HNI Corp (HNI) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the HNI Corporation fourth-quarter results conference call.

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

Later, we will conduct a question-and-answer session; 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 2010 results, which were announced yesterday after the market closed.

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

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 via 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 Webcasts 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 the 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?

Thank you, Kelly.

Good morning, everyone.

We'll share our assessment of the fourth quarter, as well as our thoughts for first quarter of 2011, and then we'll open the call up for questions.

We had a great quarter, as we experienced stronger than anticipated sales across all our businesses.

The cost reset actions that we have taken in 2009 and 2010, combined with our strategic growth initiatives, enabled us to deliver very strong results.

Strength in our office furniture contract in international businesses driven by large projects continued at a substantial pace with a 25% top-line growth.

Our supplies channel grew a healthy 10% over prior year.

Our hearth business exceeded our expectations with top-line growth of 9% for the quarter.

Strong results in remodel retrofit sales, which were up 12% over prior year, were positively impacted by the anticipated -- the expiration of the energy efficiency tax credit.

New construction channel was up 2%.

Overall, we improved non-GAAP operating income by 42%, as profit margins in both our office furniture and hearth segments improved from the prior year.

We executed well as the economy improved during 2010 .

For the year, with a modest increase in top-line sales, non-GAAP operating income improved by 34% over the prior year.

We effectively navigated the low [to] small business confidence impact on our supply-driven business, and the contract business performed well despite a very competitive market.

The hearth business delivered significant profit improvement with only a slight increase in sales.

And these results reflect the hard work and commitment of our members, and as we enter 2011 financially stronger, better positioned within our markets, and focused on long-term growth.

I'll now turn the call over to Kurt to review the specific financial data for the fourth quarter.

Thank you, Stan.

For the fourth quarter 2010, consolidated net sales from continuing operations increased 14.9% to $466 million.

Net sales for the office furniture segment increased 16.4% to $375 million.

Net sales for the hearth product segment increased 9.2% to $91 million.

Consolidated gross margins, including restructuring and transition charges, decreased to 35.2% compared to 36.5% in the prior-year quarter.

Total selling and administrative expenses, including restructuring and impairment charges, decreased $15 million or 9.2%.

Fourth quarter 2010 included $7.1 million of restructuring and impairment charges and transition costs, of which $500,000 was included in cost of sales.

These charges included $1.9 million associated with the shut down and consolidation of office furniture facilities, and $5.2 million of impairment and restructuring charges related to hearth distribution locations that were closed or classified as held for sale as of the end of 2010.

We ended the year with $99 million of cash, and we are well within our bank covenants with a leverage ratio below 1.7.

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

Thank you, Kurt.

So, as we look forward, we anticipate double-digit growth to continue in our contract business in the near-term .

Discounting pressures remain.

Our contract brands represent outstanding value propositions for our customers and are performing well.

We see significant growth opportunities in our international business, particularly in China, where we continue to grow our presence across major markets and industries.

We expect recovery to continue in the supplies-driven channel where we are the category leader.

We continue to enhance our dealer experience, invest in selling capabilities, and focus on our core markets.

We anticipate the hearth business to continue to be challenged by uncertainty in the new construction market.

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

I'm optimistic about the economy and the prospects for our growth initiatives.

Our [split] focus with leverage strategy drives the broadest and deepest coverage across the industry.

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

So now, I'll let Kurt cover the financial outlook for the first quarter 2011.

Thank you, Stan.

So, for the first quarter of 2011, we anticipate overall sales from continuing operations to be up 6% to 9%.

Office furniture sales are expected to be up 9% to 11%, with growth in both the supplies-driven and contract channels.

Sales in the supplies-driven channel are expected to increase 4% to 6%, and we expect momentum to continue in the rest of our office furniture business, with sales up 14% to 16%.

Hearth sales are expected to decrease 4% to 8%, driven by a decline in the new construction channel, due to the comparative impact of the Home Buyer Tax Credit we experienced in 2010.

Excluding restructuring and transition charges, gross profit margin is expected to increase approximately 0.4 to 0.6 percentage points, versus first-quarter 2010, when it was 33.2%.

