HNI Corp (HNI) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to HNI Corporation's second quarter fiscal year 2007 results call.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

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

Marshall Bridges.

Please go ahead, sir.

Good morning and thank you for joining us today for the HNI Corporation conference call, to discuss second quarter 2007 results, which were announced earlier today.

My name is Marshall Bridges, Treasurer for HNI Corporation.

If you've not received a copy of the financial news release, please call 563-272-7927 and we'll send it 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 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, Marshall.

Good morning, everyone.

I'm going 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 our outlook and then finally, we'll open the call up for questions.

During the second quarter we realized stronger-than-anticipated profits through aggressive cost management.

In particular, our office furniture business achieved a 16.2% increase in operating profit.

Operating cash flow was also strong.

That said, our hearth business continued to be impacted by adverse housing market conditions and lower comparable sales of alternative fuel products.

The hearth team continues to do an effective job of managing through these severe market conditions.

Despite experiencing a 27% decline in sales, the business generated an 8.5% operating profit margin.

Our office furniture business was challenged by the continued softness in the supplies-driven channel.

Our contract businesses continued to perform well.

Although quarterly profits were negatively impacted by lower hearth volumes, and a softer office furniture business, profits were favorably impacted by price realization, more moderate material cost increases, and continued efforts to eliminate structural costs across the organization.

We continue to focus on the front end of our business with new products and brand initiatives.

For example, we were fortunate to be honored with several awards at NeoCon this year.

Our Gunlocke Company won two Best of NeoCon awards, including the gold for conference tables, and Allsteel won three Dealer Choice Circle of Excellence Awards.

I'll come back and provide more comments in the outlook, but now we'll turn the call over to Jerry Dittmer, to review some of the specific numbers for the second quarter.

Jerry?

Thank you, Stan.

For the second quarter 2007, consolidated net sales decreased 7.4% to $618 million.

Acquisitions added $6 million or 0.9 percentage points.

Excluding acquisitions, organic sales growth was down due primarily to the decline in the hearth business, as well as the supplies-driven channels of the office furniture segment.

Gross margins were 34.9% and essentially flat with the prior year quarter.

SG&A as a percentage of sales was 27.5%, comparable to the prior year quarter.

SG&A dollars decreased due to lower volumes, strong cost containment initiatives and lower incentive-based-compensation expense.

The shutdown of a small office furniture facility in Monterey, Mexico, was largely completed during the quarter.

The corporation incurred $700,000 of current period charges during the quarter.

Additional restructuring-related costs of approximately $400,000 are expected during the third quarter.

As a reminder, second quarter 2006 included $600,000 of restructuring costs for the shutdown of two office furniture facilities.

Interest expense was $4.8 million, reflecting a full quarter of interest on current debt levels.

Our annualized tax rate was reduced slightly from 35.5% to 35.4% during the quarter, resulting in an effective rate of 35.3% for the second quarter.

Net income was favorably impacted $0.05 per share as a result of our share repurchase program.

Approximately $55 million remain under the current authorization.

We completed the previously announced sale of a small, non-core component of the office furniture segment during the second quarter, as anticipated.

Cash flow from operations increased to $95.7 million from $30.9 million in the prior quarter, due primarily to timing and collection of trade receivables.

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

Thank you, Jerry.

As we look forward, we anticipate our office furniture sales will be relatively flat due to the softness in the supplies-driven channel.

I'd like to remind you that the supplies-driven channel represents approximately 50% of our office furniture business, and includes our large, retail-oriented customers.

The softness, generally, continues to be broad based across customer groups and product categories.

We expect our contract businesses to continue to perform well.

As it relates to our hearth business, we continue to anticipate sales will be down approximately 20% for the full year.

Housing market conditions remain uncertain.

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

We are solidifying our strategic position during these challenging conditions to position the business for growth once a recovery begins.

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

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

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

I'll have more in a bit here.

Jerry's going to provide the financial outlook for the third quarter 2007.

Thanks, Stan.

We anticipate overall sales to be comparable to the prior year quarter.

Office furniture is expected to have top-line growth in the low single-digits.

Hearth sales are expected to be down 20% to 25% during the quarter.

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

SG&A as a percentage of sales is anticipated to continue at the current year run rate as we continue to invest in selling resources, and branding initiatives.

Stan?

So let me wrap up here.

Overall, we'll continue to aggressively manage through these changing market conditions and economic challenges.

