HNI Corp (HNI) 2008 Q3 法說會逐字稿

Ladies and Gentlemen, we thank you for standing by and welcome you to the HNI Corporation third quarter results.

(OPERATOR INSTRUCTIONS) I'd now like to turn the conference over to our host, Mr.

Marshall Bridges, Treasurer and Vice President.

Please go ahead, sir.

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss third quarter 2008 results, which were announced yesterday after the market close.

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 at our website, www.hnicorp.com.

We posted a presentation intended to accompany this call to our website.

It can be found by accessing the webcast link under the Investor Information section of our website.

We encourage you to review the slides with us during today's call.

Joining me on the line today from HNI Corporation are Bob Driessnack, Vice President and Controller; Kurt Tjaden, Vice President and Chief Financial Officer; and Stan Askren, Chairman, President and Chief Executive Officer.

Stan and Kurt will review the results and then open the call to questions.

Before we begin, please be advised that statements made by the Corporation during this call that are not strictly historical facts are forward-looking statements.

Forward-looking statements are subject to known and unknown risks.

Actual results can differ materially from expected results.

Additional information concerning factors that could affect actual results can be found in the conference call presentation posted to the HNI Corporation website.

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.

Thank you, Marshall.

Good morning, everyone.

I'll share a brief assessment of the certain quarter and then turn the call over to Kurt Tjaden, 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, as it is our custom, we will open up the call for questions.

Overall we effectively adapted and responded to the economic challenges facing our businesses during the quarter.

Inflationary cost pressures and a weak demand environment negatively impacted our profitability, as expected.

We were able to partially offset these challenges with price realization and cost containment initiatives.

Third quarter sales were down 1.7 from the prior year.

Demand was met in our channels.

In the supply service channels of our office furniture business we generated very strong government sales, but demand from the channel's core small office customers continue to be weak.

Overall, the supplies driven channel declined just under 5% in the quarter.

The remainder of office furniture business was up over 7% driven by the acquisition HBF and strong international sales.

We continue to compete very effectively in these markets.

Overall, office furniture demand was volatile in the quarter influenced by the economic uncertainty, seasonal government sales, and activities related to our price increases.

In our hearth business, our investments in the alternative fuels category continue to generate strong growth in return.

We are taking measures to meet the unprecedented demand for biofuel products.

On the other end of the spectrum in the hearth business, sales in the new construction channel were down almost 36%, consistent with a negative housing market.

Our hearth business continues to manage well through this severe decline in new home construction.

As anticipated and as we expected, we experienced inflationary pressures in the quarter.

Input costs were up $30 million versus the prior year.

We did not see significant impact from the recent declines in materials due to the nature of our contracts, many of which are based on the average market price in place during the preceding quarter.

We did benefit from our pricing actions taken at the beginning of the third quarter to offset the increased input cost.

We realized $18 million of incremental price in the third quarter.

Our price realization exceeded our expectations primarily due to a lower volume-based discounting.

We expect to fully offset higher input cost pressures by the beginning of 2009 after our fourth quarter price increases become fully effective.

I'll provide more comments in the outlook, but now we'll turn the call over to Kurt Tjaden, out Vice President and Chief Financial Officer, to review some of the specific numbers for the third quarter.

Kurt?

Thank you, Stan.

If you would like to follow along, I'll occasionally make reference to the presentation marshal mentioned was posted on our website.

Please note, you do not need to view the presentation to understand our comments.

For the third quarter 2008, slide 8 shows consolidated net sales decrease 1.7% to $663 million.

Organic sales were down 6.3% or $42.4 million due to weakness in the supplies driven channel of our office furniture businesses and the continuing decline in the new home construction channel of our hearth business.

Acquisitions added $30.9 million or 4.6 percentage points.

Slide 9 shows net sales for the office furniture segment increased 0.3% to $561 million.

This was driven by a 4.6% decline in the supplies driven channel, while the remainder of our office furniture business was approximately flat on an organic basis.

Acquisitions added $17.8 million or 3.2 percentage points.

Slide 10 shows net sales for the hearth product segment decreased 11.5% to $102 million.

