HNI Corp (HNI) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the HNI Corporation first-quarter fiscal 2006 results conference call.

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

Later we will conduct a question-and-answer session.

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 Melinda Ellsworth.

Please go ahead.

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss our first-quarter 2006 results we announced earlier today.

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

If you have not received a copy of the financial news release, please call 563-272-7927 and we will send one out to you.

The release is also available at our website, www.hnicorp.com.

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 Corporation 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.

Actual results could differ materially from those projected in any forward-looking statements, and relying on forward-looking statements is subject to risk.

Factors that could cause actual results to differ materially from those projected in any forward-looking statements are discussed in the Corporation's financial news release announcing the first-quarter 2006 results and its most recent Form 10-K and other periodic filings with the Securities and Exchange Commission.

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

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

Stan?

Thank you, Melinda.

Good morning, everyone.

I'm going to share a brief assessment of the business for the first quarter of 2006 and then turn the call over to Jerry Dittmer, our Vice President and Chief Financial Officer, to review some of the specific financial details.

I will then come back and share some thoughts on our outlook for 2006.

And then finally we will open the session up for questions.

The first quarter 2006 was another record quarter for us.

Sales increased 15.4%, net earnings increased 9% and earnings per share increased 17%.

We continue to experience solid organic growth in our office furniture and hearth businesses, a result of the investments we have been making in brand building, selling and marketing initiatives.

Gross profit margins increased as we recognized the full effect of the price increases implemented last year.

However, during the quarter we began to experience some negative trends in material costs, which partially eroded the improvements.

SG&A as a percentage of sales increased over the prior year, driven by significantly higher transportation costs, the effects of acquisitions and investments that we made in market initiatives.

During the quarter, we successfully completed the acquisition of Lamex, a leading Chinese office furniture manufacturer, and we completed small acquisitions in our office furniture service business and our hearth business.

During the quarter we announced a 16.1% increase in the annual dividend, demonstrating our continued confidence in the future growth of our business.

We now have in place a more efficient capital structure.

In early April, we issued $150 million of 10-year senior notes through the private placement debt market to refinance a portion of our revolver borrowings, establish a layer of permanent capital and take advantage of an attractive interest rate environment.

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

Jerry?

Thanks, Stan.

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

We experienced solid sales growth for the quarter, up 15.4%.

Strong organic growth across our brands contributed $66 million, or 11.7 percentage points, and acquisitions accounted for approximately $21 million of the increase, or 3.7 percentage points.

Gross margins improved to 35.4% due to the full benefit of price increases implemented in 2005.

However, gross margins were negatively impacted by increases in material costs from first quarter 2005 levels.

SG&A as a percentage of sales increased to 28.3% from 27.6%.

The largest driver of the increase was increased transportation related costs, which represented $12 million of total increase.

Other drivers of the increase included acquisitions of $9 million, restructuring costs of $1.7 million, and expensing of stock-based compensation of $800,000, and continued investment in brand building and selling initiatives.

We adjusted our annualized effective tax rate to 36.5% in first quarter '06 compared to 35.5% in first quarter '05, primarily as a result of higher state tax liabilities and the expiration of the research tax credit.

Diluted earnings per share were $0.55 in the first quarter, an increase of 17% from $0.47 in the prior-year quarter.

Earnings per share were positively impacted $0.04 due to the Company's share repurchase program, offset by $0.02 related to restructuring charges.

During the quarter we repurchased 290,875 shares for approximately $17 million, or an average of $57.18 per share.

At the end of the first quarter, $126.9 million was remaining under the current repurchase authorization.

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

Sales for the first quarter increased 14.8%.

As previously mentioned, we experienced solid organic growth representing $47 million, or 10.9 percentage points, of the increase.

Strategic acquisitions represented $17 million, or 3.9 percentage points, in incremental sales.

Operating profit balance increased 4.3%.

Operating profit margin decreased to 8.2% from 9.1% as a result of increased freight and distribution costs, the Lamex acquisition, as well as other strategic distribution acquisitions, restructuring charges, and investment in selling and new product launches.

Moving to our hearth segment, sales for the quarter increased 17.3%.

