HNI Corp (HNI) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the HNI, Incorporation second 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, you may press star and then zero.

And as a reminder, today's conference is being recorded.

I now would like to turn the conference over to Treasurer and Vice President, Marshall Bridges.

Please go ahead.

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss second quarter 2009 results, which we 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 at our website www.hnicorp.com.

We also tested 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 risks.

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 the HNI Corporation website.

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

Now I have the pleasure of turning the call favor to Stan Askren.

Stan.

Thank you, Marshall, and good morning, everyone.

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

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

And then finally, as Marshall said, we'll open it up for questions.

So let me start off and say overall during the quarter we made strong progress resetting our cost structure and generating cash flow in the face of highly challenging market conditions.

Due to our cost reset actions, we were able to increase operating income $17 million versus the first quarter, despite lower revenue of $23 million.

Our office furniture businesses, in particular, performed well, given the negative economic backdrop.

We held office furniture operating margins, almost flat on a non-GAAP basis for the prior year, despite lower revenue of $191 million.

We are pleased with our cost reset progress and we will continue to adjust our businesses to the marketplace conditions.

We also continue to invest for the future with new products and selling initiatives.

For instance, Gunlocke, HBF, and Allsteel won a combined five gold and silver product awards at this year's NeoCon Office Furniture Industry Show.

More importantly, our new product introductions are being well received by the market.

We also continue to make strong progress on enhanced selling initiatives.

Cash generation was another bright spot in the quarter.

We generated more free cash flow this quarter than the same period last year, despite 38% lower revenue.

We reduced debt $62 million, ending the quarter with a total debt of $254 million and a debt-to-EBITDA ratio of just under two times.

This gives us ample room under our three times debt-to-EBITDA bank covenants.

Our total debt is now almost $160 million lower, or approximately 40% less than it was at the beginning of last year's second quarter.

Looking at marketplace conditions, demand was consistently weak across our major channels as we expected.

Sales of the supplies-driven channel of our office furniture business were down 36%.

As discussed during last quarter's earnings call, many of our large customers in this channel were adjusting their inventory levels.

We now believe de-stocking has stopped and only modestly impacted the second quarter decline.

The remainder of office furniture businesses declined 38%.

The day-to-day contract business remains weak, with project as competitive as ever.

In our Hearth business, remodel retrofit sales, including alternative fuel products, were down 37%.

Lower energy prices and a negative retail environment continued to pressure this channel.

The new home construction channel in our Hearth business remain highly challenged with sales down 43% in the quarter.

Office furniture demand appears to be stabilizing, particularly in the supplies-driven channel.

We are currently seeing our historical seasonal upturn in most of our businesses and sequential order rates are generally improving.

I'll discuss this more in the outlook.

I'll now turn the call over to Kurt Tjaden.

Kurt.

Thank you, Stan.

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

I'm going to cover the second quarter 2009 results.

As you can see on slide eight, consolidated net sales decreased 37.5% to $383 million.

Sales for the office furniture segment decreased 37% to $324 million, driven by substantial weakness in both the supplies-driven and contract channels as shown on slide nine.

Net sales for the Hearth products segment decreased 40.1% to $59 million, driven by significant declines in both the new construction and remodel retrofit channels.

Consolidated gross margins were 33.8% compared to 34.2% in the prior year quarter.

This 0.4 percentage point decline was due to decreased volume, which was partially offset by increased price realization and cost reduction initiatives.

SG&A, including restructuring and impairment charges as a percentage of sales was 33.6% versus 30.1% in the prior year quarter.

While the percentage of sales increase is due primarily to volume de-leverage, actual SG&A dollars declined due to cost control initiatives, lower volume related costs, reduced incentive-based compensation expense, and a gain on the sale of the corporate aircraft.

Freight and distribution expense, which is included in SG&A, totaled 9.7% of sales during the second quarter.

This compares to 10.5% during the same period last year.

And this decrease is primarily due to reduced fuel costs and network improvements.

Second quarter 2009 included $5.2 million of restructuring and impairment costs, of which $1.4 million were included in cost of sales.

These included $3.7 million associated with the shutdown and consolidation of two office furniture manufacturing facilities and $1.5 million related to the disposition and restructuring of Hearth operations.

For comparison, we recorded $3.5 million of restructuring and transition costs in the second quarter of 2008, of which $1.5 million were included in cost of sales.

More details concerning these restructuring and transition charges can be seen on slide 10, which reconciles our non-GAAP results to our GAAP results.

