HNI Corp (HNI) 2010 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.

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you.

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss first quarter 2010 results, which were announced yesterday after the market closed.

My name is Kelly McGriff, Treasurer and Vice President for HNI Corporation.

If you haven't 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 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 up 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.

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

Stan?

Thank you, Kelly.

Good morning, everyone.

As Kelly said, I'll share a brief assessment of the first quarter and provide some thoughts on the outlook.

Kurt Tjaden, our CFO, will discuss specific financial details, and at the end we'll open up the call for questions.

Overall, strong execution from our split and focus business model drove a solid quarter.

Our cost-reset actions and enhanced network distribution model continued to drive improved performance.

The benefits from previous investments in selling models and long-term growth initiatives allowed us to deliver improved results versus prior year and exceed first quarter expectations.

We increased gross margin percentages, reduced SG&A expenses, and significantly improved earnings over prior year.

Activity levels in our core businesses have stabilized with positive momentum building during the quarter.

Sales declines in our office furniture business continued to moderate.

Our supplies driven channel was down 5% and the remaining office furniture business was down 13%.

Market trends in our hearth business continue to improve significantly.

The new construction channel was up 11% over prior year, driven by a more favorable housing environment.

Hearth remodel-retrofit sales, including alternative fuel products, were down 16%, driven primarily by lower energy prices.

Our operating results reflect strong performance across all businesses.

We're realizing the benefits of actions taken in 2009, and during first quarter of this year, which include resetting our cost structure, investing in selling, marketing and product initiatives, and leveraging our split and focus business model.

I'd like to thank our dedicated members for their hard work and their outstanding results for the quarter.

I'll now turn the call over to Kurt to review some of the specific numbers for the first quarter of 2010.

Kurt?

Thank you, Stan.

For the first quarter of 2010, consolidated net sales from continuing operations decreased 8.4% to $364 million.

During the first quarter, we made a decision to sell two small non-core components of our business, which are presented as discontinued operations in the financial statements.

Sales for the office furniture segment decreased 9.3% to $300 million, while net sales for the hearth products segment decreased 3.9% to $63 million due to a decline in the remodel-retrofit channel, which was partially offset by an increase in the new construction channel.

Consolidated gross margins, including restructuring and transition charges, improved to 32.8% compared to 30.9% in the prior year quarter.

Total selling and administrative expenses, including restructuring and impairment charges, decreased $4 million or 10.4% due to cost control initiatives, lower volume related costs, improved distribution efficiencies and lower restructuring and transition costs.

First quarter 2010 included $2.8 million of restructuring and transition costs, of which $1.5 million were included in cost of sales.

Of the $2.8 million in restructuring and transition costs, $2.6 million was associated with the shutdown and consolidation of office furniture facilities net of a $500,000 gain on the sale of a manufacturing facility, and $200,000 was related to the restructuring of hearth operations.

We ended the quarter with $43 million of cash.

We used $25 million of cash in the quarter compared to generating $6 million in the prior year quarter.

I'd like to remind you that the first quarter has historically been our lowest quarter for operating cash flow due to seasonal business patterns and funding requirements.

That wraps up the financial comments.

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

Thank you, Kurt.

We entered the second quarter with positive momentum across our businesses.

The economy is getting stronger, unemployment and small business confidence has stabilized, and we believe consumer confidence is trending upward.

Single-family starts and housing permits are improving.

We anticipate growth in the near term, and continued recovery in the second half in both our office furniture and hearth segment.

We expect the office furniture business to grow in the second quarter, in both the supplies and contract channels.

We're energized by the turnaround in our hearth business; we anticipate top line growth in the second quarter, marking an end to a long period of industry declines.

We expect this business to be profitable for the year with a positive outlook for the future.

I want to thank our hearth members and the management team for their perseverance and strong leadership during the downturn.

So, Kurt, why don't you pick up the financial outlook for the second quarter?

For the second quarter of 2010, we anticipate overall sales from continuing operations to be up 2% to 6%.

Second quarter 2009 did include $8 million of sales from discontinued operations, with $6 million in the office furniture segment and $2 million in the hearth segment.

Importantly, both office furniture sales and hearth sales are expected to be up 2% to 6% for the first quarter 2010.

Excluding restructuring and transition charges, gross profit margin is expected to increase approximately 0.25 to 0.75 percentage points versus the second quarter of 2009 when it was 34%.

This increase is driven by cost reduction initiatives implemented in 2009 and slightly higher volume, which is partially offset by lower price realization.

Second quarter 2010 gross profit is expected to include $1.5 million of restructuring and transition costs compared to $1.4 million in the prior year quarter.