Organic growth represented $19 million, or 14.2 percentage points.

Acquisitions represented $4 million or 3 percentage points of the increase.

Operating profit dollars increased 12% in the quarter.

Operating profit margin decreased to 7.4% from 7.8% in the prior-year quarter as a result of increased freight and distribution costs, higher volume of lower-margin products, and brand building initiatives.

Overall, our hearth operations reported strong performance for the quarter.

Now let's look at some other financial metrics for HNI.

Cash flow from operations decreased to $8.7 million compared to $18.7 million last year.

The decline was primarily due to higher marketing program payments and incentive compensation payouts driven by our strong 2005 results.

During the quarter, we funded $64 million in acquisitions and $17 million of share repurchases, with cash from operations and $70 million of borrowings under our revolving credit facility.

As Stan mentioned earlier, in early April we refinanced $150 million of our revolver borrowings with 5.54% senior notes due in 2016, issued through the private placement debt market.

As we look forward, interest costs are expected to increase in the second quarter due to our move to a leaner, more efficient capital structure.

Depreciation and amortization expense will increase approximately $2 million for the full year 2006 due to intangibles associated with acquisition, and unallocated corporate costs for the full year 2006 will be approximately $50 million, reflecting higher interest costs and stock-based compensation expense.

That wraps up our financial comments and I will turn it back over to Stan.

Thank you, Jerry.

Let me talk briefly here about our 2006 outlook.

First, our top line has outperformed our industries; we expect that will continue.

Order trends remain solid.

Our contract office furniture business in particular is strong.

Housing markets have begun to slow.

To date, our hearth group has done an excellent job managing through the decline.

We expect to continue to gain market share in our hearth business as we grow sales with the large builders and increased penetration of the remodel and retrofit market.

We have made planned and deliberate strategic investments in the front end of our business, which we believe will drive growth and provide excellent returns for shareholders in the mid- to long-term, but may have a short-term negative impact.

For instance, we have invested in strengthening our distribution in the contract office furniture segment, which involves a period of transition, 18 to 24 months, before those acquisitions contribute operating returns consistent with our other businesses.

Second, we see China as a key strategic market.

We recently completed the acquisition of Lamex, and while we are encouraged by the early results, the investment represents a platform for long-term growth.

Initially, Lamex will have minimal impact on earnings as we invest in its growth and drive operational efficiencies.

Finally, we are making front-end investments in market initiatives such as education and healthcare, which have not yet realized the full returns.

So during the quarter, we will experience the short-term impact of those investments compounded by some serious pressure in material and transportation related costs, which will negatively impact operating results.

We are implementing selective price increases where able.

However, as we've previously shared with you, approximately 50% of our office furniture business goes through office products or supply-driven channels, which take a longer time to affect price increases.

These channels rely heavily on catalogs, mailers and retail planograms.

To support these customers in their programs we have to provide advance notice of price increases, typically 90 days ahead.

We anticipate implementing price increases beginning here towards the latter part of the year, which will impact results late in the year.

So where do we see the second quarter?

Well, we see anticipated organic growth will be in the mid to high single digits.

Price increases will have little impact on the quarter.

Approximately $30 million in sales from acquisitions is expected to have a minimal or slightly negative impact on the operating profit during the quarter, as I mentioned to you earlier.

Gross profit margins are expected to be consistent with the prior-year quarter.

And, as we shared with you on our previous conference call, we anticipate for the full year, gross margins will increase slightly from 2005.

SG&A as a percentage of sales, which I will remind you includes freight and distribution, is expected to increase approximately 1.5 to 2 percentage points compared to the prior-year quarter.

For the full year, SG&A as a percentage of sales is expected to increase approximately 0.5 to 1 percentage point over the prior year.

Overall, we anticipate net income in the quarter will be somewhat lower than the prior-year quarter.

So let me summarize here.

While the second quarter impact will be negative, I will remind you we had a record first quarter and we outperformed our industries.

Overall for the year, we expect to continue to outperform industries and deliver solid top-line and EPS growth.

I will remind you, we've said our earnings will periodically be lumpy as we invest for aggressive profitable growth in the long-term.