Organic sales declined 22.8% due to a 35.7% decrease in new construction channel revenue.

Acquisitions added $13 million or 11.3 percentage points.

Gross margins were 33.9% compared to 35.6% in the prior year's quarter.

This 1.7 percentage point decline was due to decreased volume and increased material costs, which were partially offset by price increases.

SG&A as a percent of sales was 28.8% versus 26.9% in the prior year quarter.

This increase was driven by higher freight costs and non-operating gains included in prior year results.

These were offset partially by lower volume related spending, incentive base compensation, and restructuring cost, as well as cost containment initiatives.

I would like to remind you that $3 million of the prior year's quarter's $5 million non-operating gain benefited unallocated corporate overhead.

When excluding the non-operating gains, unallocated corporate overhead decreased 9.5% versus the prior year's quarter.

The remaining $2 million of the non-operating gain was reported in the office furniture segment.

Included in SG&A were freight and distribution costs, which is a percentage of sales were 10.8% during the third quarter versus 9.3% during the same period last year.

This increase is primarily due to higher fuel cost.

Slide 11 illustrates the change in freight and distribution cost.

Third quarter 2008 included $1.5 million of restructuring charges and transition costs in connection with the facility shut down, facility ramp-up, closure of two distribution centers, and consolidation and start-up of a new distribution center, compared to $4.3 million in the same quarter last year.

The effective tax rate for third quarter 2008 was 34.1% compared to 35.4% in third quarter 2007.

The lower tax rate was primarily due to a reduction in state taxes.

Year-to-date operating cash flow was $105 million compared to $178 million in the prior year quarter.

This decline was due to lower earnings and less favorable working capital reductions.

That wraps up the financial comments for the third quarter.

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

Thank you, Kurt.

As we look forward to this unprecedented financial market turmoil, ongoing housing crisis and resulted economic fallout makes it extremely difficult for us to forecast the future.

Although we expect very challenging conditions, our recent office furniture order activity has been solid, generally driven by late season government purchases and (inaudible) activity in advance of our price increases.

Due to these orders, which were put in motion before the recent economic turmoil, we have reasonable visibility in the mid-quarter.

Our ability to forecast beyond that point, however, is very limited.

We are anticipating and planning for a more negative economic environment.

In response, we are attacking input costs, reducing discretionary spending, and evaluating further structural cost elimination.

We also are carefully prioritizing our SG&A spending on fewer stronger initiatives.

We will continue to invest in new product development and focus selling growth initiatives.

I think we are effectively positioning our businesses for the challenges ahead.

That said, we'll share our best current view of the fourth quarter with the understanding we may need to update the outlook in the coming weeks as the demand picture clears up.

So we expect continuing mixed demand in the fourth quarter.

We anticipate substantial weakness in the supplies driven channel of our office furniture business.

As I previously said, recent order activity has been solid.

Before the global financial crisis, we expected a drop-off in the last half of the quarter as the government and (inaudible) activity tapered off.

Now we believe the decline will be more severe as small office customers reduce spending and hiring due to reduced credit access, slowing economy, and general office confidence.

We expect the rest of our office furniture business to grow, driven by the acquisition of HBF and projects that were already in process.

The alternative fuel category of our hearth business will continue to be a bright spot for the hearth business and the Corporation overall.

We expect the hearth business to glow in the fourth quarter as the strength of this category offset continue new home construction channel weakness.

I'll have Kurt provide the financial outlook for the fourth quarter 2008 and then I'll come back with final comments.

Thank you Stan.

I'd like to reinforce our lack of visibility given the recent economic developments.

What I am about to cover reflects our best view at this time, which we may need to update in the coming weeks as the full impact of the economic and financial turmoil is clarified.

As such, the outlook for the fourth quarter 2008 is as follows.

We anticipate overall sales to be down 1% to 7%.

For the office furniture segment, we expect sales to decline 3% to 9% driven by a substantial decline in the supplies driven channel.

Approximately flat organic growth in the rest of the segment and the favorable impact of acquisitions.

Hearth sales are anticipated to grow 5% to 10%, including the impact of acquisitions.

Gross profit margin is expected to decline approximately 4 to 4.5 percentage points versus the prior year quarter.

