HNI Corp (HNI) 2005 Q2 法說會逐字稿

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

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

Later we will conduct a question and answer session, giving instructions at that time.

If you should require assistance during this call, please press star, then zero.

And, as a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, Melinda Ellsworth.

Please go ahead.

Thank you.

Good morning and thank you for joining us today for the HNI Corporation Conference Call to discuss second quarter 2005 results 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 results are discussed in the Company's news release and its Form 10K 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.

Good morning to everyone.

I'm going to share a brief assessment of business for the second quarter 2005, and then I'll 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 final thoughts about the outlook and then we'll open up the session for questions.

Summarizing the quarter, we had a very good quarter and are pleased to report record results.

We experienced strong top line growth and solid operating leverage during the quarter.

Sales were up 16.8%.

Net income increased 35.5%, twice the rate of sales growth, and earnings per share increased 43.2%.

Our organic growth continued to be solid across our multiple brands and channels.

Gross margins returned to prior-year levels, as our ongoing cost reduction issues and price realization offset higher steel and other petroleum-based product costs.

We experienced a solid operating leverage while yet we continued in our brand building and core growth initiatives.

Our business model strategy of pursuing multiple and distinct market segments with separate focus companies' business models of brands continues to drive strong market performance for us.

We did have a very successful Neocon Show.

That is our annual business furniture trade show in June.

Our Allsteel company won two best of show gold awards for their new reach and light product platforms.

The HON Company won the Office Furniture Dealers Association Manufacturer of The Year Award for the third year in a row.

They also won category awards for best training, best customer service, and best technology.

Allsteel also won a category award for best management.

In addition, HNI was recently recognized as one of Industry Week's Fifty Best Manufacturing Companies, recognition among the largest 500 manufacturing companies for excellent business performance.

With that, I'll turn it over to Jerry Dittmer, our CFO, to review some of the specific numbers for the third quarter and then I'll come back with comments and an outlook.

Jerry.

Thanks, Dan.

I'll review the numbers beginning with the second quarter results.

We experienced solid sales growth in the quarter, up 16.8%.

Strong organic growth across our brands contributed $56 million, or 10.9%, and acquisitions accounted for approximately $30 million of the increase.

Price realization to offset higher steel and other material costs represented about $34 million of the total increase.

As Stan previously mentioned, gross margin returned to prior levels at 36.1% as a result of cost reduction initiatives and price realization.

SG&A, as a percentage of sales, decreased from 28.1% to 27.0%, reflecting strong operating leverage.

However, total spending increased $17.4 million as a result of acquisitions, higher freight and distribution costs and continued investment in brand building and selling initiatives.

As we mentioned during our first quarter conference call, we have reduced our effective tax rate to 35.5% due to the American Jobs Creation Act of 2004.

Diluted earnings per share for the quarter was $0.63, an increase of 43.2%.

Earnings per share increased $0.03 due to the Company's share repurchase program.

From a cash flow perspective, we repaid $23 million borrowed earlier in the year.

Now a few comments on our year-to-date results.

Gross margin on a year-to-date basis continued to reflect a negative impact of higher steel and other material costs decreasing to 35.5% from 36.3% due to the timing of price realizations.

SG&A, as a percentage of sales, decreased from 28.6% to 27.3%, reflecting better overall leverage.

However, total spending increased $37.7 million as a result of acquisitions, higher freight and distribution costs and continued investment in brand building and selling initiatives.

Diluted earnings per share year-to-date was $1.10, an increase of 34.1%.

Year-to-date earnings per share were favorably impacted approximately $0.06 as a result of the Company's share repurchase program.

During the year, we have repurchased 583,900 shares for approximately $24.9 million. $120.8 million is remaining in the current repurchase authorization.

Operating cash flow remains strong at $56.3 million.

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

Sales for the quarter increased 18.3%.

We experienced good organic growth across all brands representing $52 million or 13.5 percentage points of increase of which $26 million or 6.8 percentage points related to price realization to offset the higher material costs.

Our strategic acquisitions represented $19 million or 4.9 percentage points in incremental sales.

Operating profit margin increased to 10.2% from 9.7% as the result of higher sales volumes, price realization, and strong operating leverage.

Moving to our hearth segment, sales for the quarter increased 12.1%.

Organic growth represented $4 million or 3 percentage points.

Acquisitions represented $11 million or 9.1 percentage points of the increase.

Operating profit margin was 12.1%, reflecting continued investment selling brand and new product initiatives.

