HNI Corp (HNI) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by; we do appreciate your patience today while the conference assembled.

Good morning, welcome to HNI Corporation's first-quarter 2007 fiscal results.

Now at this point and during managements' prepared remarks all of your phone lines are muted or in a listen-only mode.

(OPERATOR INSTRUCTIONS).

As a reminder, ladies and gentlemen, today's conference is being recorded for replay purposes.

That information will be announced at the conclusion of our call.

With that being said we'll get right to this first-quarter agenda.

Here with our opening remarks is Ms.

Melinda Ellsworth.

Please go ahead, ma'am.

Thank you.

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss our first-quarter 2007 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 at 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 these projections in any forward-looking statements and relying on those 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 2007 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.

As is usual on these cases, I'm gone to share a brief assessment of the business 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'll then come back and share some thoughts on the outlook and then finally we'll open up the call for questions.

Overall combined results generally met our expectations for the quarter.

Our hearth business continued to be negatively impacted by the housing market conditions and lower comparable sales of alternative fuel products.

Despite the sales decline we reported higher than anticipated profitability as a result of favorable product mix and aggressive actions taken to adjust the cost structure to lower demand level.

The hearth team has done an effective job managing through these severe market conditions.

Our office furniture business did not perform as we anticipated; in particular soft orders in the supply driven channel -- and I'll explain that here in a second -- resulted in lower overall sales growth and profitability for the quarter.

Our contract business continues to perform at or above market levels.

So in the past we've talked about the supply driven channel, really another term for that is the transaction segment of the business.

What we're talking about basically is desk, chair, file typically sold through catalogers, often they're companies that sell office supplies and a second part of that segment is also the retailers, big box retailers.

So although quarterly profits were negatively impacted by lower hearth volume and a softer office furniture business, profits were favorably impacted by price realization and continued efforts to tightly manage cost across the organization.

We continued to return cash to shareholders during the quarter through dividends and share repurchases and we announced an 8.3% increase in our quarterly dividend demonstrating our commitment to shareholder value and our confidence in the future growth of our company.

I'll provide more comments in our outlook, but now I'll turn the call over to Jerry Dittmer to review some of the specific numbers for the first quarter.

Jerry?

Thanks, Stan.

For the first quarter 2007 consolidated net sales decreased 5.6% to $609 million.

Acquisitions accounted for $16 million or 2.4 percentage points.

Excluding the acquisitions organic sales growth was down due primarily to the decline in the hearth business.

Gross margins were 33.9%, down 1.6 percentage points primarily due to lower volume.

Price increases implemented during the fourth quarter 2006 more than offset moderate increases in material cost during the quarter.

SG&A as a percentage of sales was 28.0%, comparable to the prior year quarter.

SG&A dollars decreased due to lower volume, cost containment initiatives and lower restructuring costs.

We continue to implement plans to close a small office furniture facility in Monterey, Mexico.

During the quarter we decreased the restructuring charge as actual severance payments were lower than originally estimated.

The shutdown will largely be completed during the second quarter.

Additional restructuring related costs of approximately $2 million previously anticipated to occur during the first quarter will be recorded at that time.

As a reminder, the first quarter of 2006 includes $1.7 million of restructuring costs for the shutdown of two office furniture facilities.

Interest expense increased to $4.3 million reflecting a full quarter of interest on higher debt levels.

The annualized tax rate was 35.5% during the quarter as indicated during our prior conference call.

Net income was favorably impacted $0.03 per share as a result of our share repurchase program.

Approximately $127 million is remaining under the current authorization.

As previously announced, we intend to sell a small non-core component of the office furniture segment and anticipate closing on the sale during the second quarter of 2007.

Cash flow from operations increased to $40.8 million from $8.7 million in the prior year quarter due primarily to timing and collection of trade receivables.

That raps up the financial comments; now I'll turn the call back over to Stan.

Thank you, Jerry.