Year-to-date cash flow from operations was $49 million compared to $60 million in the prior year.

This change was driven by lower earnings, which was partially offset by strong working capital management.

We reduced total debt by $68 million during the first six months of 2009 using cash flow from operations, excess cash, and proceeds from the sale of long-term investments.

That wraps up the financial comment.

Now I'll turn the call back over to

Thank you, Kurt.

As we look forward, visibility remains limited and order rates continue to be volatile.

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

Market conditions remain difficult.

But as I said earlier in the call, we are seeing some stabilization, particularly in our office furniture businesses.

Overall we expect our historical seasonal demand patterns to generally hold and drive third-quarter revenue above second-quarter levels.

In particular, we expect the supplies-driven channel of our office furniture business to benefit for reset channel inventory levels, and solid government and educational business.

The rest of our office furniture businesses are seeing early signs of stabilization, but there remains a great deal of uncertainty and the competitive environment continues to be highly challenging.

Overall, we feel good about our cost position, market coverage, and selling models in this environment.

We're also seeing initial signs of stabilization in our Hearth business, but at very low demand levels.

We are expecting remodel retrofit seasonality to drive sequential growth and are encouraged by the recent month-over-month growth in housing starts.

That said, with these low demand levels, we are expecting a relatively small loss in the Hearth business for the third quarter.

We continue to adjust our Hearth cost structure.

On a consolidated basis, we're optimistic about the impact of the seasonal upturns, given our lower cost structure.

We'll continue to reduce cost, generate strong cash flow, and lower our debt.

We believe these actions, together with our investments in new products and selling initiatives position us well for the future.

I'll have Kurt provide the financial outlook for the third quarter, and then I'll come back and close.

Kurt.

Thank you, Stan.

For the third quarter of 2009, we anticipate overall sales at each of our operating segments to be down 30 to 36%.

Within office furniture, we expect the supplies driven channel to decline toward the lower end of this range.

The rest of the segment is expected to decline a few percentage points more and be closer to the upper end of the 30 to 36% range.

Hearth sales are also anticipated to decline 30 to 36%, driven by declines in both the new construction and remodel retrofit channels.

Gross profit margin, excluding restructuring charges is expected to increase approximately 1 to 1.5 percentage points from the prior year quarter results of 33.9%.

This increase will be driven by continued cost reset actions, price realization, and favorable material cost.

Included in cost of sales will be approximately $700,000 of restructuring and transition charges.

SG&A as a percentage of sales, excluding restructuring and transition charges is expected to increase 1.5 to 2 percentage points for third-quarter 2008 non-GAAP results when it was 28.6%.

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

We anticipate SG&A-related restructuring costs to be approximately $1.4 million in the third quarter.

Net interest expense is projected to be $2.7 million, and the effective tax rate is anticipated to be 35% during the third quarter.

We expect to end the third quarter with a debt-to-EBITDA ratio of approximately 2 times, essentially flat with the second-quarter level.

This summarizes our outlook for the third-quarter 2009.

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

All right.

Thank you, Kurt.

So let me close this out by saying that we have made some strong progress in resetting our cost structure and generating cash flow.

You should expect more of the same as we continue to adjust to the new marketplace realities.

We are excited about the future given these actions, the signs of stabilization we're seeing, and the investments we're making to improve our competitive position.

With those comments complete, we'll now open it up for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Mark Rupe with Longbow Research.

Please go ahead.

Guys, congratulations on the execution again, unbelievable.

On the gross margin outlook, could you go through the factors again?

I got price realization and raw materials, but curious to see if there's any kind of priority or the significance of each one of those relative to the others.

And then relative to the current quarter that you just released, is there any different factors that are coming into play into the gross margin as we go forward?

Yes.

Really, Mark -- this is Kurt.

Really, that was driven by cost containment at the gross margin level.

And what we saw in the quarter was an acceleration, and really attributes to the operating companies and the members and what they're able to do to accelerate cost reductions, right-size out staffing, and manage our day-to-day operating costs.

And we would expect the same going forward, in other words, no significant change in that sort of process or priority.

Okay.

But as far as like lower steel cost, did that have much more of an impact?

I mean, do you start to see the benefit of that in the second quarter?

And then going forward, I mean is that going to be a bigger piece?

Yes.

In the second quarter, Mark, we saw input costs reduced by about $6 million.

And there was a couple million dollars of steel savings which were offset by other materials.

Really, the second quarter was driven by lower fuel costs.