First quarter 2010 included $1.5 million of restructuring and transition costs.

Excluding restructuring and transition charges, SG&A, as a percent sales, is expected to increase approximately 0.2 to 0.7 percentage points, compared to 33.9% in the first quarter 2010.

We anticipate SG&A-related restructuring and transition costs to be approximately $750,000 in the first quarter.

Net interest expense is projected to be $3.2 million, and the effective tax rate for the first quarter is projected to be approximately 36%.

For the year, we're expecting capital expenditures to be $30 million to $35 million, again primarily focused on new products, and we project depreciation and amortization to be $46 million to $48 million for the year.

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

I'd like to remind you that our first quarter has historically been our lowest quarter for revenue and profit .

With that, that summarizes our outlook for the first quarter of 2011.

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

I remain optimistic about our markets in the improving economy.

We'll build on our momentum from 2010 to grow our business and increase profits in 2011.

Our strategy to invest in growth initiatives across multiple platforms has not changed.

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

The Corporation is financially strong, and we're well-positioned for long-term profitable growth.

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

(Operator Instructions).

And, our first question comes from the line of Peter Lisnic.

Please go ahead.

Good morning, gentlemen.

Morning, Pete .

I guess, first question, if you could talk a little bit about the international growth that we saw, it sounds as though China continues to gain some good traction here, what's the opportunity for 2011 and beyond?

How much is that contributing to growth?

And, then, how should we think about that in terms of profitability mix for the business?

So, Pete, first off, that business, although it's growing rapidly, is still 5% of our combined business.

It did in fact contribute to the growth, we're seeing, high, high double-digit growth in China and including Hong Kong.

And, so, we anticipate 2011 to see similar sort of results there.

A lot of that depends on what the overall Chinese economy does but we're performing well, that economy's growing, we're doing a nice job on the top line and, also, it's a profitable business generating positive cash.

Okay.

All right, and then I think in the past couple of quarters you talked a bit about the investments that you've made and the cost that you're incurring, several million dollars per quarter, can you give us a sense as to what sort of run rate we're at for maybe the first quarter and then the outlook for 2011, in terms of some of that spending?

And, then, maybe discuss what sorts of pay backs you're seeing on some of those investments, would be useful as well.

Okay, I'll take a shot at it and I'll let Kurt weigh in behind.

So, what we said here is we're going to forego some short-term profit and forego some of our leverage to reinvest P&L dollars back into primarily front end initiatives.

And, those initiatives are around accelerated new product development, around dealer development resources, channel development resources, marketing programs, promotions.

We look at those item by item, company by company.

And, so, each company has a different set of initiatives, we track those carefully.

We are currently in a run rate first quarter of about $5 million.

That begins the anniversary itself once you hit the second half of the year.

And, pay back, typically, on that is 12 to 24 months, probably more specifically 12 to 18 months.

And, we're encouraged, we think there's good opportunity there and we're going to invest for the long term.

Safe to assume that $5 million run rate going forward, if you're looking at 12 to 18 month pay backs, are there opportunities to maybe accelerate that spending a bit?

Well, part of that has to do with just the capacity of the organization to say grace over what we have on the table.

Okay, that's-- that's a good way of putting it.

And, then the, I guess, last question I had as you kind of look at a better demand environment relative to your capacity and organizational debt, any thoughts on adding capacity, well maybe not capacity, but labor or any incremental costs that you might incur in the second half of this year that could sort of depress some of the strong incrementals that we've seen out of the business?

I think we're managing pretty well to that regard.

One of the things I'm pleased with is our organization.

Each of the companies has responded well to the growth.

Certainly the labor add is really the capacity that we're going to need to put our line.We're in good shape around fort of PP&E, profit plant and equipment, and, so, it's going to be the labor adds.

We're-- we manage that closely.

We do use overtime.

We will use some temp labor to cover some of the cyclical or seasonal, probably a better word, up turn and I don't anticipate at this point, Pete, any sort of incremental cost penalty there.

Okay.

That is perfect.

Thank you for your time and your help.

Thanks, Pete.

Thank you.

Our next question comes from Mark Rupe from Longbow Research.

