HNI Corp (HNI) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the HNI Corporation second quarter results call.

(Operator instructions.) And, as a reminder, today's conference is being recorded.

I would now like to turn the conference over to Mr.

Kelly McGriff.

Please go ahead.

Thank you, Paul.

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss second 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 have not received a copy of the financial news release please call 563-272-7927 and we will send it to you.

The release is also available on our website at 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 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 on 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?

Good morning, everyone.

I'll share a brief assessment of the second quarter, provide some thoughts on the outlook, and then Kurt Tjaden, our Vice President and Chief Financial Officer, will share the comments with me, he'll discuss some of the specific financial details.

And then, as is our usual practice, we'll end the call with questions.

So let me jump in here.

Strengthening demand in office furniture, combined with outstanding execution across the businesses drove strong second quarter results.

We continued to improve our cost structure and network distribution models.

We also invested in growth initiatives to drive long-term shareholder value.

We delivered significantly improved results over prior year and exceeded second quarter expectations.

Our businesses gained momentum throughout the quarter as the economy and market improved.

Office furniture demand improved across the board.

The supplies driven channel recovered with a 4.7% growth over prior year, and we saw a significant turnaround in the contracted international businesses, which was up a combined 11.5%.

Our second quarter results reflect the success of our investments in new products.

We launched a record number of new products in the recent period, and they have been well received by the market.

For instance, HNI through Allsteel and HBF won a combined five gold and silver product awards at this year's NeoCon Office Furniture Industry Show, which was more than any other office furniture manufacturer.

And our intent is to continue this momentum.

Other core growth initiatives include investments in new selling capabilities, dealer development programs, [CL] training programs, e-business solutions, and many other items there.

We anticipate a 12 to 24-month payback on these incremental investments.

Overall, the Hearth segment was down 2.3% versus prior year.

The Hearth new construction channel was up 24% in the second quarter, positively impacted by the homebuyer tax credit.

The Hearth's remodel retrofit channel continued to be negatively impacted by a challenging retail environment, low fuel prices, fuel oil prices, excuse me, and a dealership towards our just-in-time delivery program and away from early buy dating programs.

As a result, retail of sales in the second quarter were down 22%.

However, I continue to be upbeat about the future of our Hearth business.

We are investing in new products and growth initiatives to strengthening our already industry leading market position.

Our recently announced value-oriented product initiatives, and entering into the Farm & Fleet type channel is an example of how we are expanding our breadth and depth in the marketplace even during these challenging times.

Hearth continues to be on track for a significant turnaround from 2009 and will be profitable for the year.

So, overall, second quarter results are strong execution across all the businesses.

Our performance is a reflection of the power of our split and focus business model.

As I said, we continue to reduce cost, improve operations, and investment growth initiatives that we believe will drive long-term shareholder value.

And I want to thank our members for their dedication and hard work during the last quarter.

And, now, I'll turn it over to Kurt to review the specific numbers for the second quarter and financial outlook for the third quarter.

Kurt?

Thank you, Stan.

So we'll start with the second quarter 2010, where consolidated net sales from continuing operations increased 6.3% to $398 million.

Sales for the office furniture segment increased 7.8% to $343 million, while net sales for the Hearth product segment decreased 2.3% to $56 million.

Consolidated gross margins, including restructuring and transition charges, improved to 35.5% compared to 34% in the prior year quarter.

Total selling and administrative expenses as a percent of sales including restructuring and impairment charges improved 1.3 percentage points.

Second quarter 2010 included $2.4 million of restructuring and transition costs, which were associated with the shut-down and consolidation of office furniture facilities, of which $1.1 million were included in cost of sales.

Importantly, we ended the quarter with $44 million of cash.

We generated $2 million of cash during the first six months, which was compared to $49 million generated in the prior year.

So as we move on to our outlook for the third quarter, we anticipate overall sales from continuing operations to be up 7% to 9%.

Third quarter 2009 included $8 million of sales from discontinued operations, with $6 million in the office furniture segment, and $2 million in the Hearth segment.

