HNI Corp (HNI) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the HNI Corporation Third Quarter Results Conference Call.

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

Later there will be a question-and-answer session with instructions given at that time.

If you should require operator assistance today, you may press star then zero on your telephone's keypad, and, as a reminder, this conference is being recorded.

At this point, I'd like to turn the meeting over to our host, Mr.

Kelly McGriff.

Please go ahead.

Good morning.

Thank you for joining us today for the HNI Corporation conference call to discuss third-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 at our website, www.HNICORP.com.

We also 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 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 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.

Stan?

Good morning.

Double-digit growth in the office furniture contracting international business contributed to a 3% increase in sales over third quarter 2009.

Weak small business confidence during the quarter impacted our supplies-driven channel.

We are the only major office furniture company to participate in the full spectrum of the office furniture market.

In the third quarter, we saw very different results across the segments.

Our contracted international business, driven by large projects, continued to experience strong results with top-line growth of nearly 12%.

The supplies-driven channel was down 2% over prior year impacted by weak small business confidence, we think a reflection of the pace of the economic recovery and political uncertainty around taxes and health care.

Overall, sales in the hearth segment were slightly below last year.

The hearth new construction channel was down 6% in the third quarter negatively impacted by the continued pressure in the housing market.

The hearth remodel retrofit channel was up 2.5% reflecting cautious consumer demand and moderate energy prices.

That said, I remain upbeat about the future of our hearth business.

We're on track for significant improvement from 2009, and we'll be profitable for the year.

I'm going to let Kurt review some of the specific numbers for the third quarter.

Kurt?

Thank you, Stan.

For the third quarter 2010, consolidated net sales from continuing operations increased 2.8% to $459 million.

Sales for the office furniture segment increased 3.5% to $387 million.

Net sales for the hearth product segment decreased 0.8% to $71 million.

Consolidated gross margins, including restructuring and transition charges, decreased to 35.1%, which compares to 36.9% in the prior-year quarter.

Total selling and administrative expenses as a percent of sales, including restructuring and impairment charges, improved 0.9 percentage points.

Second quarter 2010 included $700,000 of restructuring and transition costs, which were associated with the shutdown and consolidation of our office furniture facilities.

This included accelerated depreciation and transition costs of $1 million, which was recorded in cost of sales net of a $300,000 reduction in restructuring expenses.

The effective tax rate for the third quarter 2010 was 44.6%, which compares to 33.7% in the third quarter 2009.

This increase is primarily due to expiration of the research tax credit in 2010 and a reduction in the anticipated capital gain from the sale of a closed manufacturing facility, which negatively impacted our projected capital loss carryforward utilization.

We ended the quarter with $72 million of cash and generated $49 million of cash during the first nine months compared to $136 million in the prior year.

That wraps up the financial comments for the quarter.

I'll turn the call back over to Stan.

So looking forward, we expect continued strong results in the contract business.

Discounting pressures remain yet our contract brands are performing well and represent outstanding value proposition.

Our operational excellence combined with strategic investments and new products, programs, and distribution are key drivers for continued growth.

We continue to see significant improvement in our international business, particularly in China, where we realized significant growth.

Our investments in new products organization and go-to-market capabilities have positioned this business for continued strong growth in the future.

We believe our initiatives in the supplies-driven channel will drive near-term growth despite the challenges with small business confidence.

We are transforming the value-priced transactional business with new products, marketing the fulfillment programs.

We have enhanced our selling resources and eBusiness capabilities to drive business through our dealers and channel partners.

In addition, we remain focused on accelerating growth in the government and education vertical markets.

The hearth business will be profitable for 2010.

Even with a modest decline in sales, we are anticipating significant profit improvement.

We continue to strengthen our industry-leading market position through investments and new products, marketing programs, and distribution models.

This business is strategically positioned to generate strong financial results as the market returns.

Our strategy is split and focused with leverage that drives the broadest and deepest coverage across the industry.

We are uniquely positioned to benefit from our multiple-growth platforms, going forward.

So Kurt will share the financial outlook for the fourth quarter.

