HNI Corp (HNI) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the HNI Corporation fourth quarter year-end results conference call.

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

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

Instructions will be given at that time.

(OPERATOR INSTRUCTIONS)

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

Marshall Bridges.

Please go ahead.

Good morning.

Thank you for joining us today for the HNI Corporation conference call to discuss fourth quarter and full-year 2007 results, which were announced earlier today.

My name is Marshall Bridges, Treasurer and Vice President 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 on 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 of business plans and objectives, capital structure and other financial items.

Actual results could differ materially from those projected in any forward-looking statement 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 statement discussed in the corporation's news release announcing the fourth 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.

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

Stan?

Thank you, Marshall.

Good morning, everyone.

As is our custom, I'll share a brief assessment of the business and then turn the call back over to Jerry Dittmer, our Vice President and Chief Financial Officer, who will 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 it up for questions.

Overall we continued to compete we well in our markets.

We reported record office furniture sales and profits for the year.

Our hearth business generated solid profitability in 2007, despite a dramatic revenue decline driven by a unprecedented contraction in new home construction.

On a consolidated basis we generated record operating cash flow and improved gross margin despite the severe conditions faced by our hearth business.

During the fourth quarter we also achieved record level of EPS and operating cash flow and strong office furniture operating profit.

Office furniture market conditions in the fourth quarter remained relatively unchanged from what we saw the previous quarter, with continued softness in the in the supply-driven channel and solid demand in our contract businesses.

Even with these conditions we realized a 9.7% operating margin during the quarter despite the impact of restructuring and transition charges.

Our hearth business faced the same severe economic conditions challenging all building product companies during the fourth quarter.

Our hearth team effectively dealt with these conditions and promptly managed through them as they've done for the past 18 months.

Despite experiencing a 14% sales decline in the quarter, our hearth business improved operating margin to 8.6%, and that includes the impact of additional restructuring actions.

We continued to invest during the fourth quarter and position ourselves for growth.

In office furniture we increased our investment in new products and selling resources such as advertising, salespeople and marketing material.

I would say we are very excited about the return that these investments will generate in the future.

We also invested in our hearth business by acquiring Harman Stove company, a leader in the alternative fuel segment in the industry.

We believe that the housing market will cycle in the mid-term and we're looking for additional opportunistic investments.

As industry conditions improve, we're confident that our hearth business will return to being a strong contributor to our profitable growth.

Concurrent with our growth initiatives in the challenging market conditions, we stayed focused on reducing structural costs and streamlining our businesses consistent with our past practice.

We are executing the previously-announced plans to realign operations and close our Richmond, Virginia office furniture facility.

This will provide our customers with a better, more cost-effective fulfillment process and is expected to save in excess of $10 million annually once fully implemented in the second half of this year.

We consolidated several hearth service and distribution locations to reduce ongoing operating costs in our hearth business, while still maintaining our high level of builder service in those markets.

I'll provide more comments in the outlook.

But now I'll turn the call over to Jerry Dittmer to review some of the specific numbers for the fourth quarter and the full year 2007.

Jerry?

Thank you, Stan.

For the fourth quarter 2007 consolidated net sales decreased 2% to $669 million.

Acquisitions added $15 million or 2.2 percentage points.

Organic sales growth was down due to the continuing decline in the hearth business, as well as a small decline in the overall office furniture segment.

Gross margins were 36.4%, compared with 33.4% in the prior quarter.

The improvement in gross margins is due to strong cost control, lower material costs and better price realization, offset partially by lower volume.

SG&A as a percentage of sales was 28.4% compared to 25.9% in the prior quarter, due to costs associated with new acquisitions, increased restructuring costs as well as transition costs related to plant consolidation, increased costs related to brand-building, new product and growth initiatives, and higher incentive-based compensation.

Fourth quarter 2007 included $4.9 million of restructuring costs, compared to $900,000 in fourth quarter 2006.

