HNI Corp (HNI) 2008 Q1 法說會逐字稿

Welcome to the HNI Corporation first-quarter results.

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) As a reminder, this conference is being recorded.

I'd now like to turn the conference over your host, Treasurer and Vice President, Mr.

Marshall Bridges.

Please go ahead.

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss first-quarter 2008 results, which were announced earlier today.

My name is Marshall Bridges, Treasurer and Vice President for HNI Corporation.

If you've 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 are Bob Driessnack, Vice President and Controller, and Stan Askren, Chairman, President and Chief Executive Officer.

Stan and Bob 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 any 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 first-quarter 2008 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.

Good morning, everybody, and thank you, Marshall.

I will share a brief assessment of the business and then turn the call over to Bob Driessnack, our Vice President and Controller, to review some of the specific financial details.

I will then come back and share some thoughts on our outlook, and then finally we will open it up for questions.

We faced very challenging economic conditions during the quarter.

Demand and our supplies-driven channel of the office furniture business experienced substantial weakness, and our hearth business continued to be pressured by the unprecedented decline in new home construction.

The supplies-driven channel, which represented 53% of our office furniture sales in the quarter and primarily consists of small office and home office customers, was much weaker than our contract businesses.

Let me provide some context on our selling channels.

As you know, we serve the most channels in the industry with our multiple companies and brands.

The short-selling-cycle businesses, such as the supplies-driven channel, have softened more and faster than the longer-selling-cycle businesses, such as the larger project contract business.

Or put another way, the closer to the individual consumer making the transaction, the more significant the slowdown.

For example, retail, which is approximately 5% of our business, was the weakest of all the channels.

The more complex the selling process, the longer the selling cycle, the more order activity remained solid.

The broad economic factors driving the supplies-driven channel weakness are consumer confidence, which is at a 16-year low, small business confidence, which is at a 22-year low, deteriorating employment, slowing corporate profits and the liquidity crisis.

The weakness appears to be impacting the entire supplies-driven channel marketplace.

We continue to effectively compete in the difficult conditions and believe we are generally holding our market position.

Our hearth business posted a loss for the first quarter, but we continue to expect it will be profitable for the year.

Again, let me provide some context.

Single-family housing starts are now over 60% since the peak.

QW dealt with the dramatic decrease in our revenue by eliminating $75 million of cost.

We will continue to tightly manage the business, but it's becoming more difficult to reduce cost at the same rate without negatively impacting our competitive capability and the long-term value of the business.

We have a very strong marketshare position in the industry with the strongest brand names.

This has been an important growth engine up until the housing decline, and we continue to believe that our hearth business will return to being a substantial profit contributor in the future as this housing cycle turns.

We were also negatively impacted by increased freight costs and higher-than-anticipated transition costs related to the simultaneous shutdown of an office furniture facility, the ramp-up of an office furniture facility, the closure of two distribution centers, and the start-up of a new distribution center.

This consolidation was a very complex project which we executed in a very short time frame.

During the consolidation, we experienced a short-term disruption due to the complexity of the product and flow that runs through these facilities.

The resulting restructuring transition costs totaled $8.5 million in the quarter versus the $4 million to $5 million we had expected.

The decision to consolidate will save in excess of $10 million annually once fully implemented in 2009.

It is a good long-term decision and indicative our efforts to reduce structural cost, and we are pleased to have the major effort of this move behind us.

At the end of the quarter, we completed the purchase of HBF, a leading provider of premium upholstered seating, textiles, wood tables and wood case goods.

HBF is an excellent company which provides a distinctive model in terms of selling, brand design, and product that will complement our existing contract businesses.

It will continue to operate as a focused stand-alone entity with a unique brand position and strategy.

I will provide more comments in the outlook, but now will turn the call over to Bob Driessnack, our Vice President and Controller, to review some of the specific numbers for the first quarter.

Bob.

Thank you, Stan.

For the first quarter of 2008, consolidated net sales decreased 7.5% to $563 million.

Acquisitions added $20 million, or 3.3 percentage points.

Organic sales were down due to substantial weakness in the supplies-driven channel of our office furniture businesses and the continuing decline in the hearth business.

Net sales for the office furniture segment decreased 6.4% to $466 million.

