HNI Corp (HNI) 2005 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 an opportunity for questions.

Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

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

Please go ahead.

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss our third-quarter 2005 results we announced earlier today.

My name is Melinda Ellsworth.

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

If you have not received a copy of the new release, please call 563-264-7927 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 on 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.

Good morning to everyone.

I'm going to share a brief assessment of the business for the third 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.

I will then share some thoughts on our outlook for the fourth quarter and then finally, we will open the session up for questions.

We are pleased to report record results for third quarter 2005.

We had record sales, record profit and record earnings per share.

We experienced solid sales growth of 10.3%, net income increased 10.4% and earnings per share increased 12.3%.

Sales were solid but not as strong as we had anticipated.

Early in the quarter, we experienced some softness in our office furniture business as a result of some of the early buy activity in advance of price increases in the first half of the year and seasonally softer market conditions.

Gross profit margins continued to improve as a result of our ongoing cost reduction initiative and the benefit of price realization.

As we have shared with you during many previous conference calls, we remain committed to investing in opportunities that create long-term positive economic profits.

To that point, during the quarter, we made several investments in the areas of selling, product launches and strategic distribution for hearth and office furniture.

These investments had an expected short-term negative impact.

Obviously we believe these investments will give shareholders a positive return in the future.

As has been our history, we continue to look for opportunities to reduce structural costs, especially during periods of healthy economic and market conditions.

As such, we recently announced a shutdown of two office furniture facilities as a result of our ongoing business simplification and cost reduction initiatives.

After funding our strategic growth initiatives during the quarter, we returned $30 million of cash to shareholders through our share repurchase program.

Now I'll turn the call over to Jerry Dittmer, our Chief Financial Officer, to review some of the specific numbers for the third quarter and then I will come back and finish up with comments and with an outlook.

Jerry.

Thanks, Stan.

I will review the numbers beginning with the third-quarter results.

We experienced solid sales growth in the quarter, up 10.3%.

Strong organic growth across our brand contributed 46 million or 8% and acquisitions accounted for approximately 13 million of the increase.

As Stan previously mentioned, gross margins improved to 37.4% as a result of our ongoing cost reduction initiatives and the benefit of price realization.

SG&A as a percentage of sales increased to 27.3%.

Total spending increased 25.1 million as a result of acquisitions, higher freight and distribution costs, continued investment and brand building and selling initiatives in new product launches.

SG&A was also negatively impacted by 1.1 million of restructuring costs related to the shutdown of our Camp Washington and Van Nuys, California office furniture facilities.

Diluted earnings per share for the quarter was $0.73, an increase of 12.3%.

During the quarter, we repurchased 520,773 shares for approximately $30 million.

Earnings per share were negatively impacted $0.02 as a result of the restructuring charges and positively impacted $0.01 due to the company's share repurchase program.

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

Gross margin of 36.1% has improved to prior year levels as cost reduction initiatives and price realization offset higher steel and other material costs incurred to date.

SG&A as a percentage of sales is also comparable to prior year levels.

However, total spending increased 62.8 million as a result of acquisitions, increased freight and distribution costs, restructuring charges and continued investment in brand building and selling initiatives.

Diluted earnings per share year-to-date was $1.83, an increase of 24.5%.

Year-to-date, earnings per share increased $0.07 as a result of the company's share repurchase program.

During the year, we have purchased 1,104,673 shares for approximately $54.8 million. 90.9 million remain in the current repurchase authorization.

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

Sales for the quarter increased 9.5%.

We experienced good organic growth across all brands representing 31 million or 7.1 percentage points of the increase.

Our strategic acquisitions represented 11 million or 2.4 percentage points in incremental sales.

Operating profit margins decreased to 10.2% from 11% as a result of increased freight and distribution costs, restructuring charges, investment and selling, new product launches and other strategic initiatives.

Moving to our hearth segment, sales for the quarter increased 12.5%.

Organic growth represented 15 million or 11 percentage points.

Acquisitions represented 2 million or 1.5 percentage points of the increase.

Operating profit margin increased to 14.4% from 12.7% in the prior year quarter largely as a result of higher sales volume.

Overall, our hearth operation reported a very strong performance for the quarter.

That wraps up our financial results for the quarter.

Now I will turn it back over to Stan.

Thank you, Jerry.

Looking forward, our current order trends are strong across our multiple brands and businesses.

We expect sales growth in the fourth quarter to be stronger than the third quarter but not necessarily as strong as the first half of 2005.

I remind you why we continue to see orders strengthen.

Our business is operated on a very short cycle and it is difficult to accurately forecast long-term order rates across our multiple businesses and channels.

For the full year, gross margin percentages are expected to be comparable to 2004.

As we continue to invest our businesses, we expect SG&A as a percentage of sales to be comparable to year-to-date levels.

However, quarter-to-quarter spending and investment may be lumpy as the amount and timing of the investments will vary.