In fourth quarter 2007 these included $1.1 million of costs in connection with the shutdown of office furniture facilities, $2.7 million of impairment charges related to portions of the office furniture services business, and $1.1 million of costs associated with the consolidation of hearth service and distribution locations.

The annualized tax rate was reduced during the fourth quarter compared to earlier in the year, primarily due to a reduction in state taxes and an increase in foreign excludable income.

Net income was favorably impacted $0.04 per share as a result of our share-repurchase program.

During the year we repurchased 3.6 million shares at a cost of $147.7 million.

There is approximately 192 million remaining under the current authorization.

For the full year 2007 consolidated net sales decreased 4.1% to $2.6 billion.

Acquisitions counted for approximately $46 million or 1.7 percentage points.

Income from continuing operations was $119.9 million.

Net income per diluted share from continuing operations for the full year was $2.55.

Cash flow from operations achieved a record level and increased to $291 million from $160 million the prior year, driven by improvements in working capital.

That wraps up the financial comments.

Now I'll turn the call back over to Stan.

All right.

Thank you, Jerry.

As we look forward, market conditions in our office furniture business has softened a bit, and the macroeconomic indicators point to a continued slowing in the near term, consistent with an overall slowing of the economy.

For the first quarter, we expect office furniture market conditions to remain similar to recent quarters; continued softness in the supply-driven channel and solid but slightly lower demand in our contract businesses.

During these challenging conditions we will increase our investment for growth and position for the future as we enhance our selling resources and launch a record number of new products in our office furniture businesses.

We're investing in initiatives such as improved web-based selling capabilities, and sharpened selling, merchandising and fulfilling in our retail channels.

We're investing for the economic upturn.

Conditions in the hearth industry continue to be significantly challenged by the general housing market.

As we've said many times, the timing of any housing market recovery remains uncertain.

However, we do believe our hearth business will return to being a substantial contributor to HNI Corporation profit growth.

Accordingly, we'll manage that business with an eye to a mid-term housing market recovery.

Overall, we'll work to increase investment by eliminating waste, attacking structural costs and streamlining our businesses consistent with our long-standing past practice.

These efforts include leverage in our manufacturing operations, transportation logistics, strategic sourcing and shared services initiatives.

Despite the difficulty near-term conditions in both of our industries, we remain optimistic about the future.

We're making transformational investments and removing structural costs to position for long-term success in both of our industries.

As we look forward to the mid-term, we expect to increase our pretax return on -- on invested capital by eight to 10 percentage points over the next three years despite modest expectations for the U.S.

economy and housing market.

We'll do this by growing operating profit dollars by an average of 8 to 10% per year and, enhancing our capital efficiency.

This expectation does in the depend on our hearth business returning to its historical profit level our returns and profit growth will be even greater once new home construction returns to nor normalized levels.

We're managing our near-term challenges while positioned for these future returns.

I'll provide the financial outlook for the first quarter and full year 2008.

Jerry?

Yes, thank you, Stan.

Current economic uncertainty makes it difficult to project in the short term.

But that said, for the first quarter 2008 we anticipate overall sales for the first quarter to be flat to down 5%.

Office furniture is anticipated to be approximately flat for the quarter.

Hearth is anticipated to be down approximately 20%, including the impact of acquisitions, which brings our profitability to about a break-even level for the quarter.

Gross profit margin for the first quarter is expected to be comparable to 50 basis points higher that first quarter 2007.

SG&A, excluding a restructuring and transition charges as a percent of sales for the first quarter is expected to increase one percentage point compared to the prior year first quarter.

Seasonal investments related to the implementation of brand building, get and new initiatives will drive this increase.

We anticipate restructuring and related restructuring costs to be approximately 4 to $5 million in the first quarter.

I will now turn it our full-year outlook, which is even more difficult to project due to the economic uncertainty.

Office furniture sales for the year are anticipated to be flat to up slightly, with operating profit flat to the prior year as we invest for the future economic upturn in brand building, new product and growth initiatives.