In the past, as now, we have opted to bypass optimal quarterly results to build the business for the mid- to long-term.

I have to conclude by saying I'm excited about the new investments.

We think our long-term strategy is solid.

It has not changed.

We are where we expected to be, as we continue to execute our core growth strategy and we are excited about the year and the outlook.

Finally in closing, as usual, I want to thank all of our member owners for their continued contribution and their ongoing commitment to our success.

They make a huge difference.

With those comments complete, I will be glad to open it up to questions.

(OPERATOR INSTRUCTIONS) Craig Kennison, Robert W. Baird.

This actually Ryan Kelly for Craig.

Several questions for you.

First off, if you could just talk more about the competitive environment in both your furniture and hearth markets.

Then in regard to the hearth business, if you can talk about the mix between remodeling and new construction and how that is impacting you.

Well, the competitive markets -- I guess your question, Ryan, is have we seen any major change, if I could paraphrase it.

If not, you can be direct.

In the office furniture side, it continues to be a competitive market.

So starting on the bottom end of the market, the entry level, we continue to deal with low-cost offshore imports.

We think we have the right strategies in places and I think we are holding our own there, in fact more than holding our own;

I think we are making some good progress in that area.

But certainly, price pressure continues to be a real challenge there.

As you move on up the market, the contract market, in particular the large project market, seems to be stepping up the activity.

It in particular is healthy right now.

Our contract furniture companies are performing well in whole.

Pricing pressure continues to be there.

Large projects.

There's lots of competitors out there and everybody sharpens their pencils.

And the people buying that furniture are pretty darn sharp.

So it basically, though, in net is a continuation of what we have seen, no major change.

The hearth business, because of housing start decline, is seeing some pressure as well.

So the new starts, new construction side of the business, which we have characterized in the past as being 70 -- 60% of the market, is feeling some pressure.

We are doing well there.

Hearth has done a nice job with the largest builders of improving their relationships, of inking some long-term contracts in some cases, which is bringing us additional market share.

Secondly, we have done well with distribution in that business as far as helping our distribution grow, and I think putting new and better distribution in several key markets.

The remodel/retrofit side, which is the hearth appliance, typically a freestanding stove or an insert that goes into an existing fireplace, is very healthy right now.

That is in large part due to higher energy costs and consumers wanting to fight back, I guess, or find ways to more efficiently heat their home.

And so our business is growing very nicely in that particular segment.

Sorry, Ryan, we don't break out those segments and those sales, but that is probably as good of a general outlook as I can give you.

No, that's great.

Just want to follow up, though.

You said the market remains competitive but you are gaining share and you're contemplating further price increases.

So I take it that it is not overly competitive, at least at this point.

What we're seeing -- I would not read it in quite that way.

We are seeing some major cost input increases across the board, not just unique to us.

So we're seeing fuel costs escalate higher than certainly we forecasted.

I must tell you we were not planning on $70 plus oil, and that is being passed on.

Secondly, lane capacity is tight with the freight carriers and so they are attempting to pass on increases.

And then the whole petrol-based materials side is getting stiffer.

We are seeing cost of other inputs, like particleboard go up, and steel has not moved in the direction we forecasted.

We anticipated that steel would soften slightly and it has not.

It appears to us that it has firmed up, and so we've got some pretty good exposure.

So when you look at those core cost inputs and the magnitude of them, there is just no way that we can, through our normal, continuous improvement process, cover those.

They impact all players in the market, so that does give us, I think, an opportunity then to work with our largest customers and help put through a price increase.

You also mentioned improving your distribution.

Can you kind of give us an update on your acquisition strategy and if it's still looking at distribution options?

Well, certainly one of our core strategies and priorities in the contract office furniture has been to build stronger distribution.

As we have shared with you in the past, we first and foremost look to build with independent distribution in core markets that have the capability, the capital, the commitment and the character to pull that off.

Where required and where we think it's the best strategy, we have acquired a distributor in that market.

We've retained the principles and we have then put in place a process really to convert that selling capacity from another major line to Allsteel.

And this is an Allsteel strategy.