This decline is driven by higher input costs and volume deleverage.

As we communicated last quarter, we have implemented price increases and reduced our cost structure to offset the increase input cost.

As a result of these price increases and lower volume based discounting we expect to realize approximately $25 million in incremental price during the fourth quarter.

However, we also anticipate input cost will increase approximately $35 million in the fourth quarter, leaving us with a price cost gap.

We do expect to fully close the price cost gap when the price increases become fully effective at the end of this year.

Excluding restructuring and transition charges, SG&A as a percent of sales is expected to increase 1.6 to 2.1 percentage points versus fourth quarter 2007 when it was 26.7%.

Approximately 1 percentage point of this anticipated SG&A increase is from the impact of higher fuel cost.

In the fourth quarter of 2007, freight and distribution was 9.3% of sales.

The remainder of the year-over-year increase primarily relates to acquisitions, product development, and selling initiatives.

We anticipate SG&A related restructuring and transition costs to be approximately $500,000 in the fourth quarter.

Net interest expense is projected to be $4.2 million to $4.9 million.

And the effective tax rate during the fourth quarter is forecasted to be 23.4% due to the reinstatement of the research tax credit.

For the year, we expect the effective tax rate to be approximately 33.4%.

This summarizes our outlook for the fourth quarter.

I'll now turn the call back to Stan for closing comments.

Thank you, Kurt.

So let me summarize here briefly.

We are responding to these unprecedented and uncertain times.

We are aggressively adapting our business to the economic conditions.

We continue to invest to improve our competitive position with very focused initiatives, and I am confident that we will respond well to these challenges and I continue to be excited about the future of HNI.

So with those comments complete, we are glad to open it up to questions.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our first question then from the line of Matt McCall with BB&T Capital Markets.

Please go ahead.

Thank you.

Good morning, everybody.

Good morning, Matt.

Kurt, first on the guidance, you said to look at the 1.6 to 2.1 percentage points on top of a 26.7.

So, I'm just making sure I've got the adjustments right, make sure we are talking apples-to-apples here.

That's on a 26.7 number from last year.

What gross margin are you using when you talk about 4 to 4.5 points lower?

Matt, prior year 2007 quarter four was 36.4%.

That's what I had.

I wanted to make sure I didn't forget any type of charge on that line.

Stan, you've talked in the past or you've announced a couple of -- you closed Richmond.

We've also talked about some logistics cost savings efforts.

Can you remind us of, I guess two parts, remind us of the timing or remind us of the magnitude of the savings expected for each and remind us of the timing that you expect some of that to occur, and did you recognize any of the cost savings from those efforts in Q3?

Yes.

I think overall, Matt, what we talked about when we did these was savings of $15 million overall.

I don't have the numbers exactly here in front of me.

I'll remind you.

Those were very, very large sort of changes for us.

Probably the biggest most complex projects we have ever undertaken, closing the facility, expanding the facility, closing two distribution centers, and opening up another distribution center.

We were challenged with the complexity of that, and as a result of that, our savings have been delayed.

We do anticipate fully realizing those savings in '09 as they come on line.

So, the impact for 2008 would probably be a couple million dollars positive savings and we expect to see the rest of that either cost savings or in a negative demand climate is more cost avoidance as well.

Did that $2 million occur just in Q3 or is that going to be Q3 and Q4?

Probably would be both, Matt.

Okay.

From a pricing and inflation standpoint, it sounds like things are expected to get a little better in Q1.

Can you give us the price and cost data you gave was helpful.

As we look forward to Q1, what should holding everything cost and assuming you get the level of pricing through that you expect, what is the ballpark of what that should look like from a pricing and cost perspective?

Well, the cost perspective we can't even quite speculate on that yet.

It's so dynamic.

The price increase - we're not anticipating any additional price increases at this point.

It will be simply factoring through what we put in place.

Okay.

Thank you all.

Thank you.

Next we go to the line of Mark Rupe with Longbow Research.

Hi guys.

Just a couple of questions.

On the core office furniture you had mentioned, I believe in your guidance, that the remainder, which I assume is the core office, that the organic would be flat.

