HNI Corp (HNI) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the HNI Corporation fourth quarter and year-end results conference call.

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

You will have an opportunity to ask questions after the presentation.

Instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Kelly McGriff.

Please go ahead.

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

My name is Kelly McGriff, 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.

The presentation contains details of our financial performance, including the non-GAAP to GAAP reconciliation.

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

We encourage you to review this presentation.

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

Stan and Kurt will review the results and open the call for questions.

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

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 this call.

I now have the pleasure of turning the call over to Stan Askren.

Thank you, Kelly, and good morning everyone.

I will share a brief assessment in the fourth quarter and turn the call over to Kurt, our Vice President and Chief Financial Officer, to review some of the specific financial details.

Kurt and I will shuffle the comments back and forth here.

He will provide more of the detail, and I will provide more of the outlook, and then at the end, we will come back and open it up for your questions.

Overall, we had a solid quarter given the difficult market conditions.

We continue to reset costs and fiercely manage cash, which allowed us to modestly exceed fourth quarter expectations.

We improved non-GAAP operating profit margins in our office furniture segment over the prior year period and drove a sequential increase in our hearth business profitability.

We continue to improve our financial flexibility and strengthen our balance sheet.

We reduced debt $122 million during the year, and ended with a cash balance of close to $90 million.

Overall, demand remained weak across our major channels with no significant change, other than fourth quarter seasonality.

Day-to-day order activity remained at subdued levels throughout our office furniture businesses, driven by the negative employment and negative small business confidence.

Sales in the supply driven channel of our office furniture business declined 37%, and the remaining office furniture business was down 35%.

In our hearth business, remodel retrofit sales including alternative fuel products were down 35%.

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

The new construction channel of our hearth business continues to be challenging.

Sales were were down 26% due to depressed housing market.

Demand remains at historically low levels, but we are encouraged by some improving market trends.

Our operating results reflect our cost reset actions; continued investment in selling, marketing, and product initiatives; and our nimble split focus business model.

We made tremendous progress throughout the year despite the challenging market environment.

We ended the year a much stronger company, and I would like to thank our members for their hard work and dedication during this very challenging time.

I will come back and provide some more comments here later on the outlook, but now I will turn the call over to Kurt.

Thank you, Stan.

For the fourth quarter of 2009, consolidated net sales decreased 35.2% to $414 million.

Sales for the office furniture segment decreased 36% to $328 million, which was driven by substantial weakness in both the supply driven and contract channels.

Net sales for the hearth products segment decreased 31.9% to $85 million, which was driven by significant declines in both the new construction and remodel retrofit channels.

Consolidated gross margins, which included restructuring and transition charges, were 36.3% compared to 33% in the prior year quarter.

This 3.3 percentage point improvement was mainly due to cost reduction initiatives and lower material costs.

Total selling and administrative expenses, including restructuring and impairment charges, decreased $32 million or 16.5% due to cost control initiatives, lower volume related costs, and improved distribution efficiencies.

These were offset by increased restructuring and impairment charges and transition costs.

Freight and distribution expense, which is included in SG&A, totaled 9.1% of sales during the fourth quarter.

This compares to 9.7%, in the same period last year, and the decrease is primarily due to continued distribution efficiency improvements..

Fourth quarter 2009 included $31.6 million of restructuring and impairment charges and transition costs, of which $2.2 million were included in cost of sales.

These include goodwill and intangible impairment charges of $25 million, which were related to various office furniture reporting units, $2.8 million associated with the shutdown and consolidation of office furniture facilities, and $3.8 million related to the restructuring of hearth operations.

In fiscal 2009, cash flow from operations was $193 million compared to $174 million in the prior year.

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

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

So as we look forward, it is a similar story to what we have communicated in the last call.

Economic outlook remains uncertain, which greatly reduces our visibility and ability to forecast.

We anticipate volatility and low levels of demand will continue across the businesses.

However, the rate of decline has lessened.

We expect the office furniture segment to remain challenged by high unemployment and lack of small business confidence.

We anticipate day-to-day business to remain at low levels and competitive pricing pressure to continue.

Although we are seeing signs of improvement in our hearth business, we expect low levels of new housing starts and consumer spending to continue to negatively impact demand.

So consistent with our actions since the beginning of this downturn, we will continue to reset cost structure, continue to invest in new products and selling initiatives, and will continue to improve operations.