Okay.

What we'd expect to see in the third quarter is input costs down about $10 million and roughly half of that is in steel.

Okay.

Perfect.

Thank you for the color on that.

And just on the Hearth division, on the restructuring, could you go quickly through kind of the thoughts on what you're doing there and how -- I mean obviously taken a ton of cost out of that business already.

And obviously it's been weaker here this year, and probably what you expected going into the year.

How much more can you get out of that or what kind of -- what are some of the actions that you took to reset it again?

Yes.

Kurt [I think] clearly, [due to the first string] remark, clearly due to the significant decline here, it is tougher to take fixed cost out of that business without negatively impacting the longer-term competitive environment.

Right.

That said, we continue to look for structural costs.

And we have some significant sort of analysis, evaluations underway now.

We're not prepared to announce anything.

But we still do feel like there is additional cost that that team can remove from that business.

We've done a lot of consolidation and restructuring of smaller locations, somewhere between a dozen and a dozen and a half sort of smaller consolidations, restructuring, sales, divestments, those sorts of things to kind of remove structure cost from that business.

And we'll continue to do that, as well as look for bigger items, and then, finally, just the good old day-to-day expense management there.

Okay.

And just lastly, on the SG&A, you had mentioned the incentive-based comp expense being lower.

Was that different than previous quarters, the impact of that?

Is that sustainable?

It's not different than the previous quarters and certainly -- is it sustainable?

The answer is yes.

Although, what I would say there is it is our hope, basically as we incent the members of HNI to sort of do their job, do a better job to meet the challenges, there may be more incentive compensation going forward.

That's yet to be determined based on how well we do against the objectives or not.

Perfect.

Great job again, guys.

Thanks.

Thanks, Mark.

Next we'll go to the line of Budd Bugatch with Raymond James.

Please go ahead.

Good morning, gentlemen.

This is actually Chad filling in for Budd.

Hi, Chad.

Couple of questions.

I guess first maybe piggybacking off of Mark's first question.

Could you quantify for us the impact of pricing in the quarter and give us a sense for what is assumed in your 3Q guidance?

Yes.

In the second quarter, Chad, we saw about $30 million of price that rolled on from a year ago.

And what you should expect to see in the third quarter in those projections, somewhere in the $20 million range.

And I'll remind you, Chad, the 30 million was really closing the gap from last year.

We had that sort of phenomena where materials spiked and we were -- it took us awhile to close the gap with price increases to sort of close that gap.

And that's what we're seeing now is kind of returning that gap into normal state.

I got you.

And if I remember correctly, based on the timing of a lot of those increases, we should start to be lapping some of those initial benefits.

Would it be reasonable to think that 4Q is less than 3Q as far as the year-over-year benefit?

That is correct.

Okay.

And I guess looking forward, if I remember correctly, again, I think catalog pricing for you guys, you guys look at it or reset it maybe every six months or so.

Has there been any reset in the pricing there?

Is there something going forward, given the deflation that we've seen?

Would you expect pricing to come down the next time that issue comes up?

No, I wouldn't, because we really haven't -- I guess what I would say is we look at an ongoing basis.

I don't anticipate right now, a price increase going forward.

But I also don't anticipate a price decrease, going forward either.

Okay.

Great.

And obviously, you did a great job on cash flow in the quarter.

Kind of incorporating your volume assumptions, what do you think you can do with working capital for the rest of the year?

And you have a specific target or level in mind for debt reduction?

Yes.

I think what -- similar to what we talked last quarter, Chad, we're looking at free cash flow of about $100 million, which is in line with what we did a year ago.

And working capital continues to be a key area of focus for us as an element of that.

Okay.

And specific on debt?

Debt, think of kind of $220 to $230 million year-end position.

Okay.

Great.

And I think that does it for me.

If I have another one, I'll jump back in the queue.

All right.

Thanks, Chad.

Thanks.

Next we go to the line of Todd Schwartzman with Sidoti and Company.

Please go ahead.

Hi.

Good morning, gentlemen.

Could you repeat that expected debt level at year end, please?

Sure, Todd.

It's $220 to $230 million.

All right.

Thank you.

And I wonder if you could discuss the timing of the benefits expected from the latest round of plant closures.

Yes.

If you think of the Lewisburg, we'll not see that until 2010, as we wind down those operations through the back half of the year.

That's about $1.8 million we'll start to see in 2010.

