HNI Corp (HNI) 2009 Q3 法說會逐字稿

Ladies and gentlemen, we'd like to thank you for standing by and welcome to the HNI Corporation third-quarter results teleconference.

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

Later we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator instructions).

As a reminder, today's call will be recorded.

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

Marshall Bridges.

Please go ahead, sir.

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss third 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'll 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.

We encourage you to review the slides with us today during the 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, they 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 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.

Stan?

Thank you, Marshall.

Good morning, everyone.

As is our usual custom, I'll share a brief assessment of the third quarter, and then I'll turn the call over to Kurt Tjaden, our CFO, who will review some of the specific financial details.

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

So overall, we had a strong quarter, particularly considering the highly challenging market conditions.

We dramatically increased profitability in the face of a 32% revenue decline, achieved an 8.4% operating income margin on a non-GAAP basis.

For the first time since 2007 we drove non-GAAP operating profit margins in our Office Furniture segment to over 11%.

We returned our hearth business to profitability and improved operating profit margins over the prior year period on a non-GAAP basis.

We accelerated our already strong cash flow generation.

Operating cash flow during the quarter was almost double the same period last year.

We have already generated more free cash flow in the first three quarters of this year than we did in all of 2008.

We increased our financial flexibility and strengthened our balance sheet, repaying $52 million in debt and increasing our cash balance by $26 million.

Our debt-to-EBITDA ratio is now approximately 1.6, down from last quarter and well within our bank debt covenant.

As expected, we did see the seasonal uptick in volume.

Revenue was up $71 million versus the second quarter, primarily driven by government and education, Office Furniture sales and hearths' remodel/retrofit channel.

We benefited from our ongoing efforts to increase share in these markets.

Our major channels benefited from seasonal demand, but conditions remain challenged across our businesses.

Sales in the supply-driven channel of our Office Furniture business were down 30% versus prior year.

The remainder of our Office Furniture businesses declined 35%.

Apart from seasonality, not a lot has changed in the office furniture market.

The day-to-day business remains weak, and projects are as competitive as ever.

In our hearth business, remodel/retrofit sales, including alternative fuel products, were down 29% versus the prior year.

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

The new home construction channel in our hearth business performed better than expected.

Third-quarter sales were down 26% versus the prior year as a result of less negative new home construction and our aggressive efforts in the market.

Our third-quarter results reflect the power of our reset cost structure, particularly when combined with higher volume.

Our members have done an outstanding job of attacking cost and increasing efficiency throughout the Corporation, and I want to expressly thank them for their hard work and their commitment to the business.

I will now turn the call over to Kurt Tjaden.

Thank you, Stan.

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

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

As you can see on slide 8, consolidated net sales decreased 31.5% to $454 million.

Sales for the Office Furniture segment decreased 32.2% to $380 million, driven by substantial weakness in both the supplies driven and contact channels.

Net sales for the Hearth Products segment decreased 27.7% to $74 million, driven by similar declines in both the new construction and remodel/retrofit channels.

Consolidated gross margins, including restructuring and transition charges, were 36.7%, which compares to 33.9% in the prior-year quarter.

This 2.8 percentage point improvement was due to cost reduction initiatives, price realization and lower material cost.

SG&A, including restructuring and transition charges as a percentage of sales, was 29.6% versus 28.8% in the prior-year quarter.

While the percentage of sales increase is due primarily to volume deleverage, actual SG&A dollars declined $57 million due to cost control initiatives, which were partially offset by increased restructuring cost.

Freight and distribution expense, which is included in SG&A, totaled 9.3% of sales during the third quarter, and this compares to 10.8% during the same period last year.

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

Slide 9 summarizes our restructuring and transition charges and reconciles our non-GAAP to GAAP results.

As shown, third quarter 2009 included $6 million of restructuring and transition cost, of which $1.6 million were included in cost of sales.

These costs included $4.1 million associated with the shutdown and consolidation of the three office furniture manufacturing facilities and $1.8 million related to the restructuring of hearth operations, which was net of a non-operating gain related to the sale of a building.

For comparison, we recorded $1.5 million of restructuring and transition cost in the third quarter of 2008.

Year-to-date cash flow from operations was $136 million, which compares to $105 million in the prior year.

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

We reduced total debt by $119 million during the first nine months of 2009, using cash flow from operations and proceeds from the sale of long-term investments.

That wraps up the financial comments.

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

Thank you, Kurt.