Back over to you, Kurt.

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

That said, what I am about to cover reflects our best view at this time.

For the first quarter of 2010, we anticipate overall sales to be down 8 to 14%.

Office furniture sales are expected to decline 9% to 14%, driven by volume decline in all channels and decreased price realization due to higher discounting.

Hearth sales are anticipated to decline 6% to 11%.

Gross profit margin is expected to increase approximately 1.1 to 1.7 percentage points versus the prior year GAAP results.

This increase is driven by a lower input costs and cost reduction initiatives, which were implemented in 2009, offset partially by lower volume and price realization and $1.3 million of transition costs related to the shutdown of two office furniture facilities.

Excluding restructuring and transition charges, SG&A as a percentage of sales is expected to increase 0.5 to 1.5 percentage points versus first quarter 2009, when it was 33.6%.

We anticipate SG&A related restructuring and transition costs to be approximately $800,000 in the first quarter.

These charges relate to the shutdown of an office furniture facility.

Net interest expense is projected to be $2.7 million, and the effective tax rate is projected to be approximately 37% during the first quarter.

For the year, we expect capital expenditures to be approximately $25 million to $35 million, and this will primarily be focused on new products.

We project depreciation and amortization to be approximately $60 million for the year.

So, based on these projections, we are expecting a loss in the first quarter.

I would like to remind everyone that our first quarter has historically been our lowest quarter for revenue and profit.

With that said, we do expect to be more profitable in 2010 than with we were in fiscal year 2009.

That summarizes our outlook.

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

So I will just summarize here.

Our markets and the businesses continue to be challenging.

Even so, I am more optimistic about the future than ever.

We have a proven track record of navigating challenging market conditions, and will continue to strengthen our business by investing in long term growth initiatives, resetting cost structure, and fiercely managing cash.

Our business is financially strong and well positioned for future growth, and we believe we are taking the right actions to create long term shareholder value.

With those comments complete, I will open it up for your questions.

Thank you, ladies and gentlemen.

(Operator Instructions).

Our first question comes from the line of Mr.

Budd Bugatch with Raymond James.

Please go ahead.

Good morning.

Good morning.

Just refresh where we are on the cost resets physically, what you have got -- a couple of office furniture facilities?

Go back down the list of what we have left in office furniture, and where we are, and what's likely to persist after the first quarter.

I'll start here and then I'll turn it over to Kurt.

We continue to look at our overall structural costs.

Certainly the market has shifted dramatically.

So we have everything on the table and continue to think through what's the best manufacturing logistics configuration going forward.

And so as you talk about what's in the future, we will continue to do what we have done in the past, which is take that structural cost out that we think is available.

We do think there's more opportunity.

Kurt, pick up where we left off in the process.

As a reminder, we took out three office furniture facilities last year -- LA Southgate, Owensboro, and Louisburg.

What you see in the first quarter of 2010 is the ending tail of cost related to Owensboro and Louisburg.

That's about $2.2 million of restructuring costs in the quarter for those two facilities.

Between the accelerated depreciation transition cost and the SG&A impact?

Absolutely.

Any other restructuring in that, included in that -- the SG&A portion's $800,000, the cost of goods sold portion's $1.3 million?

Correct.

What about beyond that?

I know you may not have announced it.

But how many facilities are left?

Budd, we are going to be consistent with what we have done in the past, which is we are not -- we don't preannounce that we will have that -- as that comes online, as we take those actions we will lay out what the cost is and what the savings is going forward.

Will there be any lingering cost of the Owensboro and Louisburg facilities?

Do you have any ongoing maintenance that has to get called out?

No, nothing significant you would expect to see called out.

So this is the last of it for at least these actions that have been taken.

Yes, there may be some minor costs in the second quarter, but again I couldn't expect anything significant.

Nothing in hearth right now, Stan?

No.

I mean we -- Kurt didn't mention it, but we did take some action there around consolidating some distribution centers and adjusting the Mount Pleasant facility, but nothing else to announce there at this point.

So now when we look, when we are looking at this, how many office furniture facilities are left?

What's the census or the roster of that?

We don't have that right here readily available.

But we have got a couple of main campuses now.