Please go ahead.

Hello, guys, great quarter.

On the office furniture side, was there any surprises?

I know that the performance was a little better maybe what you guided to, but, in general, any surprises on strength and maybe particular in which areas of strength?

I don't think there's any surprises.

It was kind of across the board, Mark.

We, in a supply side, put through a price increase and we always get the deal with the buy ahead of some of our larger wholesaler or stocking customers.

And, I think that was a little bit higher than we would have anticipated but nothing that set us back on our heels.

Okay.

And, then, on the supply set, obviously, you're expecting growth of, well I think you guided to 4% to 6% in the first quarter, so I mean and even if there was pull forward, I mean the 4% to 6% still is a very positive number.

That's correct.

We're, I would say, beginning to see the early signs of recovery there.

If you look at the small business confidence, you're seeing it a tick up .

Still small business owners are I think in more of a maintenance mode, less of an expansion mode but we anticipate, barring some extraneous event, that that should continue to

Okay.

And, then you said enlarged productivity and still some discounting pressures on the contract side.

I know that in the past you've kind of called out maybe price cost gap issues, was there significant mismatch in pricing cost in the fourth quarter and what are the thoughts kind of in the first quarter?

I would have thought maybe we'd see a little more leverage on the gross margin versus last year.

So, Mark, on the fourth quarter, we did see more discounting and particularly more on mix of business with our bid and large projects.

And, we had called out I think a negative 6 to 7--

Right.

In the outlook and there were probably a couple million dollars that slipped back in the fourth quarter because of that mix of business.

So, that was the fourth quarter.

Going forward, recall we put price increases in the third quarter, [Pron] Company put a price increase effect in January.

So, as we look out into first quarter, looks like we'll close that gap for the quarter.

But, clearly, and I'll let Stan comment on this, as we look out into the year, seeing commodity inflation pressure coming at us.

Okay.

Okay.

Perfect.

Great guys.

Good luck, thank you.

Thank you.

Thank you.

Our next question comes from the line of Budd Bugatch from Raymond Jones.

Hi, Stan, Kurt, Kelly, this is actually Chad pinch hitting for Budd.

Hello, Chad.

A couple of questions.

Kurt, if you wouldn't mind, just to make sure we're on the same page in terms of the guidance, are there any revenue adjustments to the prior year for deconsolidations or disc ops or anything like that?

And, what's the revenue base?

No, we've anniversaried all of our disc ops for 2011, so the 2010 number should be good.

Okay, great.

And, the restructuring charges in the quarter came in significantly above what you had guided to, could you give us a little insight into that variance?

Was it maybe an acceleration of decisions that had already been made or were there new actions or decisions taken in the fourth quarter?

Well, what we have done is we dispositioned a hearth installing dealer-- distributor in one of the markets over to local management, local leadership that we think can do a better job.

So, I think that surprise came-- we actually did get it done in fourth quarter of 2010, it was-- could have gone to 2011 and so we tended to be more conservative on that and not factor it in and -- and count on it happening first quarter 2011, it happened in the fourth quarter of 2010.

Okay.

That makes sense.

And, talking a little bit about hearth, you guys beat your sales guidance pretty handily, beat our estimate and I think even if I had gotten the revenue number right I don't think I would of had you at 11.7% operating margin.

Can you talk a little bit more in detail about what drove that level of profitability and is that sustainable?

Obviously understanding that volume in verbal experiences are going to fluctuate, but is that kind of the right run rate to work off of going forward?

I'll talk volume here and then I'll let Kurt talk some of the cost structure.

So, what happened in the fourth quarter is several events were positive.

A, positive for the remodel retrofit, for the hearth stove side primarily, is as fuel costs goes up, the alternative biomass becomes more attractive, so that benefited.

Secondly, there's nothing like a good hard winter to get people thinking about heat and also getting to think about emergency heat.

So as the storm goes through and knocks power lines down and people are without power, they think about a hearth stove to provide alternative heat.

Third, there is the expiration of this energy efficiency tax credit, which basically offered up to $1500 tax incentive for energy efficient appliances.