As we look forward, the market environment continues to be dynamic and volatile, providing limited visibility.

Nonetheless, we will share with you our best current view of the fourth quarter.

As I said earlier in the call, our third-quarter results benefited from relatively strong seasonal office furniture demand.

We expect seasonal demand to dissipate in the fourth quarter, resulting in revenue and profitability below third-quarter levels.

Apart from the seasonal downturn, we expect office furniture demand to remain generally at existing levels with continued volatility, but we see no clear indication of significant improvement or decline in the near-term.

Our hearth business continues to face challenging conditions, particularly in the remodel/retrofit channel, due to relatively low energy prices and a negative retail environment.

We believe hearth demand, including demand in the new construction channel, will continue to stabilize and expect slightly higher sequential revenues due to seasonality.

Overall, despite these challenging and relatively unchanged base demand conditions, we remain excited about the future, given our ongoing cost reset actions, focus on cash flow generation and our aggressive efforts to improve our competitive position.

I'll let Kurt provide some specific financial outlook for the fourth quarter.

Thank you, Stan.

I'd like to point out two factors which influence the year-over-your comps for the fourth quarter.

First, last year's fourth quarter was a 14-week period compared to 13 weeks in 2009.

Second, we implemented price increases across many of our businesses in October 2008.

Customers ordered ahead of these price increases before the full impact of the economic downturn, positively impacting last year's fourth-quarter results.

Taking these factors into account, we anticipate overall sales to be down 33% to 39% for the fourth quarter 2009.

We expect the Office Furniture segment to be down 33% to 39%.

Within Office Furniture, we expect the supplies-driven channel to decline closer to 33% and the rest of the segment to be down nearer to 39%.

Hearth sales are anticipated to decline 31% to 37%, driven by declines in both the new construction and remodel/retrofit channels.

Gross profit margin excluding restructuring and transition charges is expected to increase approximately 1.9 to 2.5 percentage points from the prior-year quarter results of 33%.

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

Included in cost of sales will be approximately $2.4 million of restructuring and transition charges related to previously announced consolidations.

SG&A as a percent of sales excluding restructuring and transition charges is expected to increase 3.3 to 3.9 percentage points from the fourth quarter 2008 non-GAAP results, when it was 28%.

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

We do anticipate SG&A-related restructuring and transition costs to be approximately $1.8 million in the fourth quarter.

Net interest expense is projected to be $2.5 million.

And, finally, the effective tax rate is anticipated to be 38% during the fourth quarter.

This summarizes our outlook for the fourth quarter of 2009.

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

So I'll conclude here.

In summary, we've executed well through this downturn, dramatically resetting our cost structure, improving profitability and cash flow and enhancing our competitive position.

We are still facing significant challenges, and you should expect continued aggressive action as we continue to adjust to the prevailing marketplace conditions.

But I have to say I'm as excited as ever about our organizational capabilities, the investments we are making for future growth and our ability to adapt our business to these dynamic economic conditions.

So that completes our comments here.

I'll now open it up to questions.

(Operator instructions) Mark Rupe, Longbow Research.

Good morning; this is Leah Villalobos in for Mark.

Congratulations on the execution this quarter.

It looks like the gross margin and the SG&A came in a lot better than you had discussed on the last quarter call, and I was wondering if you could talk a little bit about what changed since then.

Sure.

On the gross profit line, Leah, that was really driven by cost containment.

But we also realized a benefit from higher volume that was at the top end of our range as well as favorable material cost.

Non-GAAP SG&A was basically flat on a percent of sales basis, better than we expected by 1.5% to 2%, and that was two factors.

One was, again, better cost containment.

And the other one is continued improvement in our freight and distribution efficiencies.

Can you talk a little bit about what you are doing with the freight and distribution?

Well, Leah, you may recall last year we initiated some significant changes in kind of our overall network model.

We realigned some distribution centers.

We engaged in some third-party logistics initiatives, some better planning.

And then we just worked very aggressively on lanes and cube utilization and just good, old-fashioned grind-it-out sort of operational improvement.

And then, as far as the material costs being lower in the quarter, how much lower were they?

They were about $10 million lower in the quarter on material costs, and we had another $3 million in diesel.

And then, looking at the guidance for the fourth quarter, what is your expectation?

You should expect material costs as we look to be about $16 million to $17 million favorable and another $3 million in diesel.

Todd Schwartzman, Sidoti & Company.

Surprisingly, all my questions were just asked and answered.

Thank you very much.