Excluding restructuring and transition charges, SG&A as a percentage of sales is expected to be down 0.25 to 0.75 percentage points versus the second quarter of 2009 when it was 33.1%.

We anticipate SG&A-related restructuring and transition costs to be approximately $1.7 million in the second quarter.

These charges relate to the shut down of previously announced office furniture facilities.

Net interest expense is projected to be $2.8 million and the effective tax rate is projected to be approximately 38% during the second quarter.

For the year 2010, we continue to expect to generate free cash flow of $80 to $100 million.

Capital expenditures for the year will be approximately $25 million to $30 million, and this is primarily focused on new products.

This summarizes our outlook for the second quarter 2010.

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

Let me summarize here.

We believe the economy and our markets are improving.

Our actions throughout the downturn have positioned the Company to benefit disproportionately as our markets improve.

I'm excited and optimistic about the future.

We will continue to strengthen our business by investing in long-term growth initiatives, attacking costs at all levels of the organization, and fiercely managing cash.

We will remain vigilant in providing outstanding value for our customers.

We're never done.

Our business is financially strong and we feel well positioned for future growth.

With those comments complete, I'll now open it up to questions.

(Operator Instructions).

Our first question comes from Mark Rupe with Longbow Research.

Please go ahead.

Hey, guys, congrats on the performance and the outlook.

First, on your last call, you were pretty clear that demand was difficult, the outlook was difficult -- uncertain, end markets weren't showing really any signs of near-term improvement, and you thought maybe employment growth was necessary before any kind of material uptick would happen in demand.

Is that still the thought process, at least on the latter part?

Because obviously you feel like you have a little bit more lift in your step right now after the first quarter played out.

Yeah, it's a great question, Mark.

I think we feel as though the overall sort of confidence improving, the economy is sort of ticking forward, that small business, corporations, federal government, etc., are out there spending money.

I'm sure there's some expenditures on office furniture that were deferred that now are moving forward, and I think everybody's kind of moving on and thinking about how do we grow, how do we invest in the future.

I believe that we will see employment pick up here going forward in the rest of this year as well.

So overall, real positive momentum felt in the first quarter.

We believe it's going to continue in the second quarter.

Okay.

So as far as the small business comment, obviously I would think you'd be getting some share there then relative to the overall market.

I mean, the supply channel in general over the last several years has kind of been weaker than a lot of us would have liked.

Do you feel like you're out of the woods there?

I know there's destocking in the fourth quarter a little bit, but just in general do you think it will act differently than the other furniture segment kind of in the near term, mid term?

Yeah.

Clearly we feel as though the day-to-day transaction, office supplies, whatever -- however you want to characterize it, is kind of unlocking and starting to move forward.

Positive momentum.

The question is, is how will it behave compared to history.

We think it's going to behave probably similar.

Exactly it's hard to tell.

I think still an issue around small business financing, small business concerns about some of the government sort of policies, etc., are going to have to play out to really see is it going to match historic type of trends.

Okay.

And then just last question, on the steel front, I don't know if this was a couple years ago, but there was a fair amount of mismatch between your price and what you had to kind of take in.

Any kind of commentary on the thought process as we go out in the next couple quarters as steel inches up?

Yeah, that's a good question, Mark.

I mean, we are seeing pressure that we'll probably feel in the second half of the year on material, primarily around steel and oil input.

That's probably going to be our guess today would be $15 million to $20 million sort of negative impact.

We are putting through price increases now, moderate price increases.

Some of those will become effective July 1st, and then additional price increases we believe will be put in effect then in some of the other companies by the beginning of fourth quarter.

We think that gap will be, as we see it today, will be minimal.

Good, perfect.

Thank you.

You bet.

Thank you, Mark.

We have a question from Budd Bugatch with Raymond James.

Please go ahead.

Good morning, everybody.

This is actually Chad pinch-hitting for Budd.

Hi, Chad.

Let me add my congratulations on the performance and the outlook as well and a return to growth.

That's very encouraging.

I guess a couple of quick questions.

One, I think, Stan, in your comments, did you say that you expect hearth to be profitable for the full year?

Did I hear that right?

You did, absolutely correct.

Okay.

And in terms of the Q2 guidance, what are you assuming as far as operating margins for each segment?

Chad, what you'd expect on office furniture, you know, that's kind of a mid single-digit 5% to 6%.

And the hearth business, while profitable for the year, is somewhere around breakeven to a $2 million loss for the quarter.

Okay.

And you talked a little bit about pricing, Stan.

Could you quantify for us what drag there was from pricing during the quarter?

I would imagine probably still a little negative in 2Q.

Any way to quantify the increases or the benefits later in the year?

Yeah.