Office furniture sales are expected to be up 7% to 10%, with growth in both the supplies driven and contract channels.

Parts sales are expected to be up 5% to 7%, driven by the remodel retrofit business shift in delivery timing.

Excluding restructuring and transition charges, gross profit margin is expected to decrease approximately 1.2 to 1.3 percentage points versus third quarter 2009 when it was 37.3%.

Third quarter 2010 is expected to include $1.2 million of restructuring and transition costs compared to $1.6 million in the prior year quarter.

Excluding restructuring and transition charges, SG&A as a percentage of sales is expected to range from 28% to 28.6% compared to 28.3% in the third quarter 2009.

We anticipate SG&A related restructuring and transition costs to be approximately $600,000 in the third quarter, and again these charges relate to the shut-down of previously announced office furniture facilities.

It is important to note third quarter profitability will be negatively impacted by higher material costs and accelerated investments in growth initiatives.

We are projecting input costs to exceed the benefit of price increases and cost reduction initiatives in the third quarter by approximately $6.5 million.

However, our previously announced pricing actions, along with cost reduction initiatives, will fully offset increased material costs by the end of 2010.

In addition, we are reinvesting a portion of our cost reset savings to focused growth initiatives across our core businesses.

The projected impact on the third quarter from these investments is approximately $5 million.

Net interest expense is projected to be $3.2 million, and the effective tax rate is projected to be approximately 38% during the third quarter.

So for the year we continue to expect to generate free cash flow in excess of $80 million and capital expenditures will be approximately $25 million to $30 million, again, primarily focused on new products.

That summarizes the second quarter results and outlook for the third quarter 2010.

I'll now turn the call back to Stan.

All right.

Thank you, Kurt.

I'm encouraged by the strengthened demand in office furniture and Hearth business despite the ongoing economic uncertainty.

As we've said, we're accelerating investments in core selling marketing and product initiatives to strengthen our multiple platforms for growth and drive long-term shareholder value.

We remain focused on improving operations and reducing costs.

And, in conclusion, we are excited that our business is financially strong and well positioned for growth.

So, with those comments, we'll now open it up to questions.

(Operator instructions.)

Your first question is from the line of Mark Rupe with Longbow Research.

Please go ahead.

Hi, guys, good quarter.

Hey, Stan, on your comments on demand, obviously, it's pretty clear that you're happy with the strengthening in demand.

On the office furniture side, in particular, the supply channel seems to have put up its first quarter of growth, I believe in a long time.

Just curious to see how as you look into third quarter the difference between kind of the supply channel and all the other office furniture, how you think about that 7% to 10% growth?

Yes, I think the supply side is lagging a little bit, so it'll tend to be on the -- more on the, you know, 5% to 7% sort of side of this, and then the contract side will be higher than that.

Okay, as far as some of your larger distributors are they restocking, at all?

You know, we're seeing just a little bit.

Some of that had to do with buy ahead, price buy ahead, so it's really hard to tell, but not significant I would say restock activity.

Okay, and then on the Hearth commentary for the third quarter you cited driven by remodel retrofit.

I know there's a seasonal bump but is there any kind of incremental impact above that you're expecting from that piece of the Hearth channel?

The remodel retrofit work -- the answer I think -- let me try this, Mark, and see if this answers what you're asking.

Sure.

We don't see any sort of core demand improvement other than the seasonal improvement and also you'll see a sales bump there because we have shifted, helped our dealers with cash and so they're shifting from kind of the early buy to more of a taking deliveries more in line with sort of seasonal demand.

So no real improvement on kind of the core, but seasonal uptick, and then this change in ordering shift pattern.

Okay, and then just secondly on the pricing and the raw material kind of headwind in the back half, since the late April call and some of the pricing that's been put through has there been any kind of change in what the overall back half headwind could be as far as your estimation or any change on the philosophy of taking price?

And maybe some of the inputs?

I mean I don't know if they've rolled over or not for you?

Yes, I'll take a whack at this, and maybe Kurt can back me up here.

Overall, no real change.

We anticipated there'd be a material cost sort of bump up and then a bit of a moderation, and that's what we've seen.

