HNI Corp (HNI) 2007 Q3 法說會逐字稿

Ladies and gentlemen, we would like to thank you for standing by, and welcome you to the HNI Corporation third-quarter fiscal year 2007 results.

(OPERATOR INSTRUCTIONS).

As a reminder, today's conference call will be 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 third-quarter 2007 results which were announced earlier today.

My name is Marshall Bridges, Treasurer for HNI Corporation.

If you have not received a copy of the financial news release, please call 563-272-7927, and we will 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 Chief Executive Officer.

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 risks.

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 third-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 will share a brief assessment of the business and then turn the call over to Jerry Dittmer, our Vice President and Chief Financial Officer, who will review some of the specific financial details.

I will then come back and shares some thoughts on our outlook, and then finally, as is usually our case, we will open the call up for some questions.

During the third quarter, we continue to find ways to improve our business.

We reduced structural costs, managed expenses, and as a result, we achieved record levels of earnings per share, operating cash flow and office furniture operating profit.

Office furniture market conditions remain similar to those we experienced last quarter -- continued softness in the supply driven channel and solid demand in our contract businesses.

We were able to leverage modest sales growth into a 15% increase in operating profit despite restructuring charges and lower nonoperating gains.

Our hearth business is facing increasingly difficult macroeconomic conditions like all building product businesses.

Our hearth team continues to effectively deal with these conditions and properly manage through them as they have done for nearly the past year.

Despite experiencing a 22% sales decline, our hearth business generated a 7.5% operating profit margin.

Consistent with our past practice, we remain focused on eliminating structural costs.

Earlier this month we made the decision to realign operations and close a Richmond, Virginia facility.

The opportunity to provide our customers with a better, more cost-effective fulfillment process led to the change.

The move is expected to save in excess of $10 million annually once we have that fully implemented in 2009.

Concurrent with these cost reduction initiatives though, we continue to invest in new products, brand building and other initiatives to accelerate long-term growth.

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

Jerry?

Thanks, Stan.

For the third quarter of 2007, consolidated net sales decreased 1.4% to $675 million.

Acquisitions added $9 million or 1.4 percentage points.

Organic sales growth was down due to the decline in the hearth business.

Gross margins were 35.6% compared to 34.6% in the prior year quarter.

The improvement in gross margins was due to strong cost control and price realization generated by price increases implemented during the current quarter and late in the prior year.

SG&A as of percentage of sales was 26.9% compared to 25.7% in the prior year quarter.

Third-quarter 2007 included $4.3 million of restructuring costs.

These costs were offset by gains in the sale of a vacant office furniture facility in a corporate aircraft together totaling $5 million.

Third-quarter 2006 included a gain on the sale of a vacant office furniture facility of $3.4 million.

As Stan previously mentioned, we made a decision to close an office furniture facility in Richmond, Virginia and will move production into other HNI locations.

During the quarter we recorded a charge of $3.5 million in connection with the Richmond shutdown.

In addition, we incurred $800,000 of current period charges related to the shutdown of the Monterrey facility which is now complete.

Additional costs related to the Richmond shutdown of 2.5 to $3.5 million are expected during the fourth quarter.

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

Our annualized tax rate remained at 35.4%, consistent with the previous quarter.

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

Approximately $38 million is remaining under the current authorization.

Year-to-date cash flow from operations achieved a record level and increased to $178 million from $71 million in the prior year quarter due to improvements in working capital.

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

Okay.

Thank you, Jerry.

As we look forward, we expect a solid fourth quarter as we continue to implement business process improvements and reduce structural cost.

We're maintaining our efforts to improve profitability by leveraging our manufacturing operation, transportation logistics, strategic sourcing and other initiatives.

Based on our experience, we feel confident in our ability to meet current and future challenges.

We do anticipate an increase in SG&A spending due to the previously mentioned restructuring and as we implement investments in brand building, new product and general growth initiatives.

As I said earlier, we continue to focus our business for long-term growth.

We expect modest office furniture sales growth during the fourth quarter.

We anticipate office furniture market conditions to remain similar to recent quarters, which is continued softness in the supply driven channel and solid demand in our contract businesses.

Conditions in the hearth industry continue to deteriorate with the general housing market.

The timing of any housing market recovery remains uncertain.

That said, we will continue to reduce structural costs and properly align expenses with anticipated demand levels.

We're continuing to improve our strategic position even during these challenging conditions.

I will have Jerry provide the details of the financial outlook for the fourth quarter 2007.