As we look forward our full-year outlook has become a bit more uncertain as the office furniture industry moderates.

In particular the supply driven channel which, as we've indicated in the past, represents approximately 50% of our office furniture business, has been soft.

Our contract business continues to perform well, the change in the supply driven channel has been broad based across multiple customer groups and product categories.

What we don't know yet is whether this is a temporary slowdown or reflective of a longer-term trend.

We continue to monitor the channel closely, but until we see a change in conditions we are conservative in our outlook.

Therefore our expectation is that topline growth in the office furniture segment for the full year will be in the low single-digits.

As it relates to our hearth business, we continue to anticipate sales will be down approximately 20% for the full year as previously indicated and profitability will remain challenged.

Housing market conditions remain uncertain.

The hearth management team has responded well to the challenges and they will continue to evaluate the cost structure to ensure it is properly aligned with anticipated demand levels.

As we've demonstrated in the past, we'll aggressively drive structural and operating cost reduction initiatives across all our businesses.

We continue to identify and implement actions to further leverage our manufacturing operations, transportation/logistics, strategic sourcing and other initiatives to improve overall profitability.

Through all of this we remain focused on the front end of the business to meet the needs and expectations of our customers and will continue to invest to drive market performance and grow it across our businesses.

I'll have Jerry provide the financial outlook for the second quarter 2007.

Jerry?

Thanks, Stan.

For the second quarter 2007 we anticipate overall sales to decline slightly from the prior quarter.

Office furniture is expected to have topline growth in the low to mid single-digits.

Hearth sales are expected to be down 25 to 30% during the quarter.

Gross profit margins are anticipated to be comparable to the prior year quarter.

SG&A as a percentage of sales is anticipated to increase approximately 1 percentage point from the prior quarter due to lower volume and approximately $2 million of restructuring charges related to the shutdown of the office furniture facility in Monterey, Mexico.

Stan.

Overall we face uncertainty in our hearth business and the supply driven channel of our office furniture business.

We'll continue to aggressively manage through these changing market conditions and economic challenges.

We're taking initiatives to reduce structural and operating costs.

We'll continue to focus on driving topline growth, building upon our strategic investments for long-term profitable growth.

I have a great deal of confidence in our members and management team and believe we'll conduct to drive success in our markets and create value for our shareholders.

With those comments complete, we'll now open it up to questions.

(OPERATOR INSTRUCTIONS).

Christopher Agnew, Goldman Sachs.

Good morning, Stan, Jerry, Melinda.

First of all if I could ask, I think before you mentioned that the profit decline in the hearth business is around two times the level of sales decline, but it wasn't the case in the first quarter.

Is this due to the aggressive actions you're taking on costs there and can we assume that it will -- the two times decline won't be the case in the few future as well?

A lot of it had to do with the aggressive actions that we took last year.

We do anticipate operating profit will be down that 1.5 to 2 times the rate of decline of sales.

So the example again will be if sales are down 20% we think operating margins will be down likely 30 to 40%.

A lot of this also had to do with the mix of products.

We had a higher margin favorable mix of products in the first quarter also.

And maybe just a little more color on that product mix.

Is that something that's a seasonal aspect or is that something you would expect to remain through the rest of this year?

Chris, what we've discussed in the past on these calls is the fact that the remodel retrofit product tends to have lower margins than the new construction product.

So what happened during this time frame this period which is -- last year was a heavier selling season of the hearth stove, if you will, remodel retrofit; this year there was less, as we've discussed, because of fuel costs were down, it was a warmer winter.

So there was less as a percentage of total sales of that type of product.

So going forward, yes, we think that our cost structure is in the right sort of area, barring any significant change in the market, and the mix will be consistent going forward with what we've seen first quarter.

Okay, thanks.

And Stan, what do you think is the disconnect between the weakness in the supplies driven market and the contract market?

The supplies driven market, if I'm right, was much stronger earlier on before contract started to pick up.