We put price increases in that by the beginning of next year should fully cover that gap, and that's about what we thought that was going to be.

So we're on track with what we anticipated.

So, yes, I think it was $15 million to $20 million, the headwind, was the expectation.

Yes, Mark, a little less.

I'd say it's probably $12 million to $15 million.

Certainly we've seen steel moderate as you look out to the back half of the year, but it's in the ballpark.

Okay, and I'm not sure if you mentioned, as it relates to the second quarter specifically on kind of the gross margin and kind of components, I think you had an expectation for price discounting of like a $6 million, $7 million impact, and raw material $1 million to $2 million.

Did I miss that on the prepared comments?

No, you got that, and that was part of the (inaudible) and a piece of that, is as Stan had talked, you know, was the return of our improved day-to-day and transactional business, so we actually had better price realization in the second quarter than we have anticipated.

Okay, perfect.

Thanks, guys.

Good luck.

Thank you, Mark.

You have a question from Budd Bugatch with Raymond James.

Please go ahead.

Yes, congratulations on the quarter, Stan, Kurt.

Good for your Team.

The first question I guess is on the, well on the contract side of the office furniture business, it was up I think 11.5% in the second quarter?

Correct.

How are you looking at the two components in the third quarter with revenues up, what is it 7 to 10 total?

Yes, what we said, Budd, is the supply side would be on kind of the lower side of that, let's say 5% to 7%, and contract will be up 10% to 14%.

Contract also includes our international business, Budd, which is primarily China, not huge but it's very, very strong, as well.

And are you seeing that in terms of orders, Stan?

What -- I know you don't typically get into the order discussion but can you kind of give us a feeling of what the backlog looks like or how that plays into the quarter?

Yes, let me comment on momentum here around order activity, Budd.

It's probably the best way for me.

We are seeing sort of still solid order momentum consistent with what we saw in second quarter.

Now, we are monitoring that closely, given all the press and some of these indicators, which would indicate that the economy is moderating some.

But right now we're seeing sort of the same momentum, but as I say we look at orders daily and certainly look at them weekly, and we're prepared for multiple scenarios, as always, but right now it's continuing.

All right.

When you're looking at Hearth, I was pleased to see that the construction channel up as much, but you're just saying that's seasonal?

Did I get that right?

Well, the construction is really impact of this first time homebuyers tax credit is what we believe was a big part of that, and there was a huge push by builders and all that to get homes built and get completed.

We believe for the second half that new construction is gong to be basically flat to maybe slightly down.

I see.

You had told me in the past I think that I had always thought that the Hearth business and construction was a late, latter part of the cycle, but you kind of disabused me of that notion.

Is that still correct?

Well, of the cycle --

To build a house, that there's a lot of work that goes in it, and when you're doing new construction in Hearth that a lot of work, and a lot of the revenue recognition actually happens earlier?

Okay, yes, there's a lag between they start a house, build a house, and when they get the fireplace installed, and then we bill it.

That was compressed in the first half, Budd, because everybody was scrambling so there was a lot of I think compressed activity to get homes started and completed.

And so that may be the new norm.

I don't think so, I think it's more around kind of the 60-day lag from the time a house is started till the time we actually see the revenue.

Got you.

And Mark went over the pricing issue.

Let me talk about the sales initiatives and the growth initiatives.

Can you go into a little bit more flavor as to what's included there and what may be causing that, and how you recoup that?

Yes, I'll give you the philosophy.

The philosophy is we've done a tremendous job, we being the Management Team and the members of this Corporation, so not we standing here, but the members of the Management Team have done a tremendous job on cost reset.

And then as we've seen this economy sort of turning, we're back on the gas regarding sort of growth and market initiatives.

Now, as I'll remind you, Budd, we go to market through multiple selling models, multiple companies, multiple brands to cover the broadest segments of office furniture than anybody.

So these growth initiatives are coming in multiple flavors, multiple places in the organization, but they include, you know, the general areas around accelerated product development.

Helping our channel partners and our dealers do a better job of positioning and selling via sort of the internet, web based, e-based tools.