We have a main campus in Cedartown, Georgia; we have a main campus in Muscatine, Iowa; and then we have some feeder operations -- a couple of plants into The HON Company, we have a significant Gunlocke facility and a significant Paoli facility, and then we have the HBF facility in office furniture.

As far as plants in Halifax, Pennsylvania; and Colville, Washington; in Mount Pleasant, Iowa; and in Lake City, and then we have a Maxon plant in Salisbury, North Carolina.

Okay.

Now, looking at revenues, just turning to that, you said you are seeing nothing in -- in office that gives you any hope, it is really [climate] related?

How about between supplies -- do you have driven and specified?

Well, let me clarify.

I mean we do see -- saying there's no hope is not where I want to lead the message.

We do see the descent arresting.

We see the descent flattening.

So we are catching up year-over-year.

So, last year, first quarter was down 25% to 30%, something like that.

This year, we are saying first quarter is going to be down 8% to 14%.

And I think as that goes forward, that's going to -- that's going to continue to get better.

But certainly until the economy shows some increased life, until we see small business confidence pick up and we see the consumer come back online and we see employment come back online, we will not see a significant uptick in office furniture.

We are driven by the same economics that everybody reads in the newspaper.

Business confidence and employment really investing in the future.

It looks like both sides of it reformed the same, down mid-30s or 35% to 37%.

Did that, any change in that during the quarter?

Was there any movement significant or notable?

Not -- nothing to call out, Budd.

Okay.

And you were down more than the industry was down in the -- in the quarter, as we ended up down about -- for the year down 30%, and for the fourth quarter -- for December a little bit better in term of orders.

Let me remind you, on that point, we are much more tied to small business, and BIFMA has tended to be more heavily weighted on the contract project segment, number one.

Number two, our transaction business has significant inventory held by the channel partners.

So last year we saw significant destocking of those individuals, which would account for we believe that difference.

We feel good about our share.

We feel good about our market position in the markets we compete in.

But even in the nonsupplies driven channel, you looked like you were down more than the industry.

And again you come back, if you really break out the other guy, and what's core office furniture versus fabric and accessories, and those sorts of things, how much exposure the other guys have to healthcare, how much is acquisition, all of that -- I think if you decouple all that, we feel good about our position in the contract segment or the nontransaction segment as well.

Just last area for me is costs, any notable movement in costs?

Nothing significant, Budd.

We are not seeing heavy duty inflation pressure at this point.

We have seen steel go up in the last six months, even though it is flat year-over-year.

And there was some article in this morning's Journal about more steel coming.

I am not sure that's just not sabre-rattling, but time will tell on that.

You buy I think through distributors, if I remember right.

We buy direct from the mills, more than through service centers.

Typically it's indexed.

So there's a lag effect to it.

And yes, often is the case, the steel industry, there are things in the press that really don't hit the street.

So we have to wait and see.

It doesn't feel like there's any near term pressure in that area.

Okay.

Any other energy -- giving you any problem or any issue there?

Energy year-on-year is about flat.

So we have a little pressure on diesel fuel, but we're offsetting that with ongoing network efficiency improvements.

So for the quarter, we would expect to see about $7 million material input costs favorability year on year.

Lastly, on the tax rate, is it 37% for the year as well as for the quarter?

That's a fair assumptions.

Thank you, gentlemen.

Good luck on the quarter and year.

Thank you.

Our next question comes from the line of Mr.

Pete Lisnic with Robert W.

Baird.

Please go ahead.

This is actually Josh Chan filling in for Pete.

On the pricing front, can you quantify how much benefit you got from carrying through the price increase that you had in the prior year?

In the fourth quarter, it was only about $3 million.

We anniversaried a lot of price increases at the end of Q3.

That benefit drops significantly.

Okay.

And then is there a way to quantify the impact of the competitive pricing environment that you're facing in the quarter?

I want to get the degree of competitiveness out there.

Certainly for the first quarter, we are seeing pricing.

But it is really more of a mix impact, and Stan talked about that day-to-day business versus our project business, which is more competitive.

So what we are seeing, certainly expecting going into the first quarter, because of that mix shift, is some impact on our pricing.

And that number is somewhere around $7 million number.

Okay.

And then jumping on to the hearth sales forecast, I was a little surprised by it being down that much.

If you look at some of the housing indicators, they're starting to turn positive.

Can you explain that a little bit?

It takes a little while for that to work through.

So permits get logged and houses get started, and a fireplace built.

