HNI Corp (HNI) 2006 Q2 法說會逐字稿

Welcome to the HNI Corporation second quarter 2006 results. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

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

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss our second 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 second 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 made 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 second quarter 2006, and then turn the call over to Jerry Dittmer, our Vice President and CFO, to review some of the specific financial details.

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

And then finally, we will open the call up for questions.

So let me summarize the quarter.

We had solid topline performance.

We feel good about our strategy, and we are competing well in our markets.

The quarter, as you see, however, was challenged as a result of unprecedented and broad-based increases in material costs that negatively impacted profitability.

We have and are implementing price increases, but in the short-term, we'll see a squeeze on profitability until all the price increases become fully effective.

The positives for the quarter -- topline growth of 13% was in line with our expectations.

Our strategic investments in Lamex, Allsteel distribution and vertical market initiatives are performing at or better than plan, and are expected to drive growth and make a positive contribution in the midterm.

We experienced solid performance in our Hearth business, we increased share, and experienced good growth in the remodel retrofit portion of that business.

And we returned $108 million of cash to shareholders through our share repurchase program.

However, material inflation was broader-based and more dramatic in size and scope than anticipated.

Steel was less favorable than anticipated and is now trending upward.

Other materials, specifically particle board, (indiscernible) and petroleum-based products, experienced increases ranging from anywhere from 5 to 15%.

In addition, fuel and transportation-related costs continued to escalate.

We have taken steps to adjust to a higher cost environment, implementing price increases where able, tightening up on our spending, and continuing to aggressively go after reductions in materials and other input costs.

And as a reminder, we do have a lag effect between material cost increases and price realization on approximately 50% of our office furniture business that goes through the supply-driven channels.

Price changes require in that channel 120-day notice and can only be effective on a quarterly break point.

So in the short-term, we will continue to experience profit pressure until announced price increases become fully effective in late 2006.

Our strategy is solid, not changed, we continue to see good growth opportunities in our core businesses, and our acquisitions are exceeding expectations.

We will work through this short-term negative impact on profitability, and we will continue to drive strategic investments to create positive economic profit for shareholders over the long term.

I will provide more comments later in the outlook session, but for now I will turn the call over to Jerry Dittmer, our CFO, to review some of the specific numbers for the second quarter.

Thanks, Stan.

I will review the numbers, beginning with the second-quarter results.

We experienced solid sales growth in the quarter, up 77 million, or 13%.

Organic growth across our brands contributed 41 million, or 7 percentage points, and acquisitions accounted for approximately 36 million of the increase, or 6 percentage points.

Gross margin decreased to 34.9% from 36.1%, due primarily to higher material and other input costs.

SG&A increased 25.8 million to 27.7%, up from 27% of sales in the prior year quarter.

Drivers of the increase included acquisitions of 12 million, increased transportation-related costs, which represented 10 million of the total increase, expensing of stock compensation of 800,000, and continued investment in brand building and selling initiatives.

Interest expense increased to 3.6 million from 300,000 in the prior year quarter, as debt levels increased to fund acquisition, share repurchase and other seasonal (indiscernible) requirements.

Our annualized effective tax rate remained at 36.5% in the second quarter '06, compared to 35.5% in the second quarter '05, primarily as the result of higher state tax liabilities and the expiration of the research tax credit.

Net income decreased 6.3 million, or 18%, to 28.7 million in the quarter, down from 35 million in the prior year quarter.

The decline was driven by increased input and transportation costs, as well as increased interest expense due to higher borrowing levels.

Diluted earnings per share decreased 11% to $0.56 in the quarter, from $0.63 in the prior year quarter.

Earnings per share were favorably impacted $0.04 due to the Company's share repurchase program.

During the quarter we repurchased 1,767,000 shares for approximately 91.2 million, or an average of $51.62 per share.

At the end of the second quarter, 35.6 million was remaining under the 200 million repurchase authorization approved by the Board in November 2005.

A few comments on our year-to-date results.

During the first half 2006, sales increased 163 million, or 14.1%.

Strong organic growth across our brands contributed 107 million, or 9.3 percentage points, and acquisitions accounted for approximately 56 million of the increase, or 4.9 percentage points.