I'll take the second quarter, Chad.

You know, we had given guidance that we expected it to be around 7 negative for the first quarter, and it came in right around 5.

For the second quarter, we're looking -- and it's primarily discounting.

We expect a similar number in the $6 million to $7 million range.

We really haven't quantified, as Stan has said, that pricing is across our businesses, but we would expect to pretty well close that gap on that outlook on material costs for the back half of the year.

Okay.

And should I assume the negative pricing that you saw in Q1 and Q2 as mainly in the contract part of the business, catalog prices relatively stable?

That's probably a safe assumption, Chad.

And then the increases for the -- later in the year are both contract and catalog?

That's correct.

Okay, great.

I think that does it for me for now.

I'll defer to others.

Congratulations again.

Thanks, Chad.

We have a question from Peter Lisnic with Robert W.

Baird.

Please go ahead.

Good morning, everyone.

Good morning.

I guess the first question if maybe we could get a little color commentary on the second quarter office growth of 2% to 6%.

Can you maybe parse out exactly where you're seeing more strength versus less strength?

Are there any markets that remain weak?

Just kind of how the order patterns have come through in the first quarter and early into the second quarter to give us a sense as to what is sort of driving the growth top line here.

Yeah.

I would say -- just first off, Peter, I would remind you that we're very broadly diversified.

So If you look at HNI, we're the broadest and deepest through all the segments and geographies.

I would say there's no specific sort of thing to call out as one segment that's stronger than the other, other than I will comment on the quarter.

Certainly as the quarter went on the momentum picked up; momentum in orders, momentum in bid activity, momentum in day to day.

And we would anticipate that as the second quarter actually that the transaction is going to be up in the lower end of the range, and that the contract and other business will be up towards the higher end of the range.

That's probably the extent of what I could share with you that's meaningful.

Okay.

That is very helpful.

If you look at the pricing equation, I understand the material side cost of the equation, but can you maybe talk about the competitive dynamics that you see out there?

You know, is it still relatively pretty disciplined from a competitive standpoint, getting better, getting worse?

Just some color commentary on that would be helpful as well.

Yeah.

I think the pricing situation is probably stable.

I don't think it's getting worse.

I don't think it's getting better.

I think we've reached probably the worst part of the pricing, though, would be my guess based on just kind of the competitive dynamics, the whole balance between supply and demand.

All right.

Kurt, just on the cash flow in the quarter, it looked a little lighter than I would have guessed, but is some of that really related to you're starting to grow now, using working capital, so first quarter potentially a little bit lighter than typical?

Really it's driven by payments, Pete, and it really revolves around our marketing programs, our contributions to our retirement and profit sharing and our incentive plans.

First quarter is our use of cash quarter.

From a working capital perspective, recall, we're actually working capital neutral to positive with the actions that we've taken through 2009.

So if you looked, we would not expect that to be a use of cash as we grow, and if you think about our productivity metrics year-on-year on working capital, AR, inventory turns, and payables all positive improvement year-on-year.

Last year we got the benefit from that big decrease in volume and accounts receivable being collected and wasn't repeated again this year.

Got it.

That is perfect.

Thank you for your help.

Our next question is from the line of Todd Schwartzman from Sidoti & Company.

Please go ahead.

Your line is open.

Good morning, gentlemen.

First question on the contract furniture trends, if you could please talk about the pace of orders throughout the quarter, maybe some areas of strength or weakness, either geographically or by vertical markets.

Yes, Todd, I guess what I would say is as the first quarter went on we saw the momentum pick up.

Regarding any specific geography or market segment, I don't think there's anything noteworthy for us to call out there.

We're very broadly diversified in that market.

So it's been pretty broad base sort of improvement.

Okay.

And, Stan, just to clarify your prepared comment about how you stand to benefit disproportionately from the pickup, were you speaking mostly to your current cost structure, the balance sheet, or maybe just your mix or some combination, or was it something else?

No.

I think you've got it characterized appropriately, Todd.

It has to do with leverage, which deals with our cost reset, our productivity on the way up.

It has to do with our market segment play, our competitive strength in both the transaction and in the contract segment.

Then as Kurt just said, you know, the good work that's been done by the whole team around working capital and cash.

Got it.

And regarding those price hikes set for the summer and then the fall, what type of realization are you expecting?

Well, basically to offset cost, Todd.

We said $15 million to $20 million is kind of what we're thinking as the headwind on cost, and we think that our price realization should cover that.

Got it.

Thank you very much.

Thank you, Todd.

(Operator Instructions).

There are no further questions at this time.

Please go ahead.

Thank you very much, everybody, for joining the call.

We look forward to speaking to you soon.

Have a great day.

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