That wraps up our financial results for the quarter.

Now, I'll turn it back over.

Stan.

So as we look forward, our order trends remain solid and we feel like we're well positioned in each of our markets and continue to experience solid market performance.

We expect organic sales growth rates to be consistent with the second quarter, while acquisition growth will moderate some as third quarter comparisons will fully reflect acquisitions completed in 2004.

As we previously indicated, gross margins are expected to return to, or slightly exceed, prior year levels for the full year, and SG&A, as a percentage of sales, will continue to trend with the prior quarter.

So, as we move forward our strategy continues.

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

We also remain committed to continue to invest in the long term, focusing on the front of the business and taking advantage of opportunities that we feel can create positive economic growth consistent with our strategy of aggressive, profitable growth.

And we believe our operating philosophy of pursing multiple and distinct market segments with separate focus companies will continue to result in solid market performance.

Once again, I want to thank all of our member owners for their commitment to our success.

Our unique member owner culture, along with our unique business model, is really the key differentiator continuing to drive these strong results.

With those comments complete, I'll be glad to open it up to questions from our listeners.

Ladies and gentlemen, if you wish to ask a question, please press star, then one at this time. [CALLER INSTRUCTIONS].

Our first question is from Susan MacLowrey with UBS.

Please go ahead.

Good Morning, great job on the quarter, well done.

Can you talk a little bit about what you're seeing in terms of raw material prices, especially steel?

Yes, Susan this is Jerry.

We've seen raw material prices, petroleum related and fuel surcharges and things like that have continued to rise.

We have seen steel -- as you know, last year about 18 months ago, we saw steel start to go up.

What we've seen over the last 3 to 6 six months is we have seen steel moderate somewhat.

Okay.

And so are you starting to feel some relief there and should we start to see even more of that as we go through the year and you get tougher comps there?

Yes, you will get tougher comps; that is correct.

What you'll also probably see, and we obviously don't know what steel is going to do the last half of the year, whether it's going to stay the same or go up or down, but with the price increases we've put in place, we think that it will moderate.

Obviously our other material costs, like I said, fuel-related plastics, things like that, have continued to go up.

So overall, we feel pretty confident that price increases that we have put in place so far have been able to adequately cover all those costs.

And, like I said, going on into the later part of the year, we're really not sure what we'll see there.

Okay.

And then just in terms of the acquisitions that you've done over the last year or so, some of those have been of dealerships, which is something that is relatively new for you guys getting into that side of the business.

Can you just comment on is there anything different than you expected there or any kind of insights that you have?

We made one acquisition of an office furniture dealership and it's early, Susan, but it is going to plan slightly ahead of plan.

That's probably the extent of what we can comment on.

Okay.

All right, thank you.

Thank you.

Thanks, Susan.

Our next question comes from Budd Bugatch, Raymond James and Associates.

Please go ahead.

Good morning, Stan.

Good morning, Jerry.

Good morning, Melinda.

Congratulations on the quarter as well.

Just a couple of questions.

I just wanted to make sure I understood your comments, Stan, on gross profit in the third quarter.

Where do you think -- to trend back, I think your max gross profit in the third quarter, if my numbers are right, are like 37.8% a couple of years ago.

That's correct, Budd.

Do you think it gets back to that level?

Headed in that direction.

Whether it gets back to that level or not, we wouldn't speculate because there's still, as you know, lots of volatility in pricing and lots of volatility in material costs, but as you can see, we've closed that gap, so we had -- we sort of developed over the last 18 months and we think we're heading back that direction finally.

Got to be 124 basis point differential between the second and the first quarter is pretty impressive, and I'm just -- do I get the same sense of magnitude in the third quarter versus the second?

I think what you'll see, Budd, is you won't see it -- I think you'll see it improved, but not at that same rate.

Obviously, when you look at the way the price increases have been put in, and the raw materials and steel prices went up 18 months ago and roll it forward, the biggest benefit we're going to see on the comparison is going to be here in the second quarter because now what we've got is the year-to-year comps get harder.

I think you will see it hopefully improve in the range of 100 basis points going forward.

Obviously, as Stan said, our goal is to get it back up to where it was, or even greater than where it was, at the 37.8, but again, it's going to take us several more quarters to get up to that level.

Okay.

That's very helpful.

And in the SG&A, if my map is right on, the incremental -- and I know you probably gave us a rounded numbers -- on the $8 million of it, sales, SG&A versus the $30 million of acquisitions, that's about a 26.7% SG&A run rate.