Jerry?

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

Growth rates in office furniture revenue are expected to be in the low to mid single digits versus the prior year quarter.

We forecast hearth sales to be down in the low to mid-teens versus the prior year quarter.

Gross profit margins are anticipated to be comparable to the third-quarter '07 results.

We expect SG&A including restructuring charges as a percentage of sales to be comparable with year-to-date run-rate including restructuring charges.

Additional charges related to our previously announced operations realignment and the implementation of our brand building, new products and growth initiatives will drive this rate above our third-quarter results.

Stan?

Alright, Jerry.

So, just in conclusion overall, we will continue to properly manage through these changing market conditions and economic challenges.

We will also continue to invest in growth and improve the strategic position of our businesses.

Our members and businesses executed well during the third quarter, and I believe together we will deliver strong results in the future.

So that really wraps up our comments, and now we will open it up to questions.

(OPERATOR INSTRUCTIONS).

Budd Bugatch, Raymond James.

Jerry, would you do me a favor and just run over the SG&A guidance again?

Kind of out -- you went through that and I kind of lost you somewhere midstream.

Sure, I can do that.

Just take it slow for this old ears.

No problem.

We expect the SG&A including our restructuring charges as a percentage of sales to be comparable with the year-to-date run-rate.

Our year-to-date run-rate is in the about 27.5% range.

Additional charges related to our previously announced operations realignment, the implementation of our brand building, our new products and growth initiatives, etc.

is what is going to drive it a little bit higher than what you just saw in the third quarter.

Okay.

So the additional charges are included in the SG&A, though?

That is still in that run-rate?

That is correct.

Okay.

And when you look then at the EBIT margins, when you look divisionally, you I think in the fourth quarter of '06 in hearth had just under a 7% pretax margin, and for office furniture it was a couple of basis -- 30 basis points under 10%.

How would you feel about that, or what guidance can you give us on that?

Yes, you asked for the breakdown, and we don't normally break it down, as you know, by the actual group.

I understand, but you have done such a good job this year in containing costs and particularly in hearth under just enormously challenging conditions and both segments, quite frankly.

I was just hoping you would give us a feel because fourth quarter was when we really started to feel the pinch last year.

And I think you are going to see in the hearth, if you remember, the hearth last year was the first quarter that it was really down.

Oh, yes.

So the comparison is going to be so our fourth-quarter run-rate, the margins is going to be higher than it was in our third quarter that we just went through.

So the numbers you gave us are going to be pretty well up 2 to 300 basis points.

The office furniture is going to basically be flat.

Got you.

Okay.

You know, we will always caveat the hearth side too (multiple speakers) barring some major, major change.

Certainly it is very uncertain.

And you have not seen -- and like the downturn, you were late seeing it because fireplaces go in pretty late in the building process.

You will probably be late seeing it on the upturn as well, or what are you hearing from your customers if they are still there?

I think certainly what we're hearing is they are not at the bottom yet.

Chris Agnew, Goldman Sachs.

I would like to ask about the supply driven business, the continued softness that you are seeing.

I was wondering if you could give us a little more color.

I know you have limited visibility, but are there any rays of light?

Maybe could you discuss are there any differences you are seeing maybe between products or geographies or particular types of business because I know that is a mix of a whole different sort of go to market businesses.

I'm just wondering if there's any more color there.

I guess the only color I can provide is really there is no change as to what we have been -- as to what we have seen in the previous two quarters regarding kind of business activity mix, geography and all that.

Okay.

In terms of -- I mean what are your -- are there any comments that your customers or your salespeople are providing back?

Can you provide any more color?

Again, it is kind of maybe a not very exciting answer is we are -- as I said, we're really looking forward as no change.

Okay.

With the contract business, what sort of initiatives are you doing there?

You talk about you are investing in growth.

Can you may be discuss what parts of the business you are investing in?

I know you're still challenged on the hearth slide, but are there areas where you are investing for growth there, or are you putting all your money towards contract and international?

Maybe you can discuss that.

Sure.

I think it is a good question.

In general, our strategy has been to pull two levers simultaneously.

One is to look at the structural cost, the non-value-added ways which is part of our legacy of this lean continuous improvement and remove that.

What we do is typically we take some of that, and we plow it right back into the business.

We do that across the board generally.

So we are investing in sales growth, topline growth even in the hearth business through marketing programs, through advertising, through product development, through sales initiatives.

Likewise, we're doing that in the supply driven general.