So there is a lag.

It also is a significant improvement -- deacceleration of a negative rate too, Josh.

So it takes a while once this ship starts to turn for it to come to bear in the hearth business, and our numbers reflect that.

Thanks for your time.

Thank you.

Thank you.

Our next question comes from the line of Matt McCall with BB&T Capital Markets.

Please go ahead.

Good morning.

Thank you, everybody.

Morning, Matt.

Let's see first, Kurt, always like to clarify, if I am looking at the right number.

When we look at the guidance and you give the guidance year-over-year, give me the baseline we should be using from a gross margin perspective?

I have got 30.7% in my model after restructuring last year -- is that correct?

That's correct.

The SG&A would be 33.6%?

Correct.

Okay.

All right.

Just like to make sure, talking about the same numbers.

Let's see.

You said that there -- I think you referenced the destocking last year, and said that that accounted -- I think Stan you said that accounted for some of the delta between you and the industry, or can you quantify what that destocking pressure, was either in percent or dollar range?

We think it is in the $40 million to $50 million range for the year.

We talked about $30 million in the first half of the year, and saw the rest of that through the second half of 2009.

About $10 million in the fourth quarter.

So there was $10 million more.

Has that trend continued in Q1 or have we leveled out?

Well, we don't really know quite yet in Q1 since it is early.

My guess is there has been a [sum].

It should start to level out -- once the industry declines start to flatten out, we should see less of it in destocking.

Okay.

You talked about the day-to-day being strong.

Can you speak to the project trends, what the pipeline looks like, and also what the trends in the government sector specifically are looking like, have looked like this year?

Day-to-day is weak.

Day-to-day is what has been the most challenging, and again that has to do with really small business transactions.

It is the stuff that's easiest to turn on.

The project business is still active at a lower rate.

But there's still big projects that are out there that our companies are competing to win, and we anticipate that will continue.

Part of it has been what segment of the economy they're operating in.

Some of that just longer cycle stuff driven by consolidation, and other factors.

And I'm sorry, Matt, government.

Government was good for us last year.

Federal government in particular, we anticipate that again is going to be good this coming year.

This coming year, I think the question is how do state and local handle the rather widespread budget crisis the states are looking, and I would anticipate that some of that is going leak over to office furniture.

How much, yet to be determined.

And back to the day-to-day comment, Stan -- when we're talking about the breakdown of your business, and understanding supplies and contract mix, but when you talk about day-to-day specifically, what percent of your business is day-to-day.

We don't break that out, Matt.

Sorry.

Okay.

No apologies.

What was the answer on the expectations of pricing pressure?

So you went from having, you are going to have $7 million favorable from cost.

Is that going to be offset by any discounting so you have a net $4 million or what is the expectation for Q1?

We have about $7 million of input favorability, which is going to be fully offset by $7 million of pricing.

So we have [wash].

And then the outlook for the year, right now, you carry the current pricing environment through -- what does that look like net of your pricing expectation?

That's anybody's gap.

At this point, we would say that we would continue -- the industry has had a good track record of being able to offset material cost with price, and we would anticipate that would be a similar situation but we really haven't -- we are not clear at this point of what, what pricing is going to be and what material costs are going be for the year.

Okay.

I understand.

Thank you, guys.

Thank you.

Our next question comes from Todd Schwartzman with Sidoti and Company.

Please go ahead.

Good morning, guys.

Hi, Todd.

For gross margin guidance, it seems to imply sequentially from Q4 about a 4 to 5 percentage point haircut.

If I am doing the math correctly, how much of that -- is that all volume related, or what are the other puts and takes there?

Great question, Todd.

We still think that on a $0.30 to $0.40 range for deleverage is the right guidance.

You are certainly going to see that quarter to quarter variability.

So on top of what we say our normal deleverage, what you have got is that pricing that Stan just talked about with Matt, about $7 million that is driven by mix and timing on projects.

And then quarter to quarter we will have some other small costs adjustments.

So you think about fourth quarter 2009.

We had some year-end accounting and accrual adjustments that were favorable, and we had will have some costs that are going to hit in the first quarters that are -- but at the end of it it is primarily volume driven.

All right.

And the net loss that you are guiding to, what does that include in terms of restructuring charges?

That includes the $2.2 million that we talked about for Owensboro and Louisburg.