We're taking strong actions to reduce structural and operating costs.

We will continue to focus on driving top-line growth, building upon our strategic investments for long-term profitable growth.

We had good execution during the second quarter and I have a great deal of confidence in our members and management teams, and believe we will continue to drive success in our markets and create long-term value for our shareholders.

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

Thank you.

(OPERATOR INSTRUCTIONS) And our first question will come from the line of Chris Agnew of Goldman Sachs.

Thank you.

Good morning, Stan.

Good morning, Jerry.

The first question relates to what you just given, the guidance for the third quarter.

I'm really thinking about the second half in the office furniture business.

I mean if I'm correct in calculating, the supplies-driven business declined, in the first half, roughly 8% to 10%.

What are you seeing that's changed there to make your third quarter guidance?

What are you seeing in the marketplace that's caused you to-- or that growth deceleration to reverse to probably flat to slightly up?

Well first off we-- Chris, we don't see significant changes overall.

So we're taking a similar sort of stance going forward as we did the first half.

The market is relatively, I think, mixed right now.

We don't see it declining any more right now, at least we don't have any signals that would indicate otherwise, and we don't see any strong impetus for it to accelerate.

So we're, I guess to summarize, calling it similar to what we saw in the first half.

As you know, Chris, the second quarter office furniture was down 1% and basically the guidance we're giving is kind of the average of our supplies-driven and the contract together which is where we're getting that low single digits.

Which is why I'm maybe a little bit confused.

Because we've seen now Miller, Steelcase, and Knoll, and pretty much everyone talking about weak -- softness in the second half of this year, and BIFMA growth rates definitely decelerating, I think way below, maybe 3% or 4% for the full year, but much weaker in the second half.

So in-- that, I guess your low single digit implies that Allsteel, your contract furniture business, is growing much, much faster.

Could you provide maybe a little bit more color around that?

And am I correct in my assumptions?

Well I think, Chris, again I'd go back and say, we're calling it as we see it, so I can't comment on what the other guys are seeing.

What we're seeing is similar sort of momentum in the supplies-driven channel and similar continued momentum in the contract segment.

And so, as Jerry said, the first half was relatively flat to even.

We see the second half similar there.

Okay.

And then maybe on the-- in the supply-driven market, you're saying it's broad based, and it-- and do you think that, do you believe that all other suppliers in that industry are experiencing the same sort of growth rates?

I mean one thing worth thinking about is, are you getting increased competition from private label products at the big box retailers?

And is that maybe a structural change in this market environment?

It's a good question, and first off let me say a couple of things.

BIFMA doesn't fully, probably, represent that segment of the market, just because BIFMA is probably more heavily mixed towards the contract segment.

Second, most of those companies that play in that segment-- in fact, we're probably the only public company of any significance that reports there, so it's very hard for us to see what's going on.

What we do know is, we look at our large publicly traded customers, as they kind of report out their office furniture segment sales, they're also indicating comparable sort of challenges as us, in that segment.

So the structural question is a good one.

We don't see it right now.

We think it's more of a kind of a broad-based market sort of factor that's keeping that sort of at a conservative, sort of market position.

Okay, and then final question and let others get on.

You're sticking to your guidance in the hearth products business.

But if anything, we're seeing worsening conditions in the housing market, and I presume that's going to lead to increased weakness in new home construction.

Why are you maintaining your guidance in that area?

Are there any particular factors?

Well I think again, we're calling it as we see it from our perspective.

So we understand the market's continuing to feel stress.

We do have two components of our business.

We have the alternative fuels remodel/retrofit segment, and the new construction.

So as we look at it, we factor in that other segment as well.

Secondly is we feel like we are doing well in a very challenging environment, from a market position standpoint.

And then probably the final is, you know, where that overall new construction market ends up is a tough one to forecast.

Okay.

Thank you.

Thank you, Chris.

Thank you.

And next we'll go to the line of Budd Bugatch of Raymond James.

Good morning, and congratulations on just an outstanding job of cost control on significantly less revenues than what I was looking for, and I think others were, you kind of beat the pants off us in the earnings number.

Can you talk a little bit about that operating expense control?

What did you do?

Where did you pull from?

Are we paying a longer-term price for that?

You know, we don't think we're paying a longer-term price for that, Budd.

We're very, very careful and I think we've got a history of, sort of, when we think we need to be investing for the long-term on that SG&A P&L, we've done that.

And so, don't think we're cutting ourselves short.