And in doing that, what happens is, to retain that selling capacity -- because that is really what you are buying -- there is a transition from one line to the other -- ergo, that is part of the comments about acquisitions that are not yet fully contributing -- our thought is to continue to do that where there is opportunity.

I will tell you I don't think that is a huge sort of strategy going forward, that there is just dozens of markets out there.

But we will do the same, take the same actions as we have previously with Allsteel distribution.

Our acquisitions are on track.

They are doing what Allsteel committed they would do and we are pleased with the results.

On the hearth side, it is a similar sort of story, kind of a continuation of that strategy.

You can almost overlay what I said about the Allsteel contract distribution to hearth, is our first priority is to go with independent, capable distribution and then, where needed, where we think it is an optimal strategy, we will acquire.

So it is kind of a continuation of the same there.

Great.

Then just two housekeeping items.

The $50 million run rate for corporate unallocated, that is basically double your current quarterly run rate.

Is that all interest expense?

Can you talk more about that?

And then do you anticipate any more restructuring or accelerated depreciation in '06?

It is really not double.

We basically -- it's somewhat lumpy.

There's interest costs that will be added in there.

I think this past quarter we ran at that $7 million to $8 million range.

And as we have more interest costs and our options etc., our compensation-based expense, it will average out to about that $50 million for the year.

Okay.

And then no more restructuring charges?

The restructuring we have is just, it will be minor.

It could be a couple hundred thousand dollars is the most we'd really we have in the quarter going forward.

Okay, great.

Thank you.

Matt McCall, BB&T Capital Markets.

Stan, one point of clarification.

I missed what you said -- the terms you used for your expectations for gross margin in Q2.

Just want make sure I had that right.

Directional nature -- I just didn't get that.

Sure, sure.

So gross margins for Q2 are expected to be consistent with the prior-year quarter.

And as we have talked with you on the previous conference calls, we anticipate for the full year, gross margins will increase slightly from 2005.

I'll also say there is pressure on material costs and so we're going to have to fight hard.

Right.

And I guess that leads to the price increase question.

The total benefit, did you quantify the total benefit from price in Q1?

In Q1 -- I don't have those numbers readily available, Matt.

But most of the price that we're going to get so far, we have taken in the first.

There is not a lot in our current pricing for the second, third, and fourth quarter, unless we do implement some other price increases.

Right.

And I think Stan mentioned the potential for implementing a price increase for the businesses that do use the printed materials.

It sounded like he said late in the year.

I guess the question is, if you know the environment is what it is today, why is it taking so long to get that price increase in place?

Part of it has to do with, Matt, is just the nature of that whole process.

They are large customers that are -- these catalogers, supply driven, require 90, some 120 days notice.

Because for them to change that whole machine -- and keep in mind there's wholesale distribution in the middle of all this -- for everybody to kind of recrank their machine, and we are significant portion of that, is a pretty major effort.

And so to work that, it just takes that long to get the through.

And so we are looking at a late year price sort of increase, and it takes that much just to work it through.

And that's in the 50% of your business that uses the printed materials, correct?

Yes, that is an approximation, 50%.

Right, about half of it.

So what about the other part of your business?

I'm assuming you're seeing prices -- or cost pressures there as well.

What are your plans there?

And we have put through price increases or are in the process of putting through price increases.

But those benefits should not show up in Q2?

Right.

Okay.

On the acquisition front -- well, first on the hearth, 14% organic growth in this home building environment, obviously the distribution moves are having some good effect.

The comps do get easier in Q2.

I think you are only up organically about 3% last year.

Should that point to expectations of accelerating growth in Q2?

Well, first off, hearth has done a nice job, but it is -- the market is getting more challenging is well, just as you see how starts are going.

So they are going to see some organic growth, but it is going to be a challenge.

Even though the comp is much easier than the Q1 comp a year ago?

The Q2 you mean.

Well, the Q1 comp a year ago was 11%, and you did 14% this year, so the Q2 comp, I think, in my model at least, is only 3%.

So I was thinking you look at that and you look at the trends, we should at least see some decent organic growth.

It sounds like you're saying it is going to be challenging to get any.

Here's the bottom line, Matt.

Housing starts are moving in ways that it's difficult forecast right now.