So as we move forward our strategy continues.

We are pleased with the results that we have put together over the last several years and we think the strategy is effective.

We remain focused on productivity improvement, cost reductions, elimination of non (indiscernible) activity throughout the total value stream along with aggressive strategic sourcing on a global basis.

We will continue to invest for the long-term focusing on the front end of the business and taking advantage of opportunities that can create long-term positive economic profit.

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.

And as usual, I want to thank all of our member owners for your commitment to our success.

Our unique member owner culture is a key differentiator continuing to drive strong results.

With those comments complete, we will be glad to open it up to any questions that you may have.

(OPERATOR INSTRUCTIONS).

Budd Bugatch, Raymond James.

Good morning, Stan.

Good morning, Jerry.

You talk about strong orders and you say that the fourth quarter I think you said will be stronger than the gains in the third quarter.

Can you kind of maybe help us understand the composition of that?

How much of that would be acquisition?

Will that also run about $13 million in the quarter?

The acquisitions, Budd, for the fourth quarter we are estimating to be about $20 million.

So 20 million of acquisitions and then what do you think organically and can you kind of characterize the order growth versus the shipment growth?

Generally, Budd, as we talk about order growth, it converts to shipments relatively fast with our business -- short cycle.

So as I say, our best guess here at this point is that it is going to be more than third quarter, less than the rate that you saw the first half of the year.

So higher than the 10% but not up to the 18% or so in the first half.

That's correct.

And that 20 million of acquisitions, what do you estimate -- most of that is inside office furniture, something like 17 million or so?

Yes. 17 million of it is office furniture. 3 million of it is in hearth.

And when you look at -- again, in the fourth quarter, what kind of pricing realization do you think you will get?

We think we're there on the pricing realization.

So no incremental over last year.

Nothing that is significant.

When you look at the -- couple of other questions -- look at the impact of restructuring, you quantified for us the fourth-quarter impact but you also said you're going to close in the first quarter of '06.

Is there much impact in the first quarter of '06?

It is basically flat.

It will be the 2 million in the fourth quarter and really in the first quarter with sales and some property and stuff it will basically be about a breakeven in the first quarter.

When you look at SG&A, Jerry, you talked about brand building, Stan.

Can you parse out the differences in the SG&A delta year-over-year?

How much is brand building?

I think you gave us $7 million of freight and distribution in the quarter.

Is that right?

Yes.

And how much was the incremental brand building that we contribute?

We don't break that out but -- let me look here.

We have additional SG&A from some of the acquired companies.

The acquisition, Budd, would run you about 4 million.

The freight and distribution we gave you at 7 and than the selling initiatives are about nine.

That's very helpful.

That will continue in the fourth quarter, the selling initiatives at that same level you think?

Yes.

Okay.

And saying that, we will get a little bump in the acquisition cost because we have a higher revenue basis, right?

That's correct.

And what are you doing to recover the freight and distribution costs?

Anything that you can do on that on pricing?

Well basically we are offsetting that through our cost reduction efforts in other areas.

We're not anticipating a price increase at this point.

That obviously is always under review and is dependent on a company by company basis.

So do think you can offset the impact you faced in the third quarter in the fourth?

I think we can net it all out.

Certainly we won't offset a dollar for dollar but we think the net of all that is going to be that we ought to maintain about the same sort of expense type ratios overall.

So you will see an improvement in gross margin to offset the additional F&D?

Yes.

That's the plan?

Yes, sir.

Let me let some others ask some questions.

Thank you.

Susan Maklari, UBS.

You mentioned in your comments that some of the lower-than-expected sales were attributable to some pull forward in demand and then there was some seasonality in there.

Can you give us any sense as to how that breaks out between those two?

Well it is difficult to nail it down detail for detail.

What I can say is that BIFMA in July and August showed -- I think the shipments in July were something like 6% growth.

August was like 7% growth and so overall, the market kind of dipped down.

So we would say that that would be where most of that whole activity softened.

But we did have some effect of this pull ahead.

And then are you seeing any differences from one price point versus another one of your segments in terms of demand and order trend?

Our contract segment is very strong right now but I have to say the channel driven or the supply driven channel companies are strong as well right now.

So as usual with is.

It is relatively consistent across the channels, across the companies, across the brand.

And then despite the fact that the sales didn't come in quite as expected, the margins held up very well.

Can you give us some update on what you're seeing in terms of steel prices and any other commodities that are changing on you?

Steel prices -- for the quarter, they are about 5% up year-over-year.

Going forward, the trend is really flat to slightly down.

Other raw material prices are kind of all over the board with pluses and minuses.

Probably the biggest one you're reading about would be the fuel and petroleum and then also foam costs that are rising.

But all the rest of them are pretty well like I said flat.

And do you have any longer-term steel contracts are you still just doing shorter-term kind of things until the market stabilizes?

They are really most of the -- the longest ones we have are really a year and they are anywhere from spot market to monthly to quarterly indexes to annual.