A lot of it is just good old-fashioned cost control.

We also, as we talked to you before, got after some significant structural cost, primarily in the logistics side of the business.

We have elected to change our logistics model, and we outsourced a significant portion of our logistics to a third party.

And we talked about this last time, we anticipate that change, for instance, once it's fully implemented in year two, it's going to generate more than $7 million worth of cost savings.

We think we got some of that cost savings here, right away, just from changing how we're thinking about that, and just process improvement.

As so it's-- that's the big component.

The rest as I come back and sort of rephrase is just managing aggressively, sort of, top to bottom of the organization.

I know you hate this kind of question, Stan or Jerry, but I'm going to ask it anyway.

When you look at your cost ratios, even with that expense control versus our guess, you're still significantly above at least one of your near-term competitors, in terms of cost of relationship to sales.

Can you kind of give us any granularity of picture as to maybe the gross margin rates, and SG&A rates by the two divisions, two operating divisions?

Yes, we can't break that out.

And you know, the one thing I'd say, we just don't do that, Budd, as you know.

The one thing I would say as you compare us to other competitors, due to the kind of supplies-driven nature of our business, the way we go to market, the bulk value relationships, the way we handle mixed truckloads nationwide, etc., there are some significant issues with the business model, which as you know, drive different economic models.

That said, we're always looking at how do we drive costs down?

How do we grow the top-line to make those margins improve?

Structural costs going forward -- what do you see take-- coming out?

Are we seeing any fixed assets being mothballed?

As we talked last time, Budd, it would be premature and potentially disruptive for us to provide a lot of details on that, but you should expect more of what we've done in the past, which is operational improvement, manufacturing consolidation.

Timing on that, Stan, will we see it in Q3?

We will announce it when we've implemented, but we will announce something before the end of the year, I'm confident.

Okay.

And my last question goes to what uses of cash and did you either in the script, or in the, I don't remember in the press release, talk about how much you reacquired in shares?

Yeah, I believe it was $85 million.

In the quarter?

Yes.

That's for the year.

Yes, we repurchased 1.9 million for the year, Budd, in shares.

Okay, and --

For almost exactly $85 million so far year-to-date.

Average price in the quarter?

Average price for the year, Budd, $43; I don't have the quarter.

Got you.

All right.

Thanks, Jerry.

Thank you, Stan.

Thank you, Marshall.

Thanks, Budd.

Thank you.

And next we'll go the line of Matt McCall of BB & T Capital Markets.

Thank you.

Good morning, everybody.

Morning, Matt.

Let me -- I missed the -- one of the last questions.

The announcement by the end of the year.

What's the expected -- not the specifics, but what was the question about?

Budd asked me whether-- we talked about structural costs -- he asked me whether we could announce anything, and I told him that it would premature and disruptive, but you should expect more of what we've done in the past -- operational improvements, manufacturing consolidation -- and before the end of the year, we'll announce more of those specific actions as we've implemented them.

Okay.

All right.

Thank you.

Jumping back to the SG&A, obviously a very pleasant surprise, but a bit shocking, given the guidance level, and I'm just wondering what-- I think the guidance was for 100 basis points of year-over-year increase as SG&A percent of sales, and that included $2 million from pressures from the facility closure, if I look back at the transcript.

I'm just wondering what changed from-- I'm sure you had a lot kind of in the works, when you had the last call, but what changed between the last call and when you actually reported the numbers?

A couple of things, Matt.

It's Jerry.

One is in '06, the second-quarter is 27.7.

We guided you to about a point higher and came up about 0.2 less than that.

And a few days after, one is Stan had already talked a little bit about our freight and distribution initiative, which hit in there.

We also, as you know, we made the call three months ago, we knew the quarter was starting off slow.

So we took a hard look at our cost initiatives and discretionary spending, and so for several million dollars there, we were able to shift costs around, as we have historically, and that's really the major part of it.

Plus, we also, obviously, have some that's volume related that brings it down.

And so instead of being up that point, we were basically flat with the prior year.

Or down about 30 basis points is the number I had.

Yeah, 20 basis points.

That's correct.

Right, right.

So those were not items that you had?

I understand the volume part.

The volume is a little weaker than expected it sounds like, but-- so all those other initiatives that drove the SG&A lower were-- you kind of decided to make those moves post the conference call?

Correct.

Okay.

And well, following on with the most recent guidance, just to kind of make sure I understand.

