HNI Corp (HNI) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the HNI Corporation First Quarter 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.

If you should require assistance during today's call, please press star then zero.

As a reminder, this conference is being recorded.

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

Please go ahead.

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss first quarter 2009 results, which were announced yesterday after the market closed.

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.

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 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 for 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 risk.

Actual results could differ materially from expected results.

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

The Corporation assumes no obligation to update any forward-looking statements made during the call.

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

Stan?

Thank you, Marshall.

Good morning, everyone.

I'll give a brief assessment of the first quarter and then turn the call over to Kurt Tjaden, our VP and CFO, and review some of the specific financial details.

I'll then come back and share some thoughts on the outlook.

And then, finally, as usual, we'll open the call up for questions.

As anticipated, we are confronting highly challenging market conditions.

In particularly, our Hearth business is managed through the unprecedented decline in new home construction, which is now in its fourth year.

Office Furniture is also undergoing a substantial decline consistent with our expectations.

Bid orders were down 32% in February, approaching the largest monthly decline in the industry history.

We continue to take strong action to reset our cost structure and improve our businesses.

We made good progress attacking day-to-day operating costs and taking out structural costs.

Yesterday's announcement of the South Gate facility closure and recent disposition of five Hearth retail and distribution locations are indicative of the painful but necessary actions we are taking to reset our cost structure.

We continue to invest in new products and selling initiatives.

Our Hearth won four new product awards including best-in-show at the recent Hearth Industry tradeshow.

In addition, our overall service to our customers is running at peak levels with reduced cost, lower lead times, and improved quality.

These efforts, along with price realization, allowed us to exceed our first quarter expectations.

Demand was consistently weak across our major channels.

Consolidated first quarter sales were down approximately 28% versus the prior year.

Sales in the supply-driven channel of our Office Furniture business were down 35%, and we estimate that approximately one-fifth of this decline was due to inventory reductions at our large stocking customers.

We expected destocking to continue in the second quarter.

The remainder of our Office Furniture business declined 19%, or 24% on an organic basis.

In our Hearth business, remodel/retrofit sales, including alternative fuel products, were down 25%.

Consistent with what we saw late last quarter, the decline was driven by much lower energy prices in a negative retail environment.

As I previously said, we are now in the fourth quarter of the new home construction decline.

This channel remains extremely challenging for our Hearth business with sales down almost 36% in the quarter.

Housing starts remain at unprecedented demand levels, which we believe are unsustainably low and will rebound in the midterm.

We are managing our business with the expectation that current economic challenges will continue.

We are adjusting our cost structure to market conditions and are not waiting for growth to return.

That said, I feel good about what our results will look like with even modest growth given our reset cost structure.

I'll provide more comments in the outlook but now will turn the call over to Kurt Tjaden to review some of the specific numbers for the first quarter of 2009.

Kurt.

Thank you, Stan.

If you'd like to follow along, I'll occasionally make reference to the presentation Marshall mentioned as posted on our website.

Please note you don't need to view the presentation in order to understand our comments.

For the first quarter 2009, slide 8 shows consolidated net sales decreased 28% to $406 million.

Organic sales were down 29.8%, or $168 million due to weakness in both of our segments.

The acquisition of HBF added $10 million, or 1.8 percentage points.

Slide 9 shows net sales for the Office Furniture segment decreased 27.5% to $338 million.

The acknowledgement of HBF added 2.2 percentage points of growth to the Office Furniture segment.

Net sales for the Hearth product segment decreased 30.4% to $68 million, driven by significant declines in both the new construction and remodel/retrofit channels.

Consolidated gross margins were 30.7% compared to 32.7% in the prior-year quarter.

This 2.0 percentage point decline was due to decreased volume.

SG&A, including restructuring charges, as a percentage of sales was 34.8% versus 30.8% in the prior-year quarter.

While the percentage of sales increase is due primarily to volume deleverage, actual SG&A dollars declined due to cost control initiatives, lower volume-related cost, and reduced incentive-based compensation expense.