This decrease was driven by an approximately 12% decline in the supplies-driven channel.

The remainder of our business was up approximately 2%, with our primary contract brands up more.

Acquisitions added $7 million, or 1.4 percentage points.

Net sales for the hearth product segment decreased 12.6% to $97 million.

Acquisitions added $13 million, or 11.9 percentage points.

Excluding acquisitions, hearth product sales declined 24.5%, driven by a 34% decrease in new construction channel revenue.

Gross margins were 32.7% compared to 33.9% in the prior-year quarter.

The reduction in gross margins was due to decreased volume, as well as accelerated depreciation and transition costs related to the consolidation of the office furniture facilities.

SG&A as a percentage of sales was 30.8% compared to 28% in the prior-year quarter.

The increase was driven by higher freight costs, increased investment and product development and selling initiatives, increased restructuring costs, and transitional costs associated with plant consolidation, as well as costs associated with new acquisitions.

Included in the SG&A totals were freight and distribution costs, which as a percentage of sales were 10.9% during the first quarter, or 10.3% when excluding transition costs.

This compares to 9.3% during the same period last year.

This increase is primarily due to higher fuel costs.

First quarter 2008 included $8.5 million of restructuring charges and transition costs in connection with the facility shutdown, a facility ramp-up, closure of two distribution centers, and the consolidation and startup of a new distribution center.

These costs included $400,000 of accelerated depreciation and $3.9 million of other transition costs, recorded in cost of sales, $800,000 of costs recorded as restructuring costs, and $3.4 million of other transition costs recorded in selling and administrative expenses.

The effective tax rate for the first quarter of 2008 was 43.9% compared to 35.5% in the first quarter of 2007 due to a deferred tax adjustment.

We anticipate the annualized tax rate for 2008 will be approximately 35.6% including this adjustment.

Net income was favorably impacted $0.01 per share as a result of our share repurchase program.

During the first quarter, we repurchased 704,700 shares at a cost of $22.1 million.

There is approximately 170 million remaining under the current authorization.

Cash flow from operations was $2 million compared to $41 million in the prior-year quarter due to the lower net income and the timing of working capital requirements in the current year.

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

Thank you, Bob.

So as we look forward, the current economic uncertainty makes it difficult to make any meaningful projection, and the short-selling-cycle lead times in our supplies-driven business do not provide much forward visibility.

That said, we expect the economy to continue to be difficult.

We anticipate economic factors that specifically impact us, such as consumer and small-business confidence, employment, and new home construction, will continue to present near-term challenges.

Material costs did not have a large impact in Q1 due to our contracts and price utilization.

However, steel costs have recently shown rapid and large increases.

We expect material and fuel costs to become more challenging in the upcoming quarters.

We are closely reviewing and will address these increases with cost containment efforts and price as the competitive environment allows.

We expect the weakness in the supplies-driven channel of our office furniture business to continue.

Our contract-focused businesses are currently seeing solid order intake, but new business quotes are slowing.

We anticipate the project business will soften some with the economy, as organizations reduce or defer capital projects and hiring.

Conditions in the hearth industry will continue to be challenging, particularly in the new construction channel.

The timing of any housing market recovery continues to remain uncertain.

We will continue to tightly manage our costs and improve our competitive position, with an eye on a mid-term housing market recovery.

Overall, we will continue our investment in growth initiatives and position for the market recovery as we enhance our selling capabilities and launch a record number of new products in 2008.

We will work to offset the market weakness by eliminating waste, attacking structural costs and streamlining our business, consistent with our past practice.

Now I will have Bob provide the financial outlook for the second quarter of 2008.

Bob.

Thank you, Stan.

For the second quarter of 2008, we anticipate overall sales for the quarter to be flat to down 5%.

Office furniture is anticipated to be flat to up 5% for the quarter, driven by a mid to high single digit decline in the supplies-driven channel, moderate organic growth in the rest of the segment, and the favorable impact of acquisitions.

Heart is anticipated to be down approximately 20%, including the impact of acquisitions.

Gross profit margin for the second quarter is expected to be approximately 1 to 1.2 percentage points lower than the second quarter 2007.