Gross profit increased 54 million, while margins decreased to 35.2% from 35.5%, due to higher material and other input costs.

SG&A increased 54.1 million to 28% of sales, from 27.3% of sales in the prior year.

The largest driver of the increase was increased transportation-related, which represented 22 million of the increase.

Other drivers of the increase included acquisitions of 21 million, restructuring costs of approximately 2 million, and expensing of stock options of 1.6 million.

Year-to-date, interest expense increased to 5 million from 800,000 on moderate debt levels, consistent with our strategy of maintaining a leaner, more efficient capital structure.

Net income decreased 4 million, or 6.5%, to 57.1 million for the six-month period, from 61.1 million in the prior year period.

The decline was driven by increased input and transportation costs, as well as increased interest expense due to higher borrowing levels.

Diluted earnings per share was essentially flat with the prior year at $1.10 per share.

Earnings per share were positively impacted $0.07 due to the Company's share repurchase program.

During the year we repurchased 2,058,176 shares for approximately 108 million, or an average of $52.40 per share.

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

Sales for the second quarter increased 59 million, or 13%.

As previously mentioned, we experienced solid organic growth, representing 29 million, or 6.3 percentage points of the increase.

Strategic acquisitions represented 30 million, or 6.7 percentage points, in incremental sales.

Operating profit decreased 8.1 million, or 17.5%.

Operating profit margin decreased to 7.4% from 10.2%, as a result of increased freight distribution costs, restructuring charges, and the investment in Lamex and other strategic distribution acquisitions, and investment in selling [a new product launch].

Moving to our Hearth segment, sales for the second quarter increased 18 million, or 13%.

Organic growth represented 13 million, or 9.1 percentage points.

Acquisitions represented 5 million, or 3.8 percentage points of the increase.

Operating profit increased 1.3 million, or 8% in the quarter.

Operating profit margin decreased to 11.6% from 12.1% in the prior year quarter, as a result of increased freight distribution costs, higher volume of lower-margin products and brand building initiatives.

Overall our Hearth operation experienced strong performance for the quarter.

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

Cash flow from operations decreased to 30.9 million compared to 56.3 million last year.

The decline was primarily due to the amount of marketing programs and incentive compensation payouts, driven by our strong 2005 results, as well as the timing of marketing program payments due to customer agreements.

During the year we funded 64 million in acquisitions and 108 million in share repurchases with cash from operations and borrowings under our revolving credit facility.

In early April, we refinanced 150 million of our revolver borrowing, with 5.54% senior notes due in 2016 issued through the private placement debt market.

As we look forward now, interest expense is expected to increase in the third quarter to 4 million, and decrease in the fourth quarter to approximately 3.5 million, as borrowings are reduced through operating cash flow.

We anticipate total debt at fiscal year end 2006 will be in the range of 200 to $225 million.

Capital expenditures are anticipated to be approximately 50 to 55 million for the full year.

Depreciation and amortization expense will increase approximately 2 million, to 68 million for the full year 2006, due to intangibles associated with acquisitions.

Unallocated corporate costs for the full year 2006 will be approximately 50 million, reflecting the higher interest cost and stock-based compensation expense.

Cash flow from operations in 2006 is anticipated to be comparable to 2005 levels.

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

Thank you, Jerry.

So as we look to the third quarter, orders remain solid in the office furniture business.

As it relates to the Hearth business, (indiscernible) started to slow significantly.

Ultimately where they end up is uncertain.

As evidenced by our results, our Hearth group has done an excellent job managing through the decline at this point.

Comparables do become much more challenging in the second half, however.

For the overall business, we anticipate solid topline growth, comparable to the second quarter of 2006.

And as I mentioned to you earlier, we put price increases in place in many areas of the business; however, the price increase for the supply-driven channels, which, as I mentioned, is about 50% of our total business, will become effective October 1st and will not be fully realized until early 2007.

Typically we see buy-ahead activity in front of the supply-driven sort of channel price increases.

Sales from acquisitions of approximately $30 million will continue to have a minimal or slightly negative impact on operating profit during the quarter in the short-term.