Budd Bugatch, Raymond James.

I was hoping you guys might be able to quantify some of the benefits in gross margin, maybe, in particular, pricing, see what you had to say there.

Are you talking specifically about the third quarter?

Yes; I'm sorry.

We had projected $20 million of price favorability, and that's basically what we realized in the third quarter results, so right in line with expectations.

Okay, that's very helpful.

And, given the excellent cash flow generation, any changes to the outlook for maybe what working capital looks like and what the year-end debt balances are going to be trending towards?

On year-end, total free cash flow for the year, we'd be thinking somewhere in the $140 million to $150 million range.

Inventories we'd expect to see continued to decline in line with revenue in the fourth quarter, another $10 million or so.

And debt -- we would not anticipate seeing a change in our current debt level.

We have some significant prepayment penalties in our remaining debt.

So what you should expect to see is us continuing to build cash.

Those are my questions, guys.

Congratulations on the excellent quarter.

Matt McCall, BB&T Capital Markets.

Kurt, first, you talked about a couple of things that are going to impact Q4, and one was the impact of the orders that were placed ahead if the price increase last year, correct?

Correct.

Can you quantify what you think that impact was and maybe give us an order of magnitude on how it's impacting the relative performance this year?

Really, it's difficult to break that out.

There's a lot of factors that impacted that.

That's not something we've got that level of detail on.

And we're in the pull-ahead, that's typically what you hear us talk about, or other companies.

It was just (technical difficulty) early in the quarter, before things really got bad last year.

Okay, all right, got it.

Obviously, things, you said, Stan, pretty volatile right now.

And you talked about project activity being aggressive as ever.

Can you talk about that project pipeline, any changes over the past three months or since the quarter closed?

I think, Matt, it's -- when we say volatile, it's just weekly, daily segments move around.

It all ends up at about the mean.

I don't think we've seen any significant changes up or down in what we've been seeing as that run rate here in the last third quarter.

As we mentioned, there is a seasonal change due to end-of-the-year budget cycles and government education and just sort of timing stuff.

But that base demand level seems to be pretty stable.

Okay.

So, moving onto guidance, it looks like -- so, you did north of an 8% margin in Q3 and it looks like the guidance range is somewhere in the 3.6% to 4.8% range, if I'm doing the math right, putting back in the restructuring.

So I guess the question is, historically it looks like the seasonal pattern there -- and it sounds like what you're saying is, there is some normal seasonality that you are experiencing or expecting.

It looks like the seasonal pattern there is not quite extreme, 8 going to 4.

Can you help us understand what's the new normal, I guess, or what's the new baseline that we should be looking at as we start to approach fiscal year '10?

We do have a pretty significant seasonal aspect to our business that Stan talked about earlier.

And if you look over the last -- you know, last year I think our sequential drop third to fourth quarter is pretty much in line, what we are expecting this year.

The last two or three years before that we didn't really see the same seasonality.

There were some unique factors in those years.

If you go back before those periods, we did see some pretty significant sequential drops in revenue.

And the main factor driving the sequential profitability drop is simply volume deleverage.

We have less volume, and we are delevering at, say, $0.35 on the dollar, and it's driving profitability lower.

(multiple speakers) Office Furniture as well.

The Hearth business has a mix comparable -- if you look at it sequentially, it's not a fair mix comparison.

But, Marshall, as we start to look at fiscal year '10, help us understand how to look at that relative to what we've just seen happen in Q4 -- Q3 with the new cost model and what the forecast is for Q4.

I know you've got some additional costs that are going to come out.

Just help us understand how, on -- assume a flat top line next year from current levels and just the normal seasonality.

What kinds of things do we need to think about for next year's results?

Well, let's see, Matt.

Let's try and tag this.

So you think of cost reset.

We think now, this year, we're going to take out about $110 million in structural cost, which, if you annualize that into 2010, would be about $140 million to $150 million.

And really, that's due to, as we had costs come out this year, and in a number of our announcements we'll start to see the full benefit of that roll through 2010.

And we are not done.

You know this well.

That's an ongoing effort and an area of continued focus for us.

I think then, Matt, for us to comment on what we see in 2010, I think, would be probably premature.

And it would not be very helpful at this point as to what we expect on the market.

That's still so dynamic and volatile, anything we would give you would probably not be helpful.

I think we just say, we think the base demand has stabilized, and then we'll just have to see how the economy comes back online, when it comes back online and how fast, in both Office Furniture and Hearths, and what is the lag as to when we get traction there as well.