The gross margin decline is due to increased input costs, lower volumes in the hearth business and the supplies-driven channel, and $1.5 million to $2 million of transition costs related to the previously mentioned office furniture consolidations.

SG&A, excluding restructuring and transition charges, as a percentage of sales for the second quarter is expected to increase 3 to 3.5 percentage points compared to the prior-year period, when it was 27.4%.

A major driver of the increase is the impact of rising fuel costs on freight and distribution expense.

In the second quarter of 2007, freight and distribution was 9% of net sales.

We project this to increase approximately 1 percentage point.

Additional investments related to product development and selling initiatives will also drive an increase.

We anticipate SG&A-related restructuring and transition costs to be approximately $1.5 million to $2 million in the second quarter.

Combining the restructuring and transition costs in cost of sales and SG&A, we expect total restructuring and transition-related costs to be $3 million to $4 million in the second quarter.

We expect interest expense to decrease slightly from the same period last year due to lower average interest rates, partially offset by increased borrowings.

We anticipate the effective tax rate for the second quarter will be 35%.

Thank you, Bob.

So, overall, we are faced with some economic challenges.

In the face of these challenges, we will do what we've always done, adapt to conditions and aggressively improve -- improvement across the total corporation.

We are attacking structural cost; we're investing for growth with a record number of new products to launch this year; and we're working to improve our selling models and capabilities.

I remain excited about the long-term prospects of the HNI Corporation.

Our strong fundamentals remain unchanged, and we will continue to adapt, innovate, and come out of this environment stronger than ever.

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

Thank you.

(OPERATOR INSTRUCTIONS) Chris Agnew of Goldman Sachs.

Good morning, gentlemen.

First question, I want to focus on your cash flow.

Can you help me think through a couple of the issues that I should not be extrapolating for the full year?

For example, reading your comments on working capital, were they particularly higher -- much higher in the first quarter?

Your capital expenditures, how much of the -- what was impacted there in terms of the transition costs?

And anything else that is relevant for sort of thinking forward.

Thanks.

Chris, this is Bob.

I think you had a couple of questions there.

Let me start with cash flow.

I think in the first quarter, the timing was really more seasonal-driven.

And we had a very strong start in 2007, which contributed to the $40 million in 2007.

So for the full year, I think our cash flow will probably be less, obviously -- we had a great year in 2007 -- more comparable to 2006 levels.

For capital expenditures, the $17 million in the first quarter had a little bit -- several million for the transition investment.

I would anticipate CapEx similar level in the second quarter, and still in the range -- maybe a little bit less -- than what we gave you for the full year, $65 million to $70 million.

Okay, great.

In terms of, I guess, the supplies-driven business and the contract business, is there any color in terms of vertical markets or geographies that you can provide us?

Or is what you are seeing in both markets fairly broad-based?

You know, Chris, certainly there are some regional differences.

Because we are so broad it is hard to plow through all of them.

I think we would say we have situations that are different based on the channel, based on the geography, and based on the vertical market.

I think, obviously, the financial sector in a market like New York is the most significantly impacted.

The rest, I would say there is nothing notable that I think we could point out that would be helpful to you.

Okay.

On the hearth business, are there any -- at what point do you think you need to take much more serious further cost action in that business?

It's a good question.

It's a real challenge there.

We have done -- I think that team has done a super job of attacking structural cost.

The issue we are down to now is really a couple of really excellent manufacturing facilities that we think are in a great position when this turns around.

So the risk would be is that we take additional manufacturing capacity off-line, go through that huge cost and complexity, only to have this market rebound.

If it rebounds like we think it should, based on history, it's going to rebound relatively fast and relatively hard.

We believe that housing is going to eventually cycle here and that we are closer now to that bottom than we've ever been.

And so we are continuing to grind through the cost management day-to-day, the structure cost is getting harder, and we are poised for the return of the market.

Okay, thanks.

And final question.

It will be tough for a lot of your maybe smaller competitors as well.

Do you think and are you prepared to look at opportunities for smaller tuck-acquisitions?

And may be to frame that, how much firepower do you have to consider any potential transactions?

Thanks.

Yes.

We actually completed two acquisitions here in the last several months, one on the fireplace side, which was Harman, which is a great company, just kind of got caught at the wrong place at the wrong time on a cash basis.