Our hearth segment will continue to be challenged throughout the year.

We expect sales in the new condition instruction channel to be down approximately 20% and the organic remodel retrofit sale approximately flat.

When including acquisitions of 30 to $35 million, total revenue will be down approximately 5% for the year in this segment, with operating profit 40 to 50% below 2007 levels, primarily due to the volume deleverage in the new construction channel, increased marketing efforts and a change in product mix.

Unallocated corporate costs, which includes interest expense, is anticipated to be 55 to $60 million for the full year 2008.

Capital expenditures are anticipated to be 70 to $75 million for the full year, with key investments during the year in new product development and related tooling and other operational efficiencies.

Depreciation and amortization expense is anticipated to be comparable to the prior year at approximately $70 million.

We anticipate the annualized effective tax rate for 2008 will be 35.5%, which is higher until we know whether the research tax credit will be renewed in 2008.

Stan?

All right, thank you, Jerry.

So I'll summarize and conclude here.

We will continue to manage through these changing market conditions and economic challenges and we'll also continue it invest in growth and improve the strategic positions of our businesses.

2008 looks to be a challenging year, but one where we can strategically invest, take advantage of market opportunities and position this company very well for the mid-to-long term.

Our members and businesses executed well during 2007, and I believe together we will deliver strong results in the future.

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

Thank you.

(OPERATOR INSTRUCTIONS)

And our first question comes from the line of Todd Schwartzman with sidoti and company.

Please go ahead.

Hi.

Good morning, folks.

A couple of things, the tax rate for the fourth quarter as adjusted seemed to be around 25%.

Expectations for the full year you just mentioned are 35.5%.

Any other factors in Q4 '07, the lower state tax or the increase in foreign excludable income, is any of that going to to recur into Q1, or has it?

No, the foreign excludable is an one-time thing.

And the -- the state taxes, we've adjusted those and included those in the 35.5% rate that we gave you for 2008.

So that 35.5 should be from where you sit now, relatively smooth throughout the year.

Well, yes, it will be.

Okay.

With respect to the hearth business and the employee count there, are you now where you will want to be when housing conditions improve?

Well, as -- as housing markets -- as housing conditions improve, we'll certainly add staff back to handle that that additional volume.

So we've -- we've corrected the head count to bring it in line with the current market realities.

As that changes, we'll add back.

Do you foresee returning to or approximating 2006-2007 total head count?

Well, I -- my hopeful -- my hope, Todd, that some day as the business comes back, yes, head count will return to those levels.

Do I think we're in a more effective cost position if that return?

The answer is yes.

Okay.

And what -- what metrics should we be looking at, what factors would you -- you know, what events would you want to see before resuming hiring?

Orders increased.

Okay.

Lastly, any -- any plans now to -- it either build or acquire an office furniture presence in Europe?

Well, we're not in a position to comment on that.

Obviously we're always looking at markets, international markets, where we think that we can enter, create value and grow.

And so everything is always under consideration.

Terrific.

Thanks.

Thanks, Todd.

And our next question comes from the line of Mr.

Budd Bugatch with Raymond James.

Press go ahead.

Good morning, this is Chris Thornsbury on behalf of Bud.

Just another follow-up from Todd's question on the tax rate, gentlemen, what was that benefit of the foreign income in the quarter that brought the tax rate down?

Could you --

Yes.

What it was, we liquidated the hearth portion of a Canadian subsidiary, and that created foreign excludable income that benefited the tax rate and also gave us the benefit to use some NOL's that were expiring in 2007.

Well, could you quantify that amount?

What the benefit was?

It was about five points of it.

Five points of the decrease?

Correct.

Okay.

And you talked about what you've been seeing in the transactional business versus the contract business now and also in the first quarter.

Does that same outlook carry through for the rest of the year, or -- or not, and when do you potentially see kind of a turn around in that supply channel that you talked about?

I think it does carry through the rest of the year based on what we know today and, Chris, obviously, you know, anybody's guess on -- on when the economy starts to get some rooting.