Helping us do a better job of transacting business with our dealer partners.

New selling models, some of that is around government, some of that is around education, some of that is right in our core business sort of client, as well.

Helping our dealers develop, so helping them with new systems and processes, and those sorts of things.

So there's many, many different flavors of this.

We have a process of which we are acting as a strategic investment fund at the Corporation for each of the operating companies.

They come to us and propose what they want to invest in.

We have a very detailed tracking process, and so we're tracking that as if it's a strategic investment type of company at the Corporate Office.

We're -- we wanted to make everybody aware that we're kind of on the gas, investing, and we anticipate a relatively quick payback, somewhere around the 12 to 24-month time period.

And we think this is the right time to get on that.

And the strategic investment fund, what is that quarterly?

What do you -- what typically do you put forth to the various business units?

What we're going to see, Budd, is probably here for the foreseeable future it's like $5 million a quarter.

Got you, all right.

And, lastly for me, I noticed that inventory grew a little faster than sales this quarter.

I'm just curious as to what may be behind that, and is that going to come back down, or how should we think about that?

Yes, Bud, that absolutely will come down.

You should expect to see inventory roll-off by about $10 million during the third quarter.

We, Stan talked that timing impact on the Hearth business, so we had some inventory we're holding for remodel, retrofit that will shift in the third quarter.

We did some steel buy-aheads at the end of the quarter to take advantage of lower prices.

And then also on our transactional business as we're sourcing foreign product and we're ramping up that as one of our growth initiatives there's a slight inventory lift there.

But I'd say overall turns continue to improve, quality of inventory continues to get better, and we'd expect to see that continue to track in the right direction.

It was not a surprise and, as Kurt said, we feel good about our core processes around managing working capital and specifically managing inventory, Budd.

So just to be clear, you say that the third quarter, end of quarter inventory will be $10 million below the second quarter end of inventory?

Right.

Okay, thank you very much.

Congratulations, and good luck.

Thanks, Budd.

The next question is from Peter Lisnic with Robert W.

Baird.

Good morning.

This is [Josh Henn] filling in for Pete.

I was just wondering with the $5 million investments into the foreseeable future what kind of incremental operating margin should we expect to see as we look out one to two years with volume growth?

Well, we can give you the leverage that we've been giving, Josh, which is a 30% sort of bottom line leverage as we drive incremental top line.

So there's really essentially no impact you'd say from the $5 million or?

I'm not sure that -- explain your question a little bit better?

Yes, I was just wondering if the $5 million investments continuing on would kind of eat into that leverage, essentially?

No, no, as we said we should get a full payback in 12 to 24 months, Josh.

And so it's really to drive top line growth, which then will convert to profit dollars at a greater than 30% sort of bottom line leverage.

Let me just add, Josh.

I think short term, clearly as we talked, third quarter you're seeing that, but as Stan said if you look 12 to 24 months out as those start to roll through that 30% leverage is what we're expecting to drop to the bottom line.

Okay, great.

And then could you talk about the pricing environment a little bit, how receptive was the market to your price increase?

And did your competitors do similar price increases?

Well, the market is always, it's always a tough market to get through price increases, but I would say that we have -- the price increase has been set, it will stick we believe.

And the competitive climate, and I'm not exactly sure specifically but in general we believe that the competitive climate has not changed around pricing, and that this industry in the past especially when it's big material cost tends to get price increases to cover that type of cost.

Okay, and then a last question, you talked a little bit about mix of lower margined products at office, could you elaborate on that a little bit?

Well, it's a mix of a big project versus day-to-day is really what we're talking about.

So when you do big project bids you tend to have lower margins and more competitive than when you have day-to-day type of business.

Okay, I understand.

Thanks for your time.

Okay, thank you, Josh.

Our next question is from Todd Schwartzman with Sidoti & Company.

Please go ahead.

Hi, good morning, all.

What did you see in the quarter in terms of number of large projects, say, a million dollars and up versus a year ago?

We don't track that nor disclose that, Todd.

Oh, okay.

