit about the backlog that you’ve got?

I know that the industry as a whole for the first two months that we have is up about 15%.

Can you just give us a sense, are you ahead or in line with the industry, or where you fall, look into that?

Susan we don’t, as has been our past history, we don’t report backlogs.

We’re a relatively short-cycle business, short lead times, and so backlog is not really something that is terribly meaningful for us.

Okay, can you give us any sense, then, in terms of just overall demand trends, what you’re seeing, maybe some of the different industries or regionally what’s strong?

Sure, we as I said in my comments, we continue to be strong across the brands, across the different channels that we play in.

Contract is especially strong right now as is the supply-driven channel; the middle-market channels are also strong.

Contract in particular is hot, I think the larger corporations are sort of awakening and we’re seeing additional capital investment.

But I want to emphasize it’s strong across the board.

Okay and what about regionally are you seeing anything?

Have markets that were weaker like Northern California or areas like that kind of stabilized some?

Yes, it’s kind of across the board.

I don’t think we have anything special to report regionally.

Okay, and then one other question relating to kind of how we think about going through the year.

Has there been any change in the expensing of the stock options?

I know that was something that was going to come up in the second half of ’05?

Actually in my comments Susan, what I said is that with the change of that, we now will begin expensing stock options in 2006 and it will be about a $0.03 to $0.04 per year EPS effect on us.

Sorry about that.

We’ve been going back and forth between calls.

No problem, we understand.

Okay and I guess that’s actually about it for now, then.

Thank you.

Craig Kennison, Robert W. Baird & Company, Inc.

Please go ahead.

Good morning everyone.

I had a question first of all with respect to just the tone of business in March and early April.

I know it’s early but just seems we have other data points from other companies that the economy may have begun to slow, especially in March.

Any indication from your perspective that that has happened?

I think Craig what we can comment is certainly the first 2 months were red hot, and we are seeing some moderation of orders, and that really kind of goes to my outlook of things cooling off somewhat.

Still at strong levels, but not at the same level as they were at the beginning of the year.

Thank you, and then with respect to your acquisition pipeline do you expect through the balance of the year to fold in relatively small acquisitions of the same type, or is there a difference in your pipeline today?

We really don’t comment much on the acquisition sort of front.

We would anticipate a similar sort of experience I think going forward.

And then just with respect to the corporate other line, are you expecting that to be up from last year, perhaps in the $40, $42 million range, or is it too early to tell?

It’s probably too early to tell, but that seems to be the range that we’re forecasting to be in.

And then finally, just Stan you’ve been in that chair for roughly a year, and I’m interested in maybe taking a step back and what you see for the Company and how you think -- you’ve executed extremely well -- and how you think you might change things and whether you think it’s going to be more of the same for HNI?

That’s a good question Craig.

First off, Jack Michaels left a tremendous foundation for us to build on, and I’ve been part of this corporation for 13 years and was part of the Senior Management Team, and actually was President here for I guess it’s been a couple of years.

And so what you see is what you ought to anticipate going forward if we do our job right, and that’s just continuing to focus on best costs lean, continue to work on building brand power, continue to invest in building our culture and our capabilities, which really is the differentiator.

And then this whole focus on aggressive profitable growth, pursuing the business through these multiple channels, multiple brands, we call it splitting the focus sort of model is what you ought to see going forward.

So it’s really more of the same, and more of the same as we look out.

Terrific, thanks again everyone.

Chris Thornsberry, Raymond James & Associates.

Hi, Chris Thornsberry again, just one quick follow-up question.

What can we look at in terms of CapEx going forward the rest of this year?

I don’t know if you’ve mentioned any plans or guidelines, but looking forward at CapEx and also keeping in mind the context of acquisitions what’s kind of your budget or plan for this year?

We see this year Chris being in that $40 to $45 million range for CapEx.

That does not include acquisitions if there are any.

Okay, so now would that be mostly in the office product segment, office furniture?

It would be both in office products and in Hearth, mostly around new-product introductions.

Okay, thanks.

(OPERATOR INSTRUCTIONS).

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Please continue.

Well thank you very much for your interest in HNI, and we’re looking forward to talking with you soon.

Have a good day.

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