So I am being a little bit elusive because we don't know how it's going to shake out yet.

What I can tell you is they have done very, very well in a very, very challenging environment.

They really have, they really have.

That's probably about as much direction as I can give you.

That's fine.

What about the comment you made about the increased volume of lower-margin products in that segment?

Can you add any color there?

Is that the retrofit business or remodel business becoming a lower margin?

Correct.

Your acquisition revenue, how much of the Q1 acquisition revenue came from Lamex?

It was minimal; it's about $5 million.

I think you have already given your outlook for Q2 -- about $30 million.

Is that right?

Yes, in total.

In total.

Help me remember what goes off or what annualizes in Q3 and Q4.

Should that number be about $30 million for the remainder of the year?

No, it should be a little lower than that.

Basically, you'll really only have Lamex and one other one going forward for the third and fourth quarter.

So that should drop some.

May be around the $20 million range?

Yes, $20 million.

Then a final one.

The SG&A from acquisitions -- and I think you probably addressed this -- but 43% of revenue from acquisitions is what I calculated was the SG&A this quarter.

Is that -- it was more like 25 to 30 -- is that just because you had Lamex come on the books and you had a couple more acquisitions?

And if so, what should that number as a percent of the acquisition revenue we just talked about be for the remainder of the year?

I don't really have that readily available, Matt, for you.

It should obviously come down some.

All right.

One more quick one and then I will get off here.

The brand building that you have planned, is that going to continue in both segments?

I just want make sure -- I broke two things down and I want to make sure I understood that.

That is going to continue in both segments, or is it impacting each segment equally, I guess, relative to sales levels going forward, or is it going to be more in the office furniture space?

It will be a little bit more in the office furniture space, Matt.

Relative to sales levels?

Correct.

Okay.

Thank you very much.

[Susan McClary], UBS.

A lot of my questions have already been covered, but maybe focusing on the balance sheet a bit.

Despite the fact that you closed Lamex and refinanced your debt, your balance sheet is still in really good shape.

Can you just give us any idea of maybe what the debt-to-cap will look like as we go through the year, what your uses of cash are?

The uses of cash, obviously, are dividends.

And really the change you've seen now is that we have refinanced our revolver, which included the acquisition of Lamex and a couple other small acquisitions.

And if you look at the balance sheet that you have here, you can see our long-term debt now is going to be at the end of the year in that $175 million to $225 million range.

Okay.

Given the kind of expenditures you expect in the second quarter and as we go through the year, is there any change to your CapEx forecast?

No, we've really kept that the same for the year, in the $45 million to $50 million range.

Okay.

I think that's all.

Thanks.

(OPERATOR INSTRUCTIONS) Budd Bugatch, Raymond James.

I hope you can hear me.

I'm on a cell phone in a car.

Can you hear me?

We can hear you.

I wish I were in Florida at this point in time.

On the acquisitions and on the change in distribution, I also want to be sure I have understood.

You have bought some other aligned office dealers.

Can you kind of quantify or just maybe go back over us what the Allsteel distribution looks like now, how many aligned dealers you've got, how many recently added this quarter or in the last two quarters?

We don't break that out.

We continue to -- Allsteel continues predicting their distribution and continue to look for stronger distribution.

That means that in the past, we have acquired new distributors.

I think it is four distributors.

We are also investing in distribution around the country to help independents really grow their business, grow their market, to invest in selling initiatives.

And so we made no Allsteel distribution acquisitions last quarter, and if there's opportunities in the future, we will.

Now, if it's just a specific strategy that we're going to go buy distribution, (technical difficulty) help independents grow.

I do not know that I caught all that.

I apologize.

So you do not -- you have not disclosed how many of the dealers you own now --how many dealers you own?

We own four, but --.

I got you.

And they are all Allsteel dealers?

Correct.

This is an Allsteel strategy.

All right.

Have you ever quantified the installed base systems for Allsteel at this point in time?

We have not.

All right.

Those are my questions at this time.

Thank you very much.

Due to the time, I'll turn the conference back over to you, sir.

Okay.

Well, thank you very much for joining in the call and we look forward to talking with you in the near future.

Have a good day.

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