Freight and distribution expense, which is included in SG&A, totaled 10% of sales during the first quarter.

This compares to 10.9% during the same period last year, or 10.3% when excluding transition costs.

The decrease is primarily due to reduced fuel costs and network improvements, which were partially offset by lower load efficiency.

First quarter SG&A 2009 included $5.1 million of restructuring charges.

These included $3 million of severance costs associated with the shutdown of our South Gate California manufacturing location and $2.1 million related to the disposition of five Hearth retail and distribution locations.

We recorded $8.5 million of restructuring and transition costs in the first quarter of 2008 of which $4.3 million were included in cost of sales.

You can see the breakdown of these restructuring and transition charges on slide 10, which reconciles our non-GAAP results to the GAAP results.

Cash flow from operations was $6 million compared to $2 million in the prior-year quarter driven by a $19 million working capital improvement, which was partially offset by lower earnings.

I would like to remind you the first quarter is historically better, our lowest quarter for operating cash flow due to seasonal business patterns and funding requirements.

Despite the difficult market conditions and seasonal funding obligations, we repaid $6 million in debt during the first quarter and ended the period with $316 million in total debt.

Our leverage, or debt-to-EBITDA ratio as defined by our bank covenants, was 2.1 times at the end of the first quarter, well within our 3 times bank covenant.

We remain focused on working capital and other key cash levers and expect to accelerate debt repayment through the balance of the year.

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

Okay.

Thank you, Kurt.

Our visibility remains extremely limited and marketplace conditions uncertain.

That said, we'll share with you our best current view of the second quarter.

We anticipate weak demand to continue across our businesses, although there may be initial signs of the general economic -- generally economy stabilizing.

We are not anticipating any improvement during the second quarter in our industries.

The supplies-driven channel of our Office Furniture business is showing early signs of flattening at these low demand levels, but there remains a tremendous amount of uncertainty around the timing and magnitude of our normal seasonal uptick and the level of destocking by some of our large customers.

The rest of the Office Furniture business has seen a continued decline beyond first quarter levels.

Overall, our cost position, product breadth, and selling model serve us well in this environment.

Sales to the federal government continue to be a relative bright spot for Office Furniture businesses.

We are also pleased with the early market response to our many new product introductions.

In our Hearth business, new home construction and the alternative fuel category continue to decline.

We expect a loss in the Hearth product segment for the second quarter, though better than the first quarter, due to market conditions and normal seasonality.

We continue to reset the constructs of this business and expect to be profitable in the second half of the year.

In response, we will continue to reset our cost structure while invest in new products, selling initiatives, and operational improvements.

These investments, when combined with our reset cost structure position, as well, for the future.

We are competing very effectively despite these market conditions.

I'll have Kurt provide the financial outlook for the second quarter.

Kurt.

Thank you, Stan.

I'd like to reinforce our lack of visibility given the volatile and uncertain economic conditions.

What I am about to cover reflects our best view at this time.

For the second quarter 2009, we anticipate overall sales in each of our operating segments to be down 32% to 38%.

Within Office Furniture, we expect the decline to be similar between the supplies-driven channel and the rest of the segment.

Hearth sales are also anticipated to decline 32% to 38% driven by declines in both the new construction and remodel retrofit channels.

Gross profit margin including restructuring charges is expected to decline approximately 1.7 to 2.2 percentage points from the prior-year quarter GAAP results of 34.2%.

This decline will be driven by volume deleverage.

Included in cost of sales will be approximately $2.7 million of restructuring and transition charges.

These charges relate to the South Gate consolidation announced yesterday and the continued restructuring in our Hearth business.

SG&A as a percentage of sales, excluding restructuring and transition charges, is expected to increase 3.5 to 4.5 percentage points from the second quarter 2008 when it was 29.8%.

While the percentage of sales increase is primarily due to volume deleverage, actual SG&A dollars are projected to decline.

We anticipate SG&A-related restructuring and transition costs to be approximately $3.4 million in the second quarter.

These costs also relate to both the South Gate consolidation and the continued restructuring in our Hearth business.