Maybe we can speak in terms of the second half.

I mean second half, I understand to be, is normally, if I look at it, it's normally a stronger seasonal pattern and you're talking about a gross margin comparable year over year in that 34.5 range, you're talking about SG&A stay at that current 27.5 percentage.

I mean, is that a good way to look at the second half of the year, given that the top lines normally look somewhat similar?

Yes, it is.

It is.

Okay.

I don't need to ask you any more.

Okay.

And then just to, I'm not trying to beat a dead horse, but following up on the first questions about furniture, I was surprised to hear you talking about growth, and I think you said-- and I'm not surprised to hear the answer, that's just what we're seeing.

But maybe talk about a little of what you are seeing.

I mean, it sounds like supplies channel is obviously getting a little bit better and maybe I missed the color that you might have offered there.

Yes, I go back and say we basically believe that overall we're going to be flat to slightly off.

But that's a pretty fine sort of delineation there.

So we kind of think that we're not really seeing much change either way.

Okay.

We think we've reached a kind of a point of stability.

We don't see anything that's going to push it down any further.

We don't see anything that's going to push it up any further.

Okay.

Okay.

And then finally, in that -- when I talked about the seasonality, you said you'd probably see a-- make some type of announcement by the end of the year, are you assuming the benefits of such an announcement in that comment, that the second half of the year will look, same as what you're guiding to Q3, or is that without any potential benefit?

Or would the benefit show up this year or would it be next?

Yes, the benefit will not show up Matt, for the most part, until 2008.

And we have not included any of those pluses or minuses in our guidance.

All right.

And I'm not sure if I'll get an answer to this, but I'm assuming-- maybe this is a bad assumption, but I'm assuming they would be hearth related, given the weakness, and to my knowledge you guys are pretty lean there already from a footprint standpoint.

Am I making a bad assumption, first, and can you just make any more comments?

I wouldn't make any assumptions on that, Matt.

Okay.

All right.

That's fair.

All right.

Thank you, guys.

Yes, thanks Matt.

Thank you.

(OPERATOR INSTRUCTIONS) And we'll go to the line of Craig Kennison of Robert W.

Baird.

Good morning.

Morning.

Congratulations on the cost containment, as well.

Getting to your comment on revenue in the third quarter being roughly flat compared to the third quarter in the prior year, does that include any impact of acquisitions?

The acquisitions, Craig, are about $5-$6 million a quarter for the rest of the year.

And so-- and the guidance would incorporate that as well?

That is correct.

Okay.

And then just with respect to, again, the remarkable cost containment, and following on Budd's comment, are you very confident you're not cutting into any of the muscle of the company?

Because we do think of HNI as being operated as a lean organization without as much fat to cut as maybe you demonstrated this quarter.

Yes, we're very confident, and another way of saying this is, we have not reduced our front end investment.

We haven't-- we're still focused on building our brand, selling resources, product development, programs.

So we are not cutting on the strategic value of this business.

We're not cutting on the front end; we're not cutting on our ability to respond aggressively in a competitive environment.

And finally, could you comment on your international business, and maybe how that compares to some of your competitors, and whether you're seeing relative strength internationally?

Yes.

You-- I would say that our percentage of international business is small.

It's been that way historically.

Our major initiative there is in Asia, with this acquisition of Lamex, that we've had part of the corporation here now, approaching 18 months.

That is going well.

It is growing nicely, albeit continues to be small.

The other part of our business would be a relatively small export business as well.

Okay, thank you.

Thank you, Craig.

Thank you.

Next we'll go to the line of Todd Schwartzman of Sidoti & Co.

Good morning, gentlemen.

Just have one quick one.

Can you shed light on the increase in receivables and inventory from Q1?

The-- most of that is volume related, as far as, receivables-- I mean, I'm sorry, inventory is up slightly from the first quarter because of some acquisitions.

Actually, year over year, inventories are actually down as receivables are also.

So if you look at the second quarter, last year inventory was $112 million.

It's $111 million this year and receivables are also down.

And so-- from sequentially, I don't have that in front of me, I just mostly have more the year over year.

In the DSO's, if we look at those, are actually better, year over year also, Todd.

Great.

Thanks a lot.

Yes.

Thank you, and, gentlemen, I'll turn it back to you for closing remarks.

Thank you very much.

We appreciate your time and your interest in HNI and we look forward to talking with you soon.

Have a good day.

Thank you.

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