With annual being the longest that we have.

Todd Schwartzman, Sidoti and Co.

What are you seeing as the net effect in October thus far looking at fuel, petroleum, foam prices as well as a lot of the others that you did not enumerate?

We don't breakout monthly data, Todd.

But net/net, those versus the others, others, all nonsteel costs add up.

Is that net flat thus far or can you give us some sense of direction in October?

Yes, Todd, this is Jerry.

As I mentioned, steel basically for the quarter was slightly up.

The other ones are petroleum and foam.

They are slightly higher.

So the net/net would be that it has been slightly negative to us.

Okay.

And what is manufactured in Kent and Van Nuys?

The Kent facility is associated with Maxon, our office furniture company that it kind of a midmarket panel systems manufacturing company.

The Van Nuys facility is associated with the Holga brand, which is a metal case goods, high-density storage company.

Craig Kennison, Robert W. Baird.

Just relative to the price increase, if I look at your margins, they did decline in the year.

Are you getting any push back on increasing prices or why not I guess go ahead and push for another if your fuel and freight costs are going up?

Part of it has to do with just the market conditions.

We, in the sort of middle market on down, compete fiercely with low-priced, offshore competition.

And so it is difficult to get a price increase through there.

Secondly, we got we think healthy good price increases the last cycle and so we think we are in good shape.

Now that said, there are some of our operating companies that will put price increases through.

But my point is we're not towing on a major price action to significantly change our financial structure.

So given your outlook for freight expenses and some of the other investments in the business you're making, is it reasonable to assume that margin can hold even with last year or should it decline from last year?

We're anticipating it is going to hold.

That's helpful.

And then relative to the hurricane, any impact there in the final month of the quarter for you?

There is a lot of ins and outs and noise around the hurricane but nothing that is material or significant when you net it all out for our business.

And on corporate unallocated expenses, about 8.5 million this quarter, still looking for about 40 million for the year and what is your outlook for '06?

We're still at that 38 to $40 million run rate and it looks like to be the same for next year to, Craig.

Great.

And finally just what is your outlook for the impact of FASB 123 on your earnings per share in '06?

It looks like it will be about $0.03 for next year.

Scott Melenia (ph), Ferris, Baker Watts.

First question is about SG&A again.

Your introduction into how (ph) current and (ph) education with new product introductions.

Is that a big chunk of that cost as well?

It's a portion of the cost.

I wouldn't say it is a big or portion of the cost, Scott.

And is there a cost savings or not you could give us on the plant closings?

Any sort of estimate from that for '06?

It looks like it is going to be about a 12 to 18 month payback on it, Scott and it looks like it will be in the 2 to $3 million range.

And what do you guys think as far as -- what are you doing differently this year on the import side of the business.

Say how has that changed in the last six to nine months for you guys and what you're bringing in offshore?

I would say we are continuing the program that we have had in place.

We are just --.

Increasing it a little bit?

Increasing it but it is not a major, major sort of overhaul of that program.

And you talked about Q4 better sales numbers expected.

Have you seen a strengthening in both segments over the last few weeks --

Correct.

Or has it been one more than the other?

Both segments.

Both.

Okay.

(OPERATOR INSTRUCTIONS).

Matt McCall, BB&T Capital Markets.

A couple of clarifications.

First, talking about the outlook for Q4, you said organic growth would be -- let me make sure I understand it -- was it organic growth that would be better than Q3 but not quite as good as Q1 and 2?

Or is it overall growth?

It's overall.

Overall.

Excuse me.

So overall growth, that is where the 10% --.

Okay.

In the past, Jerry, you've quantified the raw material impact and you mentioned I think on the SG&A line higher freight was only about 7 million.

Can you quantify what the impact from steel, from plastics, on the gross margin line was?

I don't have that readily available here.

Okay.

Do you think -- I think we're looking at 15 million in Q2.

I mean obviously -- is it well below that?

Yes, it would be well below that.

And then -- going back to the higher freight and distribution, I guess that is a little bit surprising.

It was only 7 million given what fuel prices.

Should we see a little bit of an acceleration in the pressure there in Q4?

That's a tough one to say.

Obviously, we continue to have our rapid continuous improvement activity and the stuff to try to minimize our cost wherever we can.

That number we gave is really just the non buying related piece of it and I wish I could tell you where fuel and freight costs are going to go but we can't.

Could it be higher?

Sure it could.

But obviously at the end of the quarter we got hit pretty hard with it.

Assuming that fuel costs remain in the range they are today, it could be above that 7 million?

Sure, if you have got a full quarter impact of it.

That's correct.

Most of that was existing in September.

I think that is all I had.

Thank you.

Gentlemen, please go ahead with any closing remarks.

We just want to thank you for taking the time to tune in and listen to our report and we look forward to talking with you again at the end of the year, fourth quarter.

So have a good day.

Thank you.

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