Thank you, Stan.

So for the fourth quarter 2010, we anticipate overall sales from continuing operations to be up 10% to 12%.

Fourth 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 13% to 15% with growth in both the supplies-driven and contract channels.

Sales in the supplies-driven channel are expected to increase 7% to 10%, and we see momentum continuing in the rest of our office furniture businesses with sales up 18% to 22%.

Hearth sales are expected to be flat to up 2% driven by seasonality in the remodel retrofit business, which is tempered by continued pressure in the housing markets.

Excluding restructuring and transition charges, gross profit margin is expected to decrease approximately 2.2 percentage points versus fourth quarter 2009 when it was 37%.

Fourth quarter 2010 is expected to include $800,000 of restructuring and transition costs, which compares to $2.2 million in the prior-year quarter.

Excluding restructuring and transition charges, SG&A as a percentage of sales is expected to decrease approximately 2.1 to 2.6 percentage points compared to 32.3% in the fourth quarter 2009.

We anticipate SG&A-related restructuring and transition costs to be approximately $400,000 in the fourth quarter, and these charges relate to the shutdown of previously announced office furniture facilities.

Fourth-quarter profitability will be negatively impacted by the following factors -- fourth quarter 2009 included one-time inventory adjustments of approximately $5 million, which were primarily related to a reduction in LIFO reserves, which was driven by the significant decrease in inventory levels last year.

We are projecting a negative price cost gap of $6 million to $7 million in the fourth quarter of 2010 versus the fourth quarter 2009.

Price increases we implemented in the third quarter will fully offset input cost increases.

However, discounting and customer mix, primarily government and large projects, will negatively impact the quarter.

We do expect our previously announced pricing actions, combined with further input cost reductions, to close the price cost gap during the first quarter 2011.

We continue to reinvest a portion of our cost reset savings to focus strategic growth initiatives across our businesses.

Total investment spending for the fourth quarter is approximately $5 million.

Net interest expense for the quarter is projected to be $3.1 million, and the effective tax rate for the fourth quarter is projected to be approximately 39%.

Capital expenditures will be approximately $30 million, primarily focused on new products.

For the year, we continue to expect to generate free cash flow in excess of $80 million and will end the year with approximately $110 million of cash on the balance sheet.

That summarizes our outlook for the fourth quarter.

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

Well, thank you, Kurt.

I remain optimistic about the office furniture and hearth markets.

I am confident our investments in selling, marketing, and product initiatives will continue to drive improvements across the businesses.

We see sales momentum continuing in the contract and international business and expect near-term growth in the hearth and supplies-driven channels as well.

We remain focused on improving operations, reducing costs, and generating cash.

Our business is financially strong and well positioned for growth.

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

(Operator Instructions) Todd Schwartzman, Sidoti & Company.

Hi, good morning, guys.

On the office furniture side, adjusted for the seasonal bump in Q3, did the contract business meet your internal expectations?

Yes.

Did it exceed your expectations?

No, we're right in line, Todd.

Got you.

And I don't know if you've mentioned this, but discounting for the quarter, how much did that cost you in the way of revenue?

Discounting for the quarter, Todd, was somewhere -- between discount and mix -- was about $4.5 million negative.

Matt McCall, BB&T Capital Markets.

So, first, on the guidance.

Kurt, you gave, I think, a true comp on the top line.

What was that true comp -- I think we have to adjust for some discontinued -- what's the revenue comp we're using?

I think it's already adjusted for that, Matt.

So the numbers that we gave for guidance, that 10 to 12 and for overall, and 13 to 15, already included all of the discontinued ops.

So what's the dollar comp, I guess, I'm trying to get at, to make sure I'm putting the growth on the right revenue number?

Yes, well, fourth quarter '09 you need to back out $8 million out of sales, and $6 million of that was in office furniture, and $2 million of that was in the hearth segment.

Okay, okay, that was the $6 million -- I just missed that.

Okay, if my calculation, my put calculations are correct, the midpoint of the top line is not far from what you just reported, yet your SG&A midpoint seems a little bit higher than what you just reported.