Is that the right way to think about the acquisitions?

Is that continued, like, at that level?

The acquisitions, again, what you'll see is you've now got the full effect of those acquisitions.

So, you will see that rate -- that percentage will moderate pretty much with where it's at in the second quarter.

And is the acquisition run rate for the third quarter also about $30 million or is -- I don't know what --

The two big acquisitions, Edward George and OMNI, were both in July of last year, so they'll fall off on your comparables.

So the $30 million in the third quarter will be something less than half of that.

Okay.

So, about $14 million or so?

Correct.

Okay.

So, if I apply that SG&A, that's fine.

Okay.

My last question, and I'm confused, and you all know I live confused, so it's okay.

When I look at the identifiable assets by segment, I see that office furniture is up year-over-year about $74 million, hearth is up about $40 million and corporate is down about $60 million.

And the only major changes in assets that I could find on the balance sheet were basically in inventory and receivables.

Was there a re-class involved?

No, Budd.

Let me take you through them.

What there is, is office furniture and hearth.

Those are both acquisition related and growth, as you said, with inventory and receivables.

On the corporate side, it's cash and short-term investments decreasing $60 million.

Okay, that'll do it.

Okay, that was very helpful, Jerry.

Thank you.

Thanks, Budd.

Our next question comes from Matt McCall BB& T Capital Markets.

Please go ahead.

Thanks.

Good Morning.

My congratulations too on another great quarter, first of all.

First, in the past, you've quantified the impact of your costs of -- I don't think you've broken out steel and oil.

Can you quantify what the impact was on a segment basis versus the prior year?

I don't have the segment information with me, Matt.

What about the total?

The total, I think that if you went back, you would've saw that the first quarter, actually year-to-date would be $42 million and $15 million here in the second quarter.

And I think what you also -- is you'd go back and see from the first quarter release that if you added them up, that steel is about $34 million of that and other materials is about $8 million of it.

34 of the 42?

Correct.

Okay.

Let's see.

When you look at the balance sheet, it looked like accounts receivable, inventory, both moved up, not to staggering levels, but they've been creeping up a little bit, and actually, the 11.8% of sales for accounts receivable is the highest I can find in my model.

Is this more of a seasonal shift like Q1 or is there more to it than that?

There is really two pieces to it, Matt.

There's the acquisition piece and then the other piece of it is timing of when those sales have come in with the increase.

If you'll look at the percentage increase of -- in sales and take that same percentage in A.R., in inventory, they're almost identical.

Okay.

So it's just moving -- as a percentage sales, though, it moved up.

That's what concerns, but it just sounds like it's timing.

Right.

You mentioned share repurchases in your remarks.

They did slow a little bit.

Going forward, can you give us some kind of idea of what your thinking is?

Matt, this is Stan.

We constantly look at the best uses of our cash to generate value for our shareholders.

So, we really don't comment specifically on what we're going to do.

We obviously take into account sort of where we think the valuation is heading, other uses of that cash, whether it be acquisitions or other sort of concepts.

So we kind of look at it on a consistent basis and you're going to see sometimes we're going to be buying and sometimes we're not, based on those factors.

Matt McCall.

Okay, okay.

That's fair.

The price increase realization was a little bit better than I thought it was going to be, and I remember from the last call, you talked about not seeing the full benefit of the price increase announced in April in that 50% -- I guess, your catalog business.

Did you see a quicker realization there or, I guess, where did it stand as a percent of that business?

Are you fully implemented now and you should start seeing the same type of price increases in that portion of your business going forward?

Yeah, Matt, what we did see is with the higher volumes that we experienced during the second quarter, we did see the benefit of those price increases quicker.

At this point, they are all in place and you'll see them going forward.

The one caution I have, as you look at those going forward though, is that we do not have the full effect in place, but we did have price increases that we put in the mid part of last year, so your comparables aren't going to be as high as they were in the second quarter.

Right, right.

But from that 50% of your business that was just implemented, id you receive -- but you still didn't receive the full benefit of a full quarter, is that correct?

That's correct, but we did see probably 2/3 of it in the quarter and we'll see the full benefit going forward.

Okay.

So 2/3,all right.

Finally, talk a little bit about hearth and, I guess, the outlook there.

I think your comparisons get a little bit easier in the second half.

What do you think the organic growth looks like in hearth for the remainder of the year?

That's tough to speculate, Matt.

I mean, certainly, the housing starts are slowing down some.