And nothing else?

Nothing else.

Okay.

Can you -- you mentioned new products a couple of times in the prepared remarks.

Is there anything you care to highlight for the year ahead?

No.

I don't think so, Todd, not specifically.

Each of the operating companies, as you know -- we have each of the operating companies has their own product development initiatives to meet in each of their segments.

All of them are working on a record number of new products.

So we continue to invest in significant levels in new product and in selling initiatives and marketing initiatives.

Will we hear any more details before June?

You won't hear any until they're launched.

On the hearth side, what contributed to new construction being down for Q4 less than the remodel retrofit?

Was it the small base, was it the prior year comps, some combination there?

Well, I think we saw new construction start to pick up a bit.

It declined less than it had been declining.

So as you see in new construction data, the permits and housing starts et cetera started to reach the bottom and climb out of it.

Was that driven mostly by the lower end builders?

Certainly, if you see lower end builders, certainly if you watch what's going on in new construction, the entry level housing is a higher mix now than high end housing.

All right.

And for full year 2010, what should we expect in the way of free cash flow?

You should expect to see the Company continue to generate strong free cash flow.

Certainly not the levels we had last year, given the significant working capital improvements, but I would expect something in the $80 million to $100 million range as a reasonable estimate.

All right.

That's all I have got.

That's all I have got.

Thank you very much.

Thank you.

And our next question comes from the line of Mark Rupe with Longbow Research.

Please go ahead.

Hey guys, did you comment by chance on the incremental cost reduction benefit that you will see in 2010 versus 2009?

I know there was a number out there on some prior calls, but I am not sure if you had mentioned that on this one as well.

Great question.

We did not.

If you think of the cost reset, we were on a run rate versus 2008 of about $150 million of structural cost takeout, of which we recognized approximately $120 million in 2009.

So there's an incremental $30 million that we should see roll through in 2010.

$20 million to $25 million of that, Mark, you should expect to see in the first quarter, and the rest of that rolling in Q2 to Q3.

Okay.

Perfect.

And then on the freight and distribution line, how much more opportunity is there to manage that down?

Well, one of the things that we are always working on constantly really our network efficiency.

So, do we have distribution in the right spot?

We always are working on our leans, and working on our negotiation with carriers.

So we continue to believe that there's opportunity under the spirit and continuous improvement to improve that, those efficiencies.

Okay.

And then just lastly on the make up of how this downturn in the office furniture side has flowed through, has there been any different changes or changes in the way it has flowed on the price segmentation relative to you guys, relative to the past downturn?

I don't think there's anything that is worthy of comment I guess, Mark.

Perfect.

That's all.

Thank you, Mark.

Thank you.

And we have a follow up question from the line of Budd Bugatch with Raymond James, please go ahead.

Making sure I understand, when we're comparing last year's restructuring, we had no more restructuring in our cost of goods sold model for last year.

That is correct, Kurt?

That is correct.

Okay.

Lastly, I guess if you think about it, now we have all of these cost resets and we're done, and a steady state of -- we can pass the second and third quarter when you have the last of that year-over-year cost takeout.

Can you comment on contribution margin going forward, looking down a little bit longer term?

What do we look like segmentwise, contribution margins.

I think, Budd, overall, we would say that $0.30 to $0.40 on a contribution leverage or deleverage is still the right guidance.

So 30% to 40% of each incremental sales dollar?

Correct.

And when is it 30% and when 40%?

Just making sure I know.

Great question, going to depend on mix, on channel, but that's why you will hear us consistently use those numbers.

But that's the range you ought to use.

Every CFO I talk to tells me the costs are variable on the way up and fixed on the way down.

We are not done with our cost restructure reset as well.

I want to be clear that we believe there's still opportunity for us to take cost out of this business.

And which segment more than the other -- you have four facilities left in hearth -- ?

I think it is in hearth and office furniture as well.

I mean we have a lot going on, a lot of work, and as the market continues to develop, we have new opportunities.

I hear that phrasing being emphasized.

That means those announcements are sooner than later by region.

I wouldn't try to read either way on that.

We have no more questions in queue.

Please continue.

Okay.

Well, I want to thank everybody for joining us on this call.

We appreciate your interest in HNI.

We continue to charge forward with thinking about how do we create long-term shareholder value.

So on behalf of everybody, thank you very much.

Thank you.

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