Can you help me connect the dots there as to why you'd be seeing some SG&A deleveraging?

You know, part of that is that lumpiness that we talked about, Matt, in those investments in selling and marketing.

And the other thing, you probably got some timing of expenses between quarters, but, really, nothing else of significance.

So as I look at it from a dollar basis, how should we treat SG&A.

I think it sounds like there's some opportunity on the gross margin lines moving to Q1 relative to the price cost arena.

What about the SG&A line?

How do we look at that as we approach '11 estimates?

Well, I think, one, we're still working through our 2011 estimates.

And our objective on SG&A as we think of those investments is to fund that incrementally.

You fund that internally and offset through cost reset action.

So, over time, we'd expect to see that neutralize, but there is going to be some lumpiness in the quarters.

Okay.

And just to clarify that $5 million of investment -- is that an incremental spend relative to year-ago -- I think you broke that out for Q4, I guess, two parts.

The first part is, is that incremental spend?

And then was a similar amount spent in Q3?

Yes, I'll start backwards.

It was a similar amount to what we spent in the third quarter, and we estimate it's $2 million to $3 million of that is incremental in the fourth quarter.

And we were able to offset part of that with cost savings.

Okay.

And then, Stan, maybe for you on the supply side.

You're forecasting a little bit of growth.

It's kind of the same question I asked last quarter is how -- you referenced some of these internal initiatives, so maybe that's what Kurt is referencing with this spending.

But the small business environment seems to be still pretty weak.

Is it an easy comp story?

Is it just anticipated success from some of these initiatives?

Help me understand how supplies can be growing in this environment.

Good question.

You're on a key point here, which is -- first off, it's choppy, okay?

And so, you know, if you look at where we've come from, second quarter was strong, third quarter was not as strong.

We saw small business confidence kind of strengthen earlier in the year and kind of take a dip here mid part of the year.

And we're not really forecasting small business confidence to move in a big way.

So what we're showing, what we're talking about is the traction that we're getting, that we're seeing in conversations in the market around our strategic investments in things like new products; in our strong emphasis on the entry-level transaction business; and investment in dealers; investment in selling resources; in investment in sort of our eBusiness commerce side of the market; and then investments in vertical markets.

And then, finally, we do have, Matt, a bit of a -- anticipate a bit of a pickup.

We've announced a price increase in that segment of the market effective the beginning of 2011.

And so I would anticipate that we'll see some pull ahead in orders, which is typically what we see, and we'll get some benefit of that as well.

Okay, okay.

And then a final question -- the projection for contract, up 18% to 22%.

Can you talk about the opportunity to continue that level of growth?

Is there a big back haul build from several large projects?

Or is this something that you see as this level of growth or level of top-line performance as sustainable as we move into '11?

The last question is a great question about how sustainable is this?

And we, right now, feel good about the activity we see.

You know, it's coming from multiple areas.

So, a, we're seeing a lot of real estate churn, a lot of cost reset around occupancy costs, which drives furniture events.

The federal government is very strong in large projects.

Some pentup demand that is breaking loose.

And then segments of the market, customer types, that we're seeing some growth.

Where that goes in 2011 is tough to forecast at this point.

We feel good about what's in front of us today.

One of our guys sort of characterized -- we have our people on the tallest mast of the ship with binoculars looking for trouble, and we have yet to see it.

But we are always running multiple scenarios and making sure we're prepared for up, flat, and down.

Peter Lisnic, Robert W.

Baird.

Good morning, this is Josh Chan filling in for Pete.

The first question -- on the supplies-driven channel, why was it below your forecast now looking backwards?

Was it deterioration late in the quarter or was it inventory destocking?

Could you give us some color on that?

Sure, Josh.

So I remind you that is a very short selling sort of cycle business, Josh.

The second thing is, is the latter part of the -- actually, September is our biggest sort of month for sales and for profit.

So what we saw is we had announced a price increase in that bit of the business.

And, typically, we got a large set of orders.

And so then you kind of wait and hold your breath to see what fills in when, once you kind of work through that lump.