Is this heralding weakness in the contract market to come?

And maybe just on top of that, you said it's broad based weakness.

Is it general weakness rather than you're seeing increased competition from say imports for example?

Two questions there, good questions, and let me hit the first one first here.

As we've seen BIFMA data, BIFMA data has softened here.

In November BIFMA was up 3, December it was up 2, January it was minus 1 and then we had this -- I don't know how to describe it -- February plus 14.

It looks like an aberration to us.

And overall if you look at what's going on with capital spending and business spending one would say that that has slowed down.

This segment of the market, as we call it, this transaction supply driven segment tends to be more closely linked with what's going on.

In other words the selling cycles are very short, so if there is uncertainty in the economy it shuts off fast and it also starts up fast.

That's kind of a generalization as we've seen over these cycles in the past.

The contract segment is more tied to longer-term, much longer cycle sort of projects, if you will.

So they typically are new construction or they're restacked reconfigurations that have to do with a longer planning process, a longer investment process and a longer selling cycle.

So I think it's too early to call whether or not this is going to roll to the contract segment.

I certainly think that we're seeing slower order activity, sales activity through the total industry.

And so we're going to watch that very, very closely as we go forward.

Sorry, and then the second part -- I mean, just to confirm that it is broad based and general market weakness?

When we say it's broad based, as we look at our different customer groups within that transactional from small independent dealers to big box retailers as part of this to regional supply driven sort of chains, etc., it's consistently soft across all those areas.

So your question is, are we feeling more competition?

I don't think we're feeling more competition now than we ever have.

So we always believe, by the way, Chris, that we can and should be competing better, but I would not attribute the softness to private-label or imports or those sorts of items.

But we've got our eyes wide open and looking at it very, very carefully.

Okay, great.

I'll let some others get on the call.

Todd Schwartzman, Sidoti & Company.

Good morning, folks.

What was the trend in the contract business throughout the quarter?

And also if you could maybe -- if you can tell us anything about April orders thus far.

The trend for the contract business was consistent with what we've seen before.

We think, again as the industry has shown, contract was relatively strong.

Contract is, across the industry I believe, not as strong as it was last year, but nothing notable I think regarding the trends within the quarter.

And the second part of the question, Todd?

What can you tell us about April orders?

Nothing notable there, Todd.

March was no better or worse than January to early February?

Nothing I think that is important to your analysis.

Okay.

And the other thing I was wondering, what percentage -- for Q1 what percentage of furniture sales were to overseas customers?

It's a very small part of our business, less than 5%.

Got it.

Thanks.

Budd Bugatch, Raymond James.

Good morning, Stan.

Good morning, Jerry.

Good morning, Melinda.

A couple of questions.

The unallocated grew by just about double.

I know interest expense was responsible for something close to $3 million of that, but I'm not quite sure I can figure out where the other part of that is?

Budd, this is Jerry.

A couple things there.

One is interest expense is about half of that increase, $3 million to $4 million of it because we now have a full quarter of debt that we didn't have last year.

The other piece of it really is timing of some medical costs and we had very favorable medical cost trends last year.

They're running more normal this year.

Our normalized rate, which is what we also said in our last conference call, we still think is going to be about $60 million for the year.

Last year, like I said, we had some favorability, this year it was a little bit -- we saw, like I said, some more increased medical costs.

So I think going forward we still think it's going to run in that $14 million to $15 million range per quarter.

Okay.

Secondly, can you give us any kind of update on what's going on with Lamex?

Is that meaningful yet?

I think, Budd, it is meaningful from a strategic sense.

They have integrated in very nicely.

They've realigned their focus.

We cleaned up the business from the standpoint of getting them dialed in to almost strictly office furniture versus some of the other businesses they were in.

We've transitioned the management team, put our internal controls, processes, began to introduce lean into their manufacturing operations, began to focus on product development and rebranding.

So they're growing nicely in the core markets that we've targeted, namely PRC in Hong Kong.