Now that transactional side of it, that supply driven is, we think, influenced significantly kind of by the whole credit crunch, home equity effect, if you look at retailers, et cetera, it is a similar sort of category of economic factors.

And so, you know, we're hopeful that the stimulus that you are seeing, Congress work, the Fed movement and all that, that, you know, things are going to start to move positively the latter part of 2008.

But I don't think we're ready to forecast that.

Okay.

Also with respect to restructuring, you -- you talked about, Jerry, the first quarter anticipation of 4 to $5 million.

Is that mostly in the office furniture segment?

Yes, it is.

Okay.

And I think when you talked about the Richmond plant, when you were going to be moving out of that, I think around 15 to $17 million over the next couple of years, and it seems that you've gotten a pretty good amount of that already.

So has that accelerated according to what your initial plans were, and could we then see the savings of that as expected?

No, we're pretty much on schedule yet and for the year we're looking an additional 9 to $11 million, we've taken the other portion of that in 2007, but we're pretty much on track with that now.

Just my final question, I'll let others ask, in terms of the acquisition environment, what are you seeing now in terms of what you saw last year in terms of changes, availability, and how would you look to finance that?

Is that strictly through cash flow or are you also looking to do some debt?

I'll talk about the deal environment.

Certainly, you know, I wouldn't say there's any sort of big change in sort of opportunities.

The credit crunch and those sorts of things have kind of changed the private equity perspective on potential deals and so that has changed a bit.

You know, how we finance that kind of depends on the size and sort of what other uses we have for cash and what we think the -- you know, the debt market looks like.

Okay.

Thank you very much.

And our next question comes from the line of Matt McCall from BB&T Capital Markets.

Please go ahead.

Thank you, ma'am.

Good morning, everybody.

Good morning, Matt.

More comments, I guess, or another question about the other guidance, office furniture from flat to up slightly.

Obviously the market is quite concerned about the environment.

Maybe -- maybe talk about the -- what gives you comfort in flat to up slightly?

Obviously it sounded like there's -- there's still bifurcation in the two -- two sides of your business, but is there a pretty healthy pipeline out there?

What does that pipeline look like six months, nine months, 12 months out?

Well, you know, the-- the pipeline does continue to look relatively healthy.

We don't -- you know, when you start saying six, nine, 12 months, that's -- that's a long way off in this sort of economy to really be making any sort of forecast based on that.

The contract business continued to -- to perform well, and we have not seen a significant drop-off.

But I would tell you in this sort of climate, we anticipate that there will be some slowing, just as corporations' CEOs become a bit more conservative until the economy kind of sort of sorts itself out.

The supply-driven business, you know, kind of continues on at basically the same sort of rate bates as we've seen, you know, in recent quarters.

And so we don't see any real big stimulus to move it either way.

Probably have a tinge of a bit more caution, just due to the overall change in the economy.

But I -- I guess the -- I understand about the -- the lack of visibility as we move further out.

And you kind of answered the question of what has the change been in the rate of -- of boards or -- borders or even the health of that pipeline.

But as we look out, it sounds like your -- you're expecting kind a front-end loaded year if you're expecting some kind of decline, or is the decline or pressure that you're expecting more an '09 phenomenon?

I'm not sure I understand, Matt, your -- your conclusion there.

I guess we go back to sort of our guidance.

We -- we see a little bit of softening but we're not forecasting a big dip later on in the year.

We think, you know, as I said earlier, responding to another question, we're hopeful that the financial stimulus kind of pulls us out of this thing.

But we don't see any significant thing that is going to throw a big, wet blanket on it, and likewise we do not see any significant stimulus that is going to see it accelerate; and so we're providing a similar perspective on the order of outlook with just a tinge of a little bit more caution based on what we see going on with the overall economy.

Okay, okay, that's fair.

Now, in -- in the guidance you mentioned, Stan, numerous cost savings initiatives and a focus on reducing costs.