Net interest expense is projected to be $3 million.

The effective tax rate for the second quarter is projected to be 38%.

We are expecting capital expenditures to be approximately $8 million in the quarter, and depreciation and amortization is expected to total approximately $19 million for the second quarter.

So -- consistent with these projections, we are expecting improved financial performance relative to the first quarter but do anticipate a second quarter loss.

Due to our cost reset actions, we continue to expect 2009 to be a profitable year when excluding restructuring charges.

This summarizes our outlook for the second quarter 2009.

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

Thank you, Kurt.

So I'll just summarize here very quickly.

We will continue to reset and adjust our businesses to the current challenging conditions.

Our new reset cost structure will lever very nicely with even modest growth from current levels.

We remain excited about the future of this corporation.

So with those comments complete, we will now open it up to questions.

(Operator Instructions) Budd Bugatch, Raymond James.

Congratulations on -- I mean -- I guess, some kudos on operating in this terrible environment.

Nobody feels good about that kind of -- what you're having to go through.

Can I start with the Furniture side?

It seems like we all know that the specified side of the business seems to be declining even farther.

Any commentary on that?

It was down, I think, 27.5%, if I remember right, or something like that -- 23.7% in the first quarter organically.

Where does it bottom?

Well, Budd, I think it's a good question.

Our guidance here is it's going to be down somewhere around 32% to 38%, so certainly what's happening -- and we also said that's kind of what we see the supply side going.

So we are seeing some early, early signs that possibly -- I mean, you can tell I'm qualifying this a lot -- but supplies is starting to bump along the bottom.

You know, I ultimately am not sure where it ends up but am hopeful that those two, kind of, both reach the bottom at about the same level.

Let me go into the restructuring, too, a little bit.

I think your guidance has -- if I add those numbers up, about a $6 million or $6.1 million restructuring between cost of goods and SG&A, and in the release last night, I think you indicated South Gate, for the quarter, is, like, $4 million?

Is that --?

Yes, that's correct, Budd.

So that would say -- that would imply that Hearth is about $2 million in the quarter?

Correct.

Okay, and can you give us a feel of what Hearth looks like beyond the quarter?

Well, I think it's ongoing, Budd.

I would expect that you will probably see more of the same as we go forward by quarter.

But I will tell you, it's a very dynamic sort of look, so we are constantly looking at the tradeoffs, what are those major structural costs that we can take out, you know, what's the impact, et cetera?

And I thought I heard on the guidance that you said the year will be profitable -- were you talking about a segment or the total consolidated when you add back restructuring?

Total consolidated, Budd, with adding back restructuring.

And so do you want to care to hazard what a restructuring for the year would look like?

No, Budd, we don't have anything additionally beyond what we've laid out.

All right, thank you very much.

Good luck on the balance.

Thank you.

Todd Schwartzman, Sidoti & Company.

Was the weakness in Office Furniture pretty much widespread across the board geographically?

Yes, Todd, there are always some small pockets, but I think it's pretty clear that this recession that we're experiencing is widespread, and everybody is participating fully.

Could you quantify for us what you realized in pricing on Furniture in the quarter?

Yes, Todd, we realized $29 million in price in the first quarter consolidated.

Do you ever talk about the Furniture gross margin?

No, that's not something we disclose.

Okay.

Do you plan to keep inventories at roughly that $85 million level?

Well, we're working inventories down based on volume.

So certainly we always have initiatives to drive working capital and use our inventory most effectively.

So as volume declines, inventory will decline as well.

As far as restructuring, should we expect to see any further closings, consolidations of facilities for the balance of the downturn?

We don't disclose anything on a prospective basis, Todd.

Certainly, those are always thing that we look at.

If you look at our history, we have a track record of looking at those things and taking the appropriate measures based on what the market is doing.

So I think you should expect similar sort of behavior in the future.

I know you said to expect additional debt reduction.

Could you rank your preferred uses of cash?

Yes, I think, certainly we need to invest in the core of the business, improve our competitive capability in these challenging times.

The second priority, then, is to maintain our financial flexibility, which would mean we will continue to pay down debt.