And did you mention what the Q2 furniture orders were?

No, we did not.

We don't disclose orders.

Got it.

Also, staying on office furniture, what would you say was the sweet spot in the segment in terms of customer size, number of employees, vertical market, industry, so on and so forth?

Geography I guess you could throw in there, as well?

We saw broad based, Todd, I guess -- we don't track, first of all, we don't really track that and disclose it the way you described it.

But this sort of improvement has been broad based across virtually all of our businesses.

And we saw, as we said, good improvement in supplies, we saw strong improvement in the contract side, and strong improvement in the international side.

So, as you know, we have this split and focus business model, and I would say everybody participated in the improvement.

And is there a two to three-year goal or perhaps a longer term goal for operating margins in office furniture?

Not that we've disclosed.

We do often talk about this leverage at approximately 30%, and we see that into the foreseeable future.

And on the lower end of the furniture business, lower end of the supplies business, has there been any noticeable change in the level of competitive pressure from imports or has that been pretty much status quo?

I would say it's pretty much status quo, Todd.

Thanks, guys.

All right.

Thank you.

We have a question from Matt McCall with BB&T.

Please go ahead.

Thanks.

Good morning, everybody.

Hi, Matt.

Hi, Matt.

I'm going to kind of I think continue on one of those -- the last questions.

If you look at the supplies business, I think if you track some of the small business data that's out there I think small business optimism, I guess they're still not optimistic, you said there's not really any restocking yet the supplies are starting to grow again.

Is it -- do you think it's share gains or are you actually seeing those customers despite the lack of optimism start to buy again?

That's a great question.

I think there probably was some pent-up demand from the dramatic decline.

Second, we've got some vertical markets that are, that we've increased our emphasis and I think we are seeing probably some share gains.

For example, K through 12 education, certainly Government has been a major emphasis and a major growth area for us.

And then I feel good about our momentum in kind of the core office furniture.

So I would say it probably is some share gain.

But to be fair it's tough to call share gains and sort of by a quarterly basis.

We don't do it historically, but I feel good about momentum.

And then given all the signs from a macro perspective it didn't sound like you were seeing anything that would kind of take you off of this broad based momentum theme that you've been talking about for a couple quarters.

Nothing internally saying that anything is happening kind of behind the scenes?

We are not seeing it yet.

I read the newspaper and I get concerned about moderating recovery, but it hasn't worked its way through to our business yet, if it's going to.

Okay, and then, Kurt, you said that discounting wasn't as bad, pricing maybe was a little better.

Can you give us the numbers behind that?

Yes, it really came back to that day-to-day transactional business as opposed to those large projects that have a heavier discount emphasis.

And we saw that both on our contracts and our supplies business through the second quarter.

So that beat was -- I think we said 6 to 7 negative impact, and it was closer to 2.

Okay, and then the -- on that investment side you talked about $5 million going forward, was that the same number you recognized or invested in Q2?

Well, that $2 million in Q2, as we kind of get up and running, and then Q3 it'll be more like $5 million, Matt.

$2 million in Q2.

Okay, and then finally anything from a comp perspective in any of these groups?

Did the comps get easier or better?

Remind me on the back half of the year?

I'm having technical difficulty here, I just wanted to make sure that as we look at the back half of the year I'm understanding what you're going to face.

Well, let me make sure I understand your question, Matt.

Okay.

So if you would just play it back again?

Yes, yes, yes.

No, you just talked about some of the growth trends.

You talked about contract up 12%, and I think you talked about the expectations for Q3, but as we progress through the year do the comps, and forgive my ignorance but I just don't have the model open but just want to make sure I understand what the comp trend is in the back half of last year, do things get that much better or that much easier, how do you look at the rest of the year relative to what you experienced last year?

Well, I think you'd see pretty similar trends than last year, Matt.

No major differences.

Okay.

Thank you, all.

All right, Matt.

Thanks.

And at this time there are no further questions in queue.

Okay, well, with that, we want to thank you for your interest in HNI, and appreciate your time today, and we'll look forward to talking with you soon.

Thank you.

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