I think you can anticipate in '08 that we will have a very high level of new product introductions across the office furniture business.

I think if you -- in many markets you can hear advertising, radio advertising.

You can see print advertising around HON Company in particular.

If you listen in the markets, you can see that they are advertising.

I think you can see that we continue to invest in selling resources such as salespeople, showrooms across the board.

And so we really think about this kind of as working both levers simultaneously.

Take the waste out.

Take the structural cost out, but think long-term and plow that back into really growing the topline.

So as the macroeconomic conditions change, as the businesses cycle out, including the hearth business that we really have a lot of momentum coming on through.

So we're not just kind of harvesting; we are trimming and investing at the same time.

Can you touch on international?

Is it possible to break out what that is within the mix?

We have not broken that out historically, and as I often say, we're relatively small in that area.

We have made some big steps in the last 24 months, primarily the acquisition of Lamex and our sales initiatives in Asia.

What we can tell you is that it is going well.

We're pleased with the results.

It is meeting our strategic objectives, it is meeting our commitments, and we anticipate that that will as time goes on become an even more important part of our business.

Do you think -- your competitors are doing particularly well in Europe.

Is that a geography that is of importance to you?

Do you think you need to be positioned there?

We don't comment on specific markets.

I think certainly Europe recently has done well.

I think it is still a very mature market.

The question always is, is there a good entry point for us?

So that is probably the extent of what I could comment on.

Matt McCall, BB&T Capital Markets.

This is [Sean Conner] for Matt McCall.

I just wanted to try to understand a little bit further on the SG&A.

It was kind of a surprise for us.

I guess we were looking for something in line with Q2.

And stripping out the restructuring, it was significantly better as a percent of sales I guess lower cost.

Are there any surprises there that had that lower, something that you guys were not anticipating, or when you were talking about that being in line with Q2, were you already kind of building in the restructuring from Richmond?

Well, the restructuring, we were not really building it.

If you look at it, the restructuring wound up being in that $4 million range.

There are some nonoperating gains that offset that by a little bit.

You know, it really comes down to the cost control and managing the business is really the key things we were doing during this quarter and still making sure we're investing for the future, which is why we talked about we're still going to be doing the brand building of the new products and the growth initiative.

There is a little bit of timing in there, and that's really all it is at this point.

Okay.

I know you talked about in like '09 when the restructuring is completely finished, (inaudible) the $10 million of savings annually.

Would we see any of that in the nearer term, any idea on what the savings might be for '08?

In '08 it pretty well nets out.

If we had had it in the press release, we said that the -- if I can grab it here -- the costs in '08 were going to be in that $78 million range.

The savings will be not quite at that same level, so the cost will still be a little bit higher.

But it is pretty well (inaudible) out for '08.

And then by '09 is when you will really see that 9 to $10 million in savings.

So we will see some of the savings in '08, but not enough to totally overcome all the costs.

Okay.

I think on our last call you guys had talked about in the supply channel business that I guess it was not getting any worse and even maybe being more positive than negative.

Is that when you say the same, is that kind of what you're seeing now for October and heading, maybe expecting that trend to go forward through the end of the year?

Correct.

Budd Bugatch, Raymond James.

On looking at those sales line for the fourth quarter and your midteens down for hearth, have you got much included in Harman on that?

There is nothing included in Harman on that.

So Harman is not closed?

That is correct.

And you still expect to close it in the fourth quarter?

Are there any issues that have come up?

I think you know what we would say on this is would be to take kind of a cautious approach on this.

It has not closed, and it is uncertain as to whether it will close at this point.

And so we're not factoring that into our numbers, and I would recommend that you do likewise.

I see.

So I take it from that, Jerry, that what you're telling us is that there may have come up an issue with the creditor issue on this, and I don't expect you to comment on it.

So I will just tell you that is my aside.

So when you look -- at the other side of this is, you did have some acquisition revenues in the third quarter.

What is left in the acquisition runoff essentially for the fourth quarter?

The fourth quarter is $15 million roughly.

And which acquisitions are that?

It is mostly an office furniture acquisition that we made down in North Carolina.

Okay.

Thank you very much.

(OPERATOR INSTRUCTIONS).

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There are no further questions in queue.

Please continue.

Alright.

Well, thank you very much for joining the third-quarter call.

Have a good day, and we look forward to talking with you soon.

Bye-bye.

Ladies and gentlemen, that does conclude our conference call for today, which will be made available for replay from today at 1:30 Central time until October 25, 2007 midnight of that day.

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