And what about maintaining the quarterly dividend?

Is that very likely?

Well, the dividend is very important to a significant portion of our shareholders, and so we work hard at maintaining that.

We review that on a quarterly basis.

The board reviews that and makes a decision on a quarterly basis, and if we need to adjust the dividend in the future, we will.

I would point out to you that we are working very aggressively -- all these cash flow levers and still generating healthy cash flow.

Matt McCall, BB&T.

Kurt, you quantified the price seen in the quarter a little better than we expected.

Can you first talk about the pricing environment as you progress through the quarter?

And then what the expectations are that are baked into your Q2 guidance and what you expect for the balance of the year?

You know, Matt, the first quarter -- the pricing environment is challenging, certainly on the project basis and on the transaction basis as well.

We worked at, very hard, you know, some of that has to do with, sort of, broad utilization, you know, there is some volume-based programs in there, project size, there's lots of factors that go into that.

Pricing will continue to be challenging, going forward, in this sort of competitive environment.

Kurt, do you want to talk about -- ?

Well, what you should expect -- yes -- what you should expect to see for the second quarter, Matt, is a similar number.

But realize, as we get later in the year, those price increases we took in 2008 start to roll off, so you won't see a sequential benefit in the back half of the year.

And I'd just remind you, too, Matt -- I know you know this, but just be clear -- those price increases that we took -- or are showing -- really, were catch-up from that sort of material cost price squeeze that we got last year.

So we're just getting back to where we were.

Right, okay.

So, okay, I think last quarter we talked about a couple of things -- we talked about raw materials coming down; we talked about fuel coming down.

Can you remind us of what you saved and what the impact was -- I think you said it was actually still up -- your input costs were still up year-over-year.

But what's the outlook for Q2?

And, again, for the back half of the year for those inputs as some of these year-over-year inflationary pressures ease?

Absolutely, Matt.

You know, total input costs for the first quarter was up about $10 million, a little less than we had anticipated.

You know we do lag on our steel pricing due to our index mechanisms.

We will start to see that benefit roll through in the second quarter.

You should expect to see somewhere $3 million to $4 million in benefits, and it really starts to kick in in the second half of the year.

And somewhere, clearly, volume-dependent and market-dependent, but $10 million to $15 million a quarter of steel benefit in the back half of the year.

Okay, so that's steel.

What about some of the other inputs?

Fuel comes to mind.

I think every year this will be a benefit.

What can we look for there?

Fuel -- we're looking basically flat -- flat to $2 million.

For the remaining quarters?

For the full year.

For the full year, okay, okay, not as much as I thought, okay.

And then on the cost savings front, just an update -- you did a little better than I expected and most of the upside -- and relative to your guidance, as well, came on the cost-of-goods side.

As we look to the balance of the year, give us reminder of the timing of some of these expected cost savings efforts.

It sounds like they're going to be more -- well, I guess more back-half loaded?

I think that's fair.

And to ask it a different way -- what's the -- give me a reminder, again, of the cost of goods and SG&A expected savings this year and how it should play out through the year?

Last fall we talked about a total of about $140 million between manufacturing cost of goods and SG&A.

We are now projecting that to exceed $220 million on an annualized basis, and that's across the board between direct labor up another $40 million, $20 million of additional SG&A, and 10 and 10 on operating costs and SG&A operating cost.

So it's a continuing process, and we have backup plans to continue to deal with volume pressures as they materialize.

We talked about our process of kind of always working a hot plan and sort of staying ahead of this.

I think Kurt is sharing some of those numbers.

I also don't want to qualify this a lot with you, Matt, because this is highly dependent on lots of factors around volume, input cost, and there are many, many dynamic things that impact this.

So this is -- would be (inaudible) look today at what we see.

I definitely understand the qualifiers there, but as we look through the rest of the year, how much of that $220 million, Kurt, is incremental to what you saw in Q1, how much will be recognized in Q2, and how much should we see in the back half of the year?