I wish we could give you more, but I think to give you more would just not be wise.

No; and to be clear, it was not a top-line question at all.

It was basically just make an assumption on the on the top line of flat.

And Kurt kind of hit on it.

It sounds like, Kurt, that if I remember, that 110 number was going to be 100.

And then the 140 to 150 seems a little bit higher than I remember as well.

Are there some new initiatives?

I know do you have announced Owensboro, but are there new initiatives that we may not know about, or is this just more blocking and tackling, getting -- now taking that number up to an incremental $30 million to $40 million next year?

No; I think you hit it, Matt.

It is slightly higher than what we talked last quarter.

And, other than the recently announced restructuring, we just continue to take cost out on a daily, weekly monthly basis across our business.

As you comment, we also have a policy of not calling the shots.

We basically have said, we'll let you know, when we've announced something, what the benefit will be.

And so we continue to work these items as we go forward.

Okay, and then final two.

So the 140 to 150 does include Owensboro and all the costs that you just referenced are permanent in nature.

Is that correct?

That's correct.

Peter Lisnic, Robert W.

Baird.

I guess the first question, on the pricing, the $20 million you talked about, is that just a function of basically carrying forward the impact of higher materials costs that you incurred last year?

Or is there a new product/mix element to that number as well?

Peter, you had it in the latter part.

It was primarily that, closing the gap between material costs, rapid escalation and price.

And then, can you maybe give us that breakdown by segment?

I presume the majority of that is in Office, but probably some in Hearth.

You should assume it's primarily in the Office, very little in Hearth.

Okay.

It sounds like, obviously, the competitive landscape at times is difficult.

What are you seeing from a pricing perspective, and has that changed for the better or worse over the past quarter or two?

Well, not a big huge change in pricing.

Certainly, the bid pricing, the project pricing, continues to be competitive.

But we are not seeing significant changes; it's just -- it's a challenging world out there.

There's lots of supply chasing demand, and the competitors are sharp and we remain sharp as well, to make sure we are getting more than our fair share.

And is there anything material in terms of deterioration in the supply channel?

I'm sorry?

Ask that again, Pete; I'm not sure I understand.

Well, you talked about the project side of the business.

I was just wondering in the supplies-based channel.

The answer is no, not appreciably.

There are some things that we're doing around promotions and programs, new product launches, items like that.

But not the day-to-day pricing much.

Okay.

And then separately, on the balance sheet/cash flow, clearly made great progress there.

And it doesn't sound like, with the prepayments, the debt will be coming down.

But can you maybe talk about other potential uses of cash, outside of just letting it, in this interest rate environment, just build up on the balance sheet?

Yes.

Our policy really hasn't changed here, except I think we are comfortable with letting a little bit of cash build up on the balance sheet here.

It's still a relatively modest level, and so we are comfortable letting it build.

But our policy has been, A, we reinvest back into the core business; B, we are always looking at acquisitions if we can create value.

We also consider dividends and share repurchase.

And it kind of depends on what we believe the outlook is and what the current opportunities are.

And that's something that our Board of Directors looks at on a quarterly basis, and we have extensive discussion around that.

But we don't see any real change in that policy here, I think, in the near-term.

And I guess I'm wondering whether or not you are seeing anyone or anything on the acquisition front come to the forefront here, given the end market pressures and maybe some competitors under pressure?

Yes, and we don't typically comment on that, Peter.

How about on the valuation multiples that you might be seeing?

We don't comment on that, either.

I've got to keep trying.

I understand, I understand.

Todd Schwartzman.

I just wanted to get some clarification to ask you to please repeat the guidance that you gave regarding SG&A for the fourth quarter relative to the prior year, 28%, both in terms of absolute dollars and on a percent of sales.

What we said, Todd, is SG&A as a percent of sales, excluding restructuring and transition charges, is expected to increase 3.3 to 3.9 percentage points from the fourth quarter 2008 non-GAAP results, when it was 28%.

And we didn't provide a dollar -- but we are expecting a significant decrease year-on-year.

From that 179 number, we'll call it?

Correct.

There are no further questions in queue at this time.

All right.

Well, thank you very much for joining us this morning.

We look forward to updating you in the future.

Have a great day.

Ladies and gentlemen, this does conclude our conference call for today.

On behalf of today's panel, I'd like to thank you for your participation and thank you for using AT&T.

Have a wonderful day.

You may now disconnect.