They're ahead of our financial plan as far as what we've asked them to contribute.

But it is not a major contributor to profitability at this point per our plan.

Going forward restructuring -- restructuring unfortunately probably has become a core competency of too many of our companies and you're not immune from that.

For modeling purposes as we look beyond the second quarter you talk about aggressively taking actions or seeking actions and I guess in office as well.

What's left to be done?

Have you announced anything?

Do we have anything for modeling or planning purposes that we should be aware of?

I think at this point the answer to that is, no.

And here's why, Budd, I think it would be premature and potentially disruptive to prospectively announce or provide details on plans that are being developed.

What you can expect is that we're going to continue to do what we've done in the past and even the near-term evidence of what we've done with hearth I guess would be the best case I would make at this point.

And it's around major cost areas like logistics and transportation.

That's a huge spend for us and we have some pretty detailed sort of analysis and actions in work here to significantly reduce that cost.

It's also looking at our whole network model -- where are our manufacturing plants, where do we cross stock, how do we supply -- those sorts of areas.

In addition, we continue to manage our discretionary cost tightly based on anticipated volume.

So sorry I can't give you specifics at this point, but I guess would lean on some of our past credibility in this area and say we're getting after it.

I think you do have credibility in the area.

I guess the only question I should ask is do you think when we have this call in the third quarter you will have finished that planning horizon and maybe have more detail on what you might be doing or have done at that time?

Yes, I think we'll have additional detail to provide you.

But I'll tell you, our style is not to come out and announce just like huge sort of things.

We tend to look at these things, have a long-term vision and then kind of announce them as we're implementing and rolling them out.

So I believe there will be some things we can talk about then.

I just don't think you have a lot left that you can do.

I mean you've done so much -- you are lean anyway.

So it would be curious as to your actions may be very modest in retrospect of what's been done already.

I'm not going to dispute what you're saying to a great degree, Budd, But I can tell you we've been at Lean for 15 years.

And the more we learn the more we realize what the potential is.

I understand that.

The second thing is as the business changes the cost structure needs to change as well.

So for us we see it as an ever-changing evergreen opportunity for us to realign cost and take the waste out and continue to drive shareholder value.

Just two other quick questions.

Acquisitions, I think Lamex now kind of -- we've cycled through that.

What do we look for going forward in terms of impact of either the specified or unspecified acquisitions on revenues for the rest of the year?

There's only about $10 million to $15 million for the rest of the year that's in there right now, Budd.

Okay.

And my last question has to do with you still have some nice free cash flow, I would take it you're still going to be in the market for your stock and what's left to do, what do you need to -- what can you tell us on that score?

I think our priorities for cash remain unchanged is what we would say.

We will behave consistent with how we behaved in the past around the whole cash redeployment cash investment for shareholders.

Thank you very much.

Good luck on your actions.

Matt McCall, BB&T Capital Markets.

This is actually Sean Connor for Matt McCall.

Matt is celebrating the birth of a new baby.

A quick question on the amount of price in the quarter.

How much price did you guys receive on the revenue?

We historically don't actually give that out.

What we did say in my comments was that we were able to get enough price this time to cover our material and input cost increases.

Okay.

I guess the next question, if the price increase is able to cover the material increase and I guess we're seeing some weaker trends in the transactional furniture side, is that margin that we saw this quarter, I guess we margin reduction, is that something that we can expect going forward or will there be I guess ideas in place to maybe offset some of that?

Right now we feel that the gross profit margin is going to be comparable to what was in the prior year quarter last year.

Okay.

Thank you very much.

With that, Mr.

Askren, and our host panel, I'll turn it back to you for your closing remarks.

Thank you very much for your time and thank you very much for your interest in HNI.

We look forward to talking to you soon.

Thank you.

Ladies and gentlemen, Mr.

Askren is making today's conference available for digitized replay.

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And that does conclude our fiscal results for this first quarter.

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