Throw all the qualifiers you want at it, I understand, but just trying to understand the timing of the -- that's a pretty big number, so I just want to know when we're going to see it.

Yes, Matt, the numbers that we talked about in the fourth quarter conference call were in place at the time of that call.

So you're seeing those (inaudible) realized now.

The incremental that Kurt mentioned, that's being put into place now, and as Stan said, that will really be recognized more in the back half.

They are not fully in place, not being fully realized in the second quarter.

The decision is made and being implemented but not fully in effect at that run rate.

The 220 -- that's the number you're talking about?

Right.

Correct.

But you expect, on a full run rate, that that will be in place by the end of the year?

Correct.

Craig Kennison, Robert W.

Baird.

Stan, could you comment on any changes you are seeing in any vertical markets?

I know finance has been weak, government relatively strong, but are you seeing any movement among verticals?

Well, I think you characterize certainly the financial industry and the support around that is challenged.

As I indicated, the federal government is very strong on a relative basis.

State and local is feeling some challenge of just state budget, sort of, cuts, et cetera, and still healthy.

Education is related to government spending, seems to still have relative strength to the overall market, and then health care still continues to be a relatively positive sort of market.

I would qualify all that, though.

The term "relative" is important because everything in this economy, in this sort of recession is feeling stress and strain.

So there is not a lot that I would say is up.

Mostly just not down as much.

Okay, thank you, and then you had mentioned that you'd seen some signs of flattening.

Is it the case the end market demand in the supplies channel has flattened, but you're still seeing destocking?

Or are orders themselves starting to flatten?

The way we look at it is orders are starting to flatten for us, and so it looks to us like the end demand is also starting to flatten.

There certainly is still some destocking that will take place because as this decline that these large customers felt happened so fast -- sort of November, December, first quarter -- it takes a while for them to get adjusted down.

A lot of it has to do with the mix of product they're stocking, et cetera.

So our best guess, Craig, right now, is that -- our best look is that end demand is starting to flatten.

These large customers will continue to destock through the second quarter and then hopefully we'll have something that we can deal with with a little bit more stability.

What inning do you think we're in on that destocking trend?

I'm sorry, say again?

What inning would you estimate we are in on the destocking trend?

Well, we're in, probably, the fourth of fifth.

Okay.

And then --?

It's not a major league game, right?

A regular inning game.

All right.

And then, lastly, certainly recognize that the recession has brought a host of challenges for you as you try to right-size your cost structure, but are there dislocations in the market, or opportunities that you see that maybe would only come about in a situation like that that five to 10 years from now you might look back and say, "Boy, that was a game-changing opportunity?"

You know, I don't see anything that I would be comfortable commenting on a public forum like this.

I think "It's still developing" would be probably the safest thing to say.

Mark Rupe, Longbow Research.

Just within the Hearth segment, any color you could provide on the performance within the new construction channel versus remodel/retrofit -- (inaudible) on that kind of going forward this year and then, if you could, provide any kind of breakeven level commentary on it from a sales point of view on that segment?

New construction is getting planned you could get slammed down 35 -- I think we said 36%, and I think that's going to continue here for a bit.

We are optimistic that things will start to settle down here the very late 2009, and hopefully reach some stability there.

Remodel/retrofit has been impacted, as well, by two things -- the alternative fuels, as fuel prices have come down, certainly, you know, the desire of the consumer, which is the second part of this, the retail consumer is stressed.

They are not as active in trying to figure out how to offset fuel costs, plus overall remodel/retrofit just in the building products is feeling the same impact as this down economy.

So -- going forward, I think it's going to continue to be a challenge in 2009, though I think in 2010, there will start to be a light at the end of the tunnel.

Okay, then, as far as the profitability of that segment -- any commentary you might have on -- is there a chance that this, as you move forward, that there is a chance you'd break even this year?

I think as we look forward, Mark, the second half of the year is where we are looking to be at at a breakeven position.

There are no additional questions at this time.

All right, well, again, we want to thank everybody for your interest in HNI, and we look forward to talking with you more in the future and have a good day.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference Service.

You may now disconnect.