Gross profit margin is expected to be approximately 1 percentage point higher than the second quarter of 2006.

SG&A as a percentage of sales, which I'll remind you includes freight and distribution, is expected to be slightly lower than the second quarter 2006.

For the full year, we're anticipating topline growth to be in the low double digits.

Gross profit margins are anticipated to be slightly lower than prior year.

SG&A as a percentage of sales is going to continue to moderate and is anticipated to be comparable to prior year levels.

Overall, we continue to see good growth opportunities for our office furniture businesses.

Our core businesses are well positioned in their markets.

We are competing well, and our strategic growth initiatives are on track for solid performance.

We do have short-term challenges as we adjust our pricing to offset significantly higher material and transportation costs as we work through softening housing starts.

We've been here before and we will manage through the short-term negative impact.

We continue to feel positive about our long-term growth initiatives and anticipate good topline and EPS growth in 2006.

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

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

(OPERATOR INSTRUCTIONS).

Budd Bugatch, Raymond James.

Of the margin degradation in office, how much would come at the gross profit line, how much comes from brand building that I guess would show up at the SG&A line?

We really don't break that out in detail.

And obviously, as we stated in the call here and in our press release, the majority of it is related to material costs.

Is the degradation basically from raw material costs, that 280 basis points?

Is that the way I should read that?

I'd have to go back through that, but the best thing for me to say is the majority of it, yes, is related to material costs.

When you look at Hearth going forward, I didn't quite know if I understood.

Are you suggesting that in the third and fourth quarter that organic growth will go where, Stan;

I wasn't quite sure I followed --

It's pretty dynamic and pretty uncertain, quite frankly, with the housing starts bouncing around here.

But our -- I guess the thing I would say is we would be flat.

For both third and fourth quarter in terms of organic, and still have -- you still have a -- what is it -- about $5 million of a quarter of acquisition?

That's correct (inaudible)

So the combined would be flat.

The combined is flat.

So down then organically.

Slightly.

Okay.

That's what I'm trying to understand.

What impact do you think that has on [op] market, just to make sure we --

Again, it's difficult to tell.

We're managing aggressively, but I would anticipate we're going to see that stressed down slightly.

Last question is -- is the price increase through all segments?

Can you quantify what that is in terms of as a percentage of sales?

And I guess that would flow through then back to the bottom line.

We basically -- we're going to be putting in price increases at some of our various operating companies.

The price increases we put through, Budd, we feel will cover the current cost increases we're seeing.

Most of these, like we mentioned in the release, the October 1 one, which is in our supply -- catalog-driven sales, we won't get a lot of effect of that this year since it's not going into effect until October.

From a percentage standpoint, we continue to look at the various levels that we put them through, and it's anywhere from 1% up as high as 6%.

Balancing on average somewhere around three?

Would that be the way to look at that?

Probably a little bit higher than that.

Of the 3 or 3.5 effective October 1st would be, I guess, pretty much half of the office side, and the Hearth side would be effective more rapidly, or is there still a delay on Hearth?

Back it up here, Budd.

We have put in moderate price increases in the non-supply-driven channels in the -- earlier in the year.

And those would be a couple of points.

In Hearth, it has a couple of points which will be probably midyear.

And then the supply-driven channel would be higher up there in the 5 to 6%.

But that side would not -- is not going to be really effective this year in any meaningful way, just because typically what happens is, as we've all been talking about, we get this buy ahead.

And then we have to ship all that before we finally get to the higher price (multiple speakers)

I understand.

Thank you very much.

Good luck in this period and in the third quarter.

Matt McCall, BB&T Capital Markets.

Looking at some of the guidance, I looked back at what you guys spoke about last quarter.

Specifically, I want to focus on -- I understand what's going on on the gross margin side.

I understand -- I think I understand there.

Looks like the SG&A is where I see most of the change.

I think you said you expect SG&A to be comparable for the full year, that is, to last year.

And if my notes are correct, the directional guidance for the full year that you gave last quarter was more like a 50 to 100 basis points increase as a percent of sales.

Tell me what changed there.

Let me tell you what hasn't changed first.