Is that what you indicated?

Correct.

As it relates -- I know your visibility is probably not very strong right now, but where does the confidence lie on your ability to outperform the industry relative to the next 12 months or so?

Mark, we can't even speculate on that right now.

It's just such a dynamic environment in the economy that it's tough to even understand where the industry is going to go.

Okay.

And then secondly, I guess, on the hearth, obviously it's good to see that your guidance and your prospects are up for the fourth quarter.

The last three quarters I know we are heading in the big season for you in the bio area, but the last three quarters, the comparisons were much easier, I would say, and it seems like the fourth quarter comparison is one of the more challenging comparison and you're actually looking for positive growth.

Can you remind us how big that growth area is for you within the hearth segment?

Hi, Mark.

This is Marshall.

In the fourth quarter, we are expecting the alternative fuel products to be in excess of 40% of the hearth segments revenue.

That is what is driving the modest growth there offsetting the severe decline in the new construction channel.

Okay.

Is there any chance you have a comparable figure what that might have been on mix last fourth quarter?

Well, it's a little bit distorted because of the Harman acquisition that was done in the fourth quarter, so I don't really have a meaningful number for you.

Okay.

Obviously if you backed out Harman, though, would you have thought that you would have upgrowth or is Harman really the reason why we're seeing the 5% to 10% growth year every year?

Harman is a big part of that.

Okay.

Perfect.

Thank you.

We'll move then to the line of [Chad Bolen] with Raymond James.

Good morning, guys.

First of all, I just really want to thank you for all the additional detail in the presentation on the website.

I think it's fantastic and certainly very helpful for us.

First, could I ask Kurt to repeat the dollar amount of the expected inflation in Q4?

I think I got $25 million for pricing but I missed the other part.

Yes.

Let me come back to that.

The pricing number was $35 million.

Okay.

And the cost was 25.

Okay.

You got it reversed.

Thank you.

That is very helpful.

I guess we saw that you didn't buy back any stock during the quarter.

But you did continue to generate some pretty solid free cash flow.

What went into the decision there?

Is it just conservatism given what we are seeing out of the economy or could you talk a little bit about your priorities for cash?

I think your comment about conservatism is well placed.

In this uncertain times, we want to make sure we maintain our financial flexibility.

Okay.

And when I look at the segments and kind of think about margins, probably particularly in hearth, with the improved volume, I would imagine we would see a sequential improvement in margin, but are we still down year-over-year from Q4?

For the fourth quarter in hearth, what you are going to see is comparable dollars to the prior year, which is a percentage improvement from the third quarter to the fourth quarter.

It will be just a tad below on the margin rate versus last year's fourth quarter.

That is our current expectation.

That's very helpful.

Can you give us any help on the office side of it?

Office furniture is where you are going to see the significant impact of both the volume that Kurt talked about, as well as most of the material cost versus price gaps in office.

I think that will be at least half or a little bit less than last year's rate.

Okay.

That's very helpful.

Thanks a lot, guys, and good luck the rest of the year.

Thanks, Chad.

Thank you.

We'll take our next question from the line of Christopher Agnew with Goldman Sachs.

Please go ahead.

Thank you very much.

Good morning.

A couple of questions.

First on commodities.

We've seen sharp pullback in commodity prices.

Could you just touch on across the board, sometimes obviously steel is back down, but can you talk to all the other commodities that are inputs for your particle board wood, etc., and also comment on -- I know on the last conference call I think you mentioned that as steel prices were going up, you had some long term-contracts, but those became ineffective.

So on the way back down, how quickly will you start to see the benefits pass through into the income statement?

Thanks.

Chris, so first we are seeing in the market -- you are seeing press about the spot prices going down around steel and oil, etc.

I'll remind you though, steel, for instance, the spot price - spot market now versus last year, steel is still up 70 some percent.

So it's coming down.

It's looking more favorable, but it's still very, very high on a year-over-year comparison.

Oil is coming down.

We do appreciate that in the freight cost, et cetera.

We saw a minor benefit.

Should see a little bit more benefit in '04.

Overall, though, we basically indexed many of our commodities to sort-of an average market price on the way up.