It's going to be run at a comparable level, maybe slightly above as it is now.

So in that low single-digit rate?

I think that's accurate.

That's fair for the second half.

Other than housing starts, what are the other big drivers of the organic growth there?

I know you're talking about acquisitions and price increases have held, but other than housing starts, can we look at any other?

Sure, the whole remodel retrofit market and the retail climate sort of high dollar ticket items.

Okay, okay.

All right.

That's fair.

Well, thanks a lot and, again, congratulations.

Our next question comes from Todd [Schwashman] with Sedoti and Company.

Please go ahead.

Good morning.

What does your quarterly debt repayment schedule look like through 2006?

Actually, right now, it is standing at -- we only have, Todd, about, oh, $3.5 million dollars outstanding and most of that are long-term IDRBs, so basically, it's a very small amount.

We basically are debt free at this point.

Still, what you saw in this quarter was a repayment of our revolver, but that has been paid back, so there is really no long-term debt at this point.

Got it.

And what was the average price -- the average level of the price increases implemented?

They ranged between 4 and 5%.

They were put in about -- half of them were put in last year mid year, and the other ones were put in in the first part of the year through about April of this year.

In your opening remarks, did you quantify the actual number of shares repurchased during Q2?

We did not.

It was -- you can do the math from the total, but it was 71,400 shares we repurchased during the second quarter.

So that year-to-date roughly is 564,000 shares.

That was, I assume, net of issuance?

That is correct.

Okay, thanks.

Our next question comes from Craig Kennison with Robert Baird.

Please go ahead.

Good morning, everyone.

Also congratulations on the quarter.

Relative to unallocated corporate expense, that line was a little bit lower than we anticipated.

Can you comment on your expectations for the year?

Yes, that -- as you know, we kind of have timing up and down in that line.

Probably it's at about a $40 million run rate for the year, so what you saw is 11 in the first quarter and 9, and basically, we're looking at about a $40 million run rate for the year in there.

Is 10 and 10 a decent expectation?

Yes, that'd be great.

The second question having had some time to assess Neocon, what were your key take-aways from that event for yourselves and for the industry?

I think, in general, you're seeing a continued industry recovery.

Attendance was up, good quality attendees, large corporations, good architect and design community.

No major new sort of product launch or any new -- I would call it disruptive event on the horizon.

We, as I indicated to you, felt good about our multiple companies' participation.

They all reported high quality contacts, good discussions and good traffic.

Then finally, you mentioned your very strong cash flow and also your debt free balance sheet.

How does the Board think about sort of the optimal capital structure for your company?

Thanks.

That's a big question.

We constantly talk about that sort of item and I think you should expect to see similar sort of capital structure going forward.

Obviously, it depends on sort of what we perceive as the opportunities to create value.

Some of that depends on sort of the risk environment with the economy and the industry.

Okay.

Thank you.

Our next question comes from Scott [Heleneiak] of Ferris, Baker & Watts.

Please go ahead.

Good morning.

I missed actually the first five minutes of the call or so.

Did you make any acquisitions this quarter?

We did not, Scott.

You did not.

Okay.

And then, Stan, in your opening remarks you talked about cost reduction initiatives.

Can you talk a little bit more about that?

Scott, if you track HNI over the long-term, we have really a philosophy and a pretty well-defined set of tools to relentlessly go after continuous improvement and cost reduction.

So, it's day-to-day sort of drive in the operations, in the administrative functions to take out the waste, reduce costs of improved productivity and improved material yield, and all sorts of things.

So there is no one big sort of bite; it's just a bunch of little bites all over the corporation.

So, it's nothing new above and beyond what you've already been doing then, right?

No, it's the same old stuff that works pretty well for us.

Okay.

And then, on the contract side, can you talk about backlog there and what you've seen in July and if you think you're gaining share in the project side?

We don't disclose backlog.

Even in our contract business, it's a relatively short cycle business.

Our contract business is very strong and we do believe that we are out-performing the market.

And things are still looking very good in July?

As I indicated to you, orders remain at a strong level.

Finally what's capital spending budget for '05?

It's between about $35 and $40 million, Scott.

Okay, thanks a lot.

If there are any additional questions, please press star and then one at this time.

Okay, we appreciate very much your time.

Thanks for tuning in and look forward to talking to you soon.

Thank you.

Ladies and gentlemen, this conference will be available for replay after 1:30 p.m. today through midnight July 28th.

You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and enter the access code 788486.

International participants dial 320-365-3844.

That does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.