And we've had them under the family, and it has been a super acquisition.

We are able to go in and leverage their strong brand and their strong product, and they're great members, and provide some lean sort of expertise, some market leverage.

And it has been a good and we're excited about that.

The second is this HBF acquisition.

That really resulted in furniture brands making a decision to focus more of their attention on their core business.

And a company we think is a very fine company that complements our other businesses, becomes available, and we are able to pick it up.

I imagine that there are going to be more of those sorts of acquisitions.

We have the firepower, to use your term, I think, to go complete those where those make sense and where we can create value with them.

Okay, great.

Thank you.

Matt McCall of BB&T Capital Markets.

Thanks.

Good morning, everybody.

Can you first address unallocated corporate expense down dramatically year-over-year?

Is this just sub $9 million level -- is that a sustainable number.

Explain -- I know you've been very cost-conscious, but how did you decrease it that much?

This is Bob.

Good question.

In the first quarter, we saw the benefit of adjusting some incentive compensation and other market-driven costs.

We did have favorable timing on some of our medical benefits and things.

We expect the full year to be in a $50 million to $55 million range.

So going forward, a run rate probably more about $14 million to $15 million for the quarters.

Okay, that is helpful.

I know it's a smart part of your business, Stan, but you talked about the retail business and the weakness there.

Do you think it is just purely cyclical and purely a result of the consumer weakness that is out there?

Do you think there is something else going on?

Specifically, I would talk about imports, talk about just overall secular shifts that may be going on at the retail channel.

Anything outside of cyclicality?

I think, Matt, the best way to probably determine the answer to that question would be to go sort of cruise through some of those large big box office furniture -- office supply retailers and probably get a better handle of sort of what their read is.

We certainly think that consumer and kind of the credit crunch and the consumer slowdown has impacted that channel and that selling model.

If you look at the overall segment there, those great customers of ours are really challenged right now as well.

I think if you look at their specific results, they will indicate to you that office furniture in particular and some of their other classes of product are more severely impacted.

Do I think there is a larger issue?

I think I'm not prepared to comment on that.

Certainly, the whole import private label has been a challenge for us.

The good news, if there is good news in this economy, the dollar is -- the cost of imports is going up dramatically.

So if you think about the dollar/RMB appreciation, if you pick China, for instance, that has changed dramatically.

If you think about the transportation costs, that has changed dramatically.

The costs in China are going up.

And so the playing field from a global economic basis is probably leveling back to domestic supply.

So I think that is a good longer-term factor for us primarily US-based manufacturers.

Okay.

You commented a little bit about pursuing price if needed.

Can you talk a little bit about the price that was recognized in the quarter?

I would assume there would be some price benefit maybe in furniture and maybe a price hit -- maybe there are some deflationary trends in hearth.

Can you comment on that and maybe quantify the benefit?

This is Bob.

I think in the office furniture segment, we did have some realization of price, primarily some increases instituted in the prior year.

It was just enough or a little bit more than enough to offset material costs in the quarter, but not substantial.

The hearth business remains very competitive, but we had a pretty much neutral position on price in the first quarter.

Okay.

That's helpful.

Thank you.

Finally, looking at the hearth business, you're talking about profitability for the year.

Can you remind me -- I guess two parts to this question.

Can you remind me of the breakeven level, if that is the way you want to look at it, for the hearth business overall?

And then did the Harman acquisition help or hurt the profitability this quarter?

The Harman acquisition helped the top line; really it was kind of neutral on the bottom line.

The benefits of that are to come as the year goes on, and then next year is really when we start to see the benefit.

As far as the breakeven, we don't really break that out.

Obviously, as you look at our sales level and our deleverage, we are approaching that.

We expect to be profitable for the year.

For the quarter, as you saw, we did go red.

So I think that is probably the best indicator we can give.

Okay, all right.

Thank you guys.

Budd Bugatch of Raymond James.

Good morning, Bob.

The supplies-driven channel is obviously a real challenge.

And as I recall, pricing in that sector requires something of a 90- to 180-day lead time to affect price.

With steel going up and costs going up in such a volatile and strong way, what are your plans or what have you done in that and when would you see additional price realization on that?

I mean, you summarized it well, Bud, the challenge.