The benefit for us is it provides stability.

So we are able to price -- the downside -- the benefit on the rising market is we lag the market so we get the benefit of the delay.

Like wise on a declining sort of commodity price market, we sort of lag as well.

So the overall effect is a smoothing effect, but a little bit of a disconnect on the way up, which is beneficial.

A little bit of a disconnect on the way down.

And, sorry.

So steel and oil are obviously the big headline inflation.

What about across the board in other commodities?

Is that significant?

I think it's very dynamic right now because what you have, again because of this lag, is you have sort-of the-- which economy are we in?

Are we in the rising sort-of commodity costs or are we in a softening market?

So it's very, very dynamic.

We are sorting through that now, I think.

It's going to have to play out a bit for us to have a really good handle on that.

We are not anticipating any major sort of changes inflection points at this point.

Okay.

And a final question.

Could you go through the restructuring charges again, and I take it you say SG&A guidance excludes restructuring charges.

I just want to make sure the rest of the guidance excluded restructuring charges, and then it says in the outlook 500.

I guess that's $.5 million dollars?

And could this change in the fourth quarter given you said you sort-of outlooked through for the first half of the quarter.

Yes.

This is Bob.

On the restructuring -- in the third quarter you can see the numbers.

We had about $1.5 million this year versus about $4.3 million last year.

For the fourth quarter, we are anticipating about $.5 million.

That is not included in the SG&A guidance, the other SG&A guidance, so it is separate.

That would not -- that would exclude any future or additional activities that may be planned.

I guess given the timing, would it be more likely that any additional activities would be impacting 2009, I guess is my question.

We are sorting through that now Chris.

There may be some in fourth quarter 2008.

It may be in 2009.

It's too early for us to state that, I think.

Okay.

Thank you very much.

Thank you, Chris.

(OPERATOR INSTRUCTIONS) We'll move next to the line of Todd Schwartzman with Sidoti & Company.

Please go ahead.

Good morning, folks.

Could you talk about inventory by segment, adjusting for any acquisitions and divestitures from last year?

We don't break inventory out by segment, Todd.

More specifically, what are you interested in?

Just the delta by segment.

Well, overall inventory is improving, inventory turns are improving, Todd.

And that's probably the extent of what we can share with you.

Okay.

Fair enough.

Maybe some color on the alternative energy products please.

Any particular pockets of strength geographically or is that pretty much widespread?

Well, what drives the biofuel category primarily is cold weather number one, but even more so sort-of the alternative fuel source.

So fuel oil, in particular, is at very high levels and northeast is a big fuel oil market, so the northeast is very, very strong.

The other markets are really related to rural LP.

Liquid propane markets, those are strong.

As you get south, obviously it's less of an issue, and then where there's wood products, so the Midwest, the west of cord wood appliances are a very hot item.

All right.

And in terms of additional cost saving opportunities, discretionary spending cuts, any more color could you give on that than you've already alluded to?

No.

I think we probably covered that.

And if you look at our history, we take a very broad-based sort-of approach to this.

We look at first at the sort-of day to day, just old-fashioned cost control.

Second, we look at mid-level type of improvements to change how we buy something or consolidate, et cetera, and then finally we look at major structural cost reduction, elimination.

I think you should expect more of the same in the future.

Is it fair to say that you are closer to the end in terms of discovering additional cost, you are closer to the end on the hearth side of the business?

Certainly, hearth becomes more challenging.

I think, as we've shared in the past, the big question is at what point do you adjust capacity?

We believe that housing is going to recover.

We've got world-class operations, and so taking a plan offline right now does not make a lot of sense to us.

That said, there's always opportunities to reduce cost.

As a lean company, we never ever say we're getting close to eliminating cost.

Got it.

My final question, I know you spoke to this before, but I missed.

Did you buy back any shares in the third quarter?

If so, how many?

We did not buy back any stock, Todd.

Thanks.

You bet.

Thank you.

And we have no further questions at this time.

Okay.

Well, thank you very much for everybody's attention and interest in HNI and we look forward to updating you in the future.

Have a great day.

Thank you.

And ladies and gentlemen, that does conclude this conference call.