We continue to invest in these strategic growth initiatives that [then] create value for the long-term.

What we are, what we have done is we've tightened our belt on what we would call non-strategic spending.

So there's some things that we deferred, there's some things that we've eliminated to try and moderate the impact of the material cost increases without impacting our long-term sort of strategic growth initiatives.

Okay.

So as far as the growth goes, you're still focusing on all that.

It's not anything we're going to necessarily miss.

Correct.

So it's not -- of that change, you said some was deferred, some was eliminated.

Kind of give me the magnitude of each.

I can't, Matt, because it's a bunch of cats and dogs over eight operating companies (multiple speakers) hand to hand combat, grind it out sort of stuff.

Okay.

I did want to hit on the Hearth business just a little bit more.

You talked about strength with the big builders, and I know you've talked in the past about gaining some share there.

And also, you talked about some traction with the remodel retrofit.

If you could just add a little bit of color there and tie in that comment you made about an increase in lower margin products -- I'm assuming that's coming from the remodel retrofit business.

Maybe talk about the shifting mix.

I know for the longest time you talked about 70/30 was kind of the new build versus remodel retrofit.

Where do you see that going?

First off, confirm that the lower margin mix is to the remodel retrofit.

You have that correct.

The mix has shifted.

We used to talk about 70/30; it's more like 60/40 going forward.

So the Hearth folks have done a nice job of really trying to pull up the slack.

The dynamics are starts are moving around.

And you all watch this stuff closely.

So the last official forecast for starts were they are going to be [off] 9%, basically.

Some people think it's a soft landing, some people think it could be more severe.

We don't know.

I would tell you that we're making great strides on the remodel retrofit.

This is kind of a period of time where not a whole lot of people are thinking about retail remodel retrofit sort of stuff.

We have to kind of move into the fall.

So we're in a period where the new construction is softer, and the remodel retrofit is a little soft as well.

So there's a lot that we're watching.

And we'll see, as we kind of move into the fall, early fall, to see where it shakes out.

So that's probably the best summary I can give you.

Can you tell any more about the distribution efforts on the Hearth side?

What's changing there?

Are you moving into any new channels, identifying any new opportunities?

We're grinding out what we have.

So again, it's just day-to-day execution, working to take more share, working to do a better job, taking care of our customers, earning their business.

But not -- we're not really pursuing any new channels per se.

Finally, you spoke -- a minute ago you talked a little bit about the organic expectations in Hearth, and then coupled that with the growth from acquisitions.

Can you do the same thing for your outlook for the second half in your office furniture segment?

My comments were we expect overall to be in the low double-digit growth.

And that's probably the best I can give you.

And that's for the total company?

Correct.

And low double-digits, that's in the, say, 10 to 12% range?

Is that where you --

That would be low double-digits.

(OPERATOR INSTRUCTIONS).

Chris Agnew, Goldman Sachs.

A couple of questions please.

If I can just continue on on housing starts.

Did you see -- when did you see housing starts weaken in the second quarter?

Or was that pretty much after the second quarter that you've seen that significantly weaken?

That's a good question.

We lag, by the way.

So you see the official housing starts; the effect for us is typically after a housing start happens, we are in that house probably 30 days later.

So we've seen it in the second quarter start to -- really start to feel it a little bit more.

I'm just looking at something here, Chris.

Yes, we really [started to feel] in the second quarter, starting early on through.

So you actually started seeing that weakness right -- it was really right through the second order that you saw it?

I'm not sure I could answer that to the precision that you're looking for.

Because we deal with multiple markets, nationwide, and some markets are (indiscernible) and some aren't.

So it kind of depends, and there's some weather-related things and all that.

So it's hard for us to put a real precise when did we feel it and when did we not feel it.

(indiscernible) there's also that 30 to 60-day lag from once the housing starts slow down, because you've still got construction that's ongoing.

Can you give us an indication on roughly what share you have with the large builders?

What I'm trying to get my head around is what's the opportunity for you to offset weakness in housing starts?

We don't break that out.

We think there's still a good opportunity for market share, not only with the large builders, but with all builders.

That you can think (indiscernible) can offset a gradual slowdown?