It is a challenge for us, especially when big costs go up in a hurry, to recapture it exactly in the period.

We plan to take it on as we have in the past, which is work that through, give our customers adequate notice so they can go work it through their system as well.

We do have price increases going in right now.

So we anticipate that some of this material cost is going to be covered.

We anticipated that costs would go up.

The question still is how much will some of these costs go up and stay, and that is yet to be determined.

And so, we manage it company by company, channel by channel.

First thing we try to do it is scratch back all the costs we can through efficiency, eliminating the waste.

And then the rest, we work with our channel partner to get it all the way through.

Stan, if we were to think of how to quantify some of that, how would we best to be able to do that for modeling purposes or even for thought purposes going forward?

It's pretty darn hard right now, Bud, to be candid with you, because it is all moving pretty quick, pretty fast.

And so I would say for second quarter, there is not a big impact, is how you should model it.

And we'll have to come back and provide clarity on third and fourth quarter when we have more visibility there.

Okay.

Looking at the operating loss in the first quarter in hearth, and you talk about being profitable for the year.

Do you reach profitability in the second quarter implied in the guidance?

More like breakeven, Bud.

There is a strong seasonal impact to that business, especially as the mix has shifted less new construction, more to sort of remodel/retrofit alternative fuel stoves.

So the second and third quarter is really when that stove-buying season comes on, and that is when most of the profitability is earned in this year.

Okay.

Just back to office for a second, a question I forgot to ask.

You had just under $7 million of acquisition revenue in the first quarter reported.

None of that was HBF, because that wasn't completed until the end of the quarter, I believe.

Where was the other $7 million?

Was it in the transactional side or the supply side or was it in the contract side?

This is Bob.

That was in the contract side.

So the contract side would have been up year-over-year.

Can you give us kind of an order of magnitude of how much that might have been up?

Yes, if you look at our core contract business -- you know, Bud, our challenge is always sorting through what is supply and what is contract --

I know.

-- if you look at our core contract businesses, which would be Gunlocke and Allsteel, they were up for the first quarter more than (inaudible).

Okay.

And did the acquisition come inside those two, or was it in the HON Company?

No (multiple speakers).

Allsteel.

It had to be Allsteel.

-- (inaudible)

Right?

The acquisition would have been separate --

It would have been separate?

Yes.

Okay.

So then it looks like the transactional side was somewhere -- down between 13% to 15% year-over-year?

About 12%, Bud.

Okay.

Just a couple of other questions.

Refresh us or update us on the restructuring actions beyond the second quarter restructuring and transition costs, for maybe the third quarter and fourth quarter.

Is there still much to be done?

Bud, when you get into the third and fourth quarter, there is a little bit, but it's not much.

It's probably $1 million to $2 million for the balance of the year.

And the benefits of that, when will that start to accrue onto the operating statements?

We will start to see some of the benefits for this in the second half of 2008, and then I think we previously talked about the full realization of these being in 2009.

Do you want to give us a quantification of how much in the second half?

Second half is probably in the nature of $5 million to $6 million.

Okay.

Thanks, Bob.

Thank you, Stan.

Good luck on it.

I know it is a challenge for you.

Thanks, Bud.

Todd Schwartzman of Sidoti & Company.

Good morning, gentlemen.

Just a quick clarification on the gross margin guidance for Q2.

Is that versus what I think is a non-GAAP number of 34.9 that I'm looking at, or is there some other number I should be using?

This is Bob.

I think it is versus the prior-year second quarter, was the guidance.

So 1 to 1.2 percentage points down from the prior-year second quarter, as reported.

Okay.

On the op margin side, when do you foresee hitting double digits on a full-year basis?

I think that is too hard for us to forecast right now, Todd, due to just sort of the uncertainty of the economy and the market.

Okay.

One last thing, getting back to possible acquisitions.

Within office furniture and North American markets, is there any niche, any tuck-in product category that you would like to be better represented in that you really can't or don't choose to grow organically?

Nothing that I am prepared to comment on, Todd.

Okay, thanks a lot.

You have no further questions at this time.

Please continue.

All right.

Well, thank you very much for tuning in.

We appreciate your interest in the Company and we look forward to talking with you in the future.

Have a good day.

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