Maybe, you know, in reference -- looking back at that list, what assumptions are you baking into that margin guidance or the profitability outlook for '08?

You mentioned a lot of things lake shared services and -- and there was a whole list I don't have in front of me.

But what kind of assumptions are you making on changes that you are going to have to make to meet those margin goals?

Well, it's kind of a -- a continuation of what we're doing now.

And so we pull -- you know, we've also said that we pull these multiple levers here.

So we're always thinking about structural costs, where is the waste?

What -- what are the big structural things that we've talked to you about, logistics, outsourcing in the past.

We've talked to you about plant consolidations in the past.

We've spoken with you about this Richmond, Virginia consolidation, by the way we're expanding also in cedartown, Georgia, so it is not sort of just cost reduce our way out of this, and I should share with you also, that where we really do well is the day in, day out, grind it out, take the waste out, take the excess costs out sort of thing.

And so it is a lot of just continuing on with what we've done over the years.

I think, likewise, we were talking a lot about not just cost-reducing our way out of this.

That we are -- we are on our toes here in the market and saying this is a great time for us to be investing in the front end of the business, in -- in product launches and in selling models and helping our distribution and channels do a better job.

And so -- and -- and including in the hearth business.

And so what you see in that gross margin is sort of a -- a pretty broad compilation of all of those things kind of coming together.

Okay.

Okay.

Well, no, I -- I definitely saw the -- the strength of the gross margin in Q4 and just wanted to understand what was assumed -- assumed next year.

Thank you all very much.

All right, Matt.

Thank you.

Thank you.

Our next line comes from the line of Craig Kennison with Robert W Baird.

Good morning, guys.

Good morning.

Good morning, Craig.

Congratulations on really executing on the cost side in a difficult environment and I also wanted to thank you for the color in your guidance.

Just to follow up on a few questions that were asked earlier, it seems to me that a fundamental core competency for HNI is really the rapid, continuous improvement and getting at structural costs and your ability to source effectively from other countries.

Has the Board given any thought at all to, you know, looking at that as a core competency and saying, look, right now we're in hearth, we're in furniture, but there are other inefficient manufacturing processes where our core competency may play, or are you still happy really in these two vertical markets and just would like to look for opportunities there?

Thanks.

That's -- that's a great question, Craig.

And certainly like -- we have a -- we have a great Board that thinks a lot about these things long-term.

And so certainly that's a dialogue or discussion that -- that has transpired, as you might imagine.

And I don't -- there's no conclusions, firm conclusions on that.

I think clearly what we see right now is we need to maintain our focus on office furniture and hearth.

But, you know, that's -- that's an ongoing dialogue and one that will continue on into the future, I think.

And -- and -- but I'll reiterate, the focus right now is office furniture and hearth.

And if you don't mind, just my phone was breaking up when you talked about your -- your ROIC guidance.

What is your goal with respect to return on invested capital?

Yes, the ROIC guidance, Craig, was that it would be eight to ten percentage points over the next three years.

And that we'd also have crawler operating profit dollars by an average of eight to ten percent over the next several years.

Per year.

Average.

And what do you calculate your return on invested capital at today, just so I have a rough approximation?

I think what it is, is 24.9, is what it was for 2007.

Okay.

Thanks, guys.

Great.

Thank you, Craig.

Thanks, Craig.

And our next question -- well, I don't believe we have any more questions in cue.

Please continue.

All right.

Well, we want to thank everybody for your interest in HNI and joining our call, and we look forward to talking with you in the future.

Have a good day.

Ladies and gentlemen, this conference will be made available for replay after 1:00 p.m.

today until February 13th at midnight.

You may access the AT&T executive service by dialing 1.800.475.6701 and entering the access code 905966.

International participants may dial 1.320.365.3844.

Again, those numbers are 1.800.475.6701 and international parties may dial 1.320.365.3844.

Access code 9059.

9059 -- 905966.

Thank you for using AT&T executive teleconference service.

You may disconnect.