Yes, a gradual slowdown.

Can I just confirm -- I think there's one point -- sales from -- the contribution from acquisitions.

Is that -- are you talking about $30 million per quarter for the rest of the year?

I think you mentioned earlier.

Correct.

And then in terms of office furniture, the organic growth rate -- and I think I'm right -- is about 6%.

How do you feel versus how the market is going, and certainly versus market forecasts?

And is there anything we need to bear in mind in terms of anything specific to your business, the seasonality in particular parts of the business, or your ability to put through price increases versus your competitors?

You know, for the year our organic growth has been more than -- it was in that 9% range.

It was a little bit lower for the second quarter, but we don't really -- monitoring it quarter by quarter is more for a long-term.

So you're going to see some spike up and down in that.

And we anticipate that we should continue to outperform the market and gain share.

We have not seen any sort of difference there.

And Jerry, I think, emphasized -- in the short-term you're going to see some movement around.

So we don't crawl out on the ledge based on a quarterly sort of market share type of number.

Chris, what else did you ask here that we didn't respond to?

It just -- was there anything we needed to particular bear in mind when thinking about -- I know you don't monitor necessarily on a quarter-on-quarter basis, but was there any particular seasonality in one part of the business?

Or was it the -- some of your competitors can maybe put through price increases (multiple speakers)

Certainly, the fact that we -- 50% of our business is supply-driven makes us unique.

And quite frankly, it's easier for our other channels to put through price increases on a more timely basis, because their customers are able to handle that, even from an administrative process, easier than our large supply-driven channels that have to go through catalogs and planograms and retail sort of situations.

So we've communicated that in the past, and that continues to be a factor that we account for in our business, is this 50% channels strategy.

Can I ask on -- or can you just remind me what authorization you've still got to buy back shares, and when and if you plan to renew an authorization, and also how you're thinking in terms of your capital structure -- how -- your level of debt has gone up, as you mentioned, as planned.

But where are you comfortable going to with continuing to improve your capital structure.

We're somewhere around 30 million remaining on the authorization.

As to where we go with that, that's a topic of conversation that we'll have actually at our next board meeting coming up in early August.

Our current debt level is, I think we said we would be around 200 million at the end of the year.

We think that leaves us some room to take on additional debt, very conservative and very comfortably in the future.

We have no further questions at this time.

Please continue.

I think if we have no other questions, then we want to thank everybody for their time on the call.

And with that we'll conclude the call, and we shall talk to you soon.

Actually, sir, Mr. Kennison just queued up for a question.

Would you like to take that?

We would be glad to.

Craig Kennison, Robert W. Baird.

Thank you.

Actually I thought I queued up earlier.

Most of my questions have been addressed.

But with respect to Lamex, would you please provide an update on your progress and any milestones we should anticipate with that acquisition?

Good question.

Just to remind you, Lamex is the office furniture manufacturer from China that we acquired and really closed on in February.

So we're still relatively new on that, but I would tell you that we are ahead of our plan.

It's still a relatively small acquisition that has great strategic importance.

We indicated that it would have phenomenal contribution to the bottom line early, and we feel good about what we've done.

Those folks are doing a good job of kind of moving out and doing what we've asked them to do in that part of the world.

Beyond, I think, milestones, Craig, I can't really think of any that (indiscernible) report.

We'll give you an update each time we chat with you at the quarterly call.

Finally, I may have missed it -- but did you give D&A and CapEx guidance?

D&A for the year, I think, was 68 million.

And what was the second one you asked about?

CapEx is 50 to 55 million for the year.

And as you think about '07 with respect to corporate unallocated expenses, interest expense and those other metrics, any new thoughts?

The corporate unallocated right now is in about that $50 million range.

You remember we used to run about 40 million (indiscernible) we had options and interest expense in there that kicked us up to that $50 million range.

And as far as the (indiscernible) for '07, really none. (indiscernible) what our debt level would be for next year.

And right now (indiscernible) 200,$225 million range.

There are no further questions at this time.

Thank you very much, and we shall talk to you soon.

Have a good day.

Thank you.

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

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This does conclude your conference for today.