During that period, small business confidence, the economy started to slide sideways, and I think that's where we end up today with numbers that were less than we anticipated.

Was it sort of a deferral of order -- or delivery -- intake?

Small businesses operate; it's small orders, very short selling cycle.

So is it deferral or is it a void?

It's tough to tell, Josh.

Okay.

And then on the pricing environment -- I think you talked about pricing being negative on a year-on-year basis.

Do you think industry pricing has at least stabilized on a sequential basis?

Are you still seeing incremental deterioration in pricing?

We think -- first off, the pricing deterioration, to a large extent, has to do with the size of the projects, or the mix of the size of the projects.

And so pricing hasn't deteriorated on a project-by-project basis.

It's just that the industry is running more large projects and less day-to-day business.

And to answer your question specifically, we think it's stabilized and don't anticipate further deterioration with that framework set.

Mark Rupe, Longbow Research.

Hey, guys, I just wanted to make sure I'm clear on the supplies channel performance growth as to what you initially thought.

Did you guys put through a price increase in that early July timeframe?

Yes.

So there could have been some pull-forward in 2Q then, I assume?

Significant.

Okay.

So that would explain some of it.

But there was still probably strong patterns through early July for you guys to think that 5 to 7 was still adequate?

Correct.

Okay.

So, I mean, then, ending in kind of the September period and October period, I have to assume, with 7% to 10% even despite the pull-forward maybe anticipated for fourth quarter, that demand kind of came back?

The market activity, the market buzz, our conversations with dealers and our channels partners would indicate that we will see better activity in that channel.

Okay, perfect.

And then on the contract side, obviously, great growth outlook.

Just would love any kind of color you could provide on kind of the flow of some of the larger project activity, maybe since July 1st and where we are today?

It's kind of steady, I guess, Mark.

And certainly the government buying season is, you see pretty intense activity around their budgeting cycle.

We are well positioned there with our companies and their value propositions, and so it's kind of across the board sort of activity.

Our international business, our China business, is very, very strong as well.

And that's in those numbers, and that continues -- has been strong from the beginning and continues to be strong now.

Okay, and China represents, again, of that business?

It's about 5% of our total business.

Budd Bugatch, Raymond James.

Just a couple of questions, and most of them have already been asked.

Any chance of getting an idea of the orders for contract in the quarter?

I realize the short selling cycle of the supplies-driven makes that less relevant.

What about contract orders in backlog?

We don't disclose that, Budd.

The activity has been strong and remains strong.

And, government, for you last year, was at about $70 million total -- US government?

Is that about the right number?

Total state and federal government is more along the lines of 300, 290, I think, is probably closer to the number last year.

I was thinking US government at 70, but -- ?

It's about half and half.

Okay, all right.

And on the idea of the hearth side, one of the things that I find curious is your hearth business actually gets better in the fourth quarter when building is seasonally weakest, which tells me that the mix of that business changes as we get through the year.

Can you kind of shed some color on the way that business flows?

Yes, it's a good observation and a good question.

Our mix of that business has changed dramatically with the housing new construction side down and with the remodel retrofit or the biofuel heating stove business up.

And so our mix is more on the remodel retrofit these days of 70%.

New constructions is, like, 30%.

It used to be, before the housing crash, it was the inverse of that.

And so what you're seeing is just really heating season.

So around here we pray for a really big nationwide cold snap and everybody needing a heating fuel appliance.

And that's what we're counting on here.

So that's in your guidance, thinking that we're going to have a cold winter?

No, no, our guidance is --

I don't want to have to forecast weather.

The normal sort of flow.

No, we don't forecast weather.

And it was $5 million.

Your results this quarter were about $5 million below in hearth than you expected.

That's just really all new construction?

It's both.

It's new construction and just a slower retail market than we anticipated when we put out that projection last time.

And that's because that's a high average ticket?

What's the average ticket for the consumer in that side of the business?

$2,000.

Are there additional questions?

If yes, please queue up by pressing star 1 at this time.

Okay, well, we thank you very much for your interest in HNI, and we look forward to talking with you in the future.

Have a great day.

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