LA South Gate, which we talked about last quarter, we're expecting to see about $3 million of savings in the back half of this year and $7 million on an annualized basis.

Okay.

What was CapEx for the quarter, and any projection for full year?

Any change there?

Full year projection, thinking the $25 million range.

And for the quarter, we were at about $3 million in the second quarter.

And any additional commentary on order rates since quarter's end or July versus June?

No, I think we've covered it in the comments.

Okay.

Thanks a lot.

You bet, Todd.

Thank you.

And next we go to the line of Matt McCall with BB&T.

Please go ahead.

Thanks.

Good morning, everybody.

Morning, Matt.

Morning, Matt.

Kurt, I always have to clarify and make sure I'm talking apples to apples here.

When you gave your guidance, the PowerPoint says gross profit margin excluding restructuring related to accelerated depreciation.

And you said up one to 1.5 points.

And I think you said the gross margin items includes 700,000 in restructuring.

So I just want to make sure I'm looking at the right number year-over-year.

Yes, go ahead.

Yes, Matt, the one to 1.5 points Kurt talked about is comparing the non-GAAP number of last year to a non-GAAP number of the third quarter of this year.

And on top of that we have 700,000 of restructuring related accelerated depreciation.

Okay.

So it's the -- so I've got non-GAAP of 33.9.

So I just take that and I add one to 1.5 points?

Correct.

Okay.

Got it.

Okay.

And then, so just a clarification, 28.6 was the non-GAAP SG&A, up 1.5 to 2 points on that?

Correct.

Okay.

All right.

Just making sure.

And so I wanted to follow up on the last question.

So outside of -- so we've got Lewisburg at $1.8 million in the back half, South Gate $3 million back -- I'm sorry Lewisburg was 2010, South Gate in the back half $3 million, $7 million annualized, so that's $4 million in the out -- year.

Anything else from a cost perspective, we need to look at?

You said -- sounded like you got a little -- you did a little better from the time of perspective on taking some cost out.

But anything else that's going to come out in the back half?

Well, as usual, Todd, we don't announce things sort of pre -- or excuse me.

I'm sorry, you're Matt.

That's all right, a lot of names.

That's all right.

One click here.

That's all right.

Need another cup of coffee.

We don't sort of announce things sort of pre-pre.

But I think it's fair to say if you kind of look at our track record on what we're doing with cost, reduction, and structural cost, as long as we maintain the sort of down level of where the market's at, you should anticipate more cost restructuring going forward in the foreseeable future, similar to what we've been doing.

Okay.

And then another point for clarification, Kurt.

You said Q2 costs were down $6 million.

That's a year-over-year number, correct?

Correct.

And you're going to be down $10 million in Q3?

Correct.

And then what was the transportation cost as a percent of sales in the quarter?

Transportation for the quarter, we were down about 8/10 of a point.

We were at 9.7%.

And any -- how much of that was related just to the cost of fuel and how much of that was related to some of the initiatives you've worked on trying to bring that number down?

Half of that was related to fuel and the rest was network improvements and (inaudible) utilization, and the improvements.

And what kind of a target, six, 12 months out for that number, based on flat fuel prices?

I don't know.

I mean --

More of the same.

Yes, I --

(inaudible) another number.

Okay.

And then finally, the Hearth business, it sounds like you said, Stan, a modest loss and the guidance looks like about a $70 million topline.

Is that roughly going to be looked at as breakeven in that $70 million range?

Little bit lower.

Little bit lower is breakeven.

Repeat -- make sure I understand your question, Matt.

Sure.

Sure.

I'm sorry.

I said based on your guidance of look like you're talking about, if you take the midpoint of the decline about $69 million in revenue.

And you said a modest loss.

So should I -- I'm just trying to get an idea of where the breakeven point is for that business.

I think for the third quarter, given the seasonality, Matt, the $65 to $70 million range is probably the breakeven for Hearth.

We're continuing to reset our cost structure, so we're attempting to lower that and expect to continue to lower it.

Okay.

Got it.

Okay.

Thank you all.

Thank you, Matt.

(OPERATOR INSTRUCTIONS)

Okay.

Well, thank you very much for your interest in HNI and for joining us on the call.

We look forward to talking to you in the future.

Have a great day.

Thank you, everyone.

That does conclude our conference for today.

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

You may access this call via the replay system by dialing 1-800-475-6701 and entering the access code of 106074.

Again, that number is 1-800-475-6701, with an access code of 106074.

Once again, we appreciate your joining us today.

You may now disconnect.