That expired, actually stepped down a bit to $300 from $1500 as of the end of the year, and, so, we saw a pretty aggressive activity by the dealers and actually saw some more activity around that than we anticipated .

I will let Kurt talk about the cost structure

So, Chad, your comment, we -- the leverage you ought to be thinking about on that business still is consistent with our past comments, that's a 30% to 35% leverage going forward.

And, there were some things that were unique in the fourth quarter.

One, to link back to Stan's comment on volume was, we had benefit from richness in mix predominately both our retail and on those stoves.

So, that was a better mix of profitability than we had anticipated.

We did better on the cost side and that group's been at that for five years and continues to do an exceptional job on taking cost out of that business.

And, then the other one we talked about this in office in the fourth quarter of 2010, we had a significant adjustment on LIFO as that group has brought their inventory down.

So, kind of half of it on inventory, a big part of it on mix and then on cost reset.

But ,30% to 35% is what you want to be using going forward, still.

Okay.

Well, great, guys, that's very helpful detail, I appreciate that.

And, I guess, along those lines could you share with us maybe a range or thoughts on what you're guidance assumes in terms of operating margin per the segments?

Sure.So, if you think of, for office, we'd be looking somewhere in the $9 million to $11 million range of profitability for first quarter for that.

And, on the hearth business, that's a business that we're projecting a loss at somewhere in the $3 million to $4.5 million range.

All right, guys, well congratulation on the beat in the quarter and good luck to you in 2011.

Thanks, Chad.

Thank you.

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

Hi, good morning, guys.

Sticking with the weather, the winter theme, was there any impact on the supplies-driven sales orders in particular or just furniture overall in either Q4 or Q1?

It's hard to tell, Todd, on the impact of first quarter.

Certainly I believe there was an impact, just when there are businesses that are shutdown, et cetera, what that impact is, it's hard to tell.

I think it's an impact that's made up as well, it's not demand that goes away, it's just demand that gets deferred.

And, I think there's plenty of time in the quarter to make up whatever impact it might have occurred there.

Okay.

And, as we look at modeling 2011, how should we think about incentive compensation?

Todd, I would expect there'd be some increase.

It's predominately in profit sharing at our operating companies as we see those businesses continue to improve.

As we look at the first quarter, that's about $1 million number that's included in our SG&A estimates.

So, that's the big lever from an incremental year-on-year comparison.

And, when Kurt says profit sharing, Todd, what that is, is we have since the beginning of this Corporation share the profits with our member owners as we make it, it's a significant part of their retirement contribution.

And, so, it's based on profitability, return on sales type of profitability predominately.

So, as return on sales improve, we make bigger contributions to our member owners' retirement.

Got it.

And, what can you tell us about new product initiatives for the year?

Well, we continue to be very aggressive in that regard across the board, across the companies.

And, so, last year we launched a record number of new products and we anticipate doing the same this year and it virtually is in all categories and all price points top to bottom.

And, there's some remarkable story there, one of our companies launched a new seating line which first year generated more than 100,000 units and over $20 million in sales.

So, we're not probably as expansive on new product development, specific new products maybe as some of the other industry players, but it's a vital vibrant part of our plan going forward.

Great.

And, lastly, you don't disclose backlog, is that correct?

That's correct.

We're relatively short lead time, Todd.

One of the things we're very proud of and, so, backlog is not probably a very good measurement of things going forward .

Our objective is to ship as fast as

And, on the contract side, you wouldn't want to throw out any numbers?

No, sir.

Okay.

Thank you very much.

Thank you, Todd.

Thank you.

And, our next question comes from Matt McCall from BB&T Capital Markets.

Thank you, good morning, everybody.

Hello, Matt.

So, you don't talk about backlog, I understand that, but when you talk about some of the leading indicators, as we look at Q4, can you talk about things like customer visits, RFPs, mark ups, any of those things that would be leading indicators and maybe how those trends, or how those items have trended in January and February?

Yes, Todd, we don't share, or excuse me, Matt, pardon me, we don't share that sort of data.

We don't even -- each of the individual companies track it.

But, because we have such a different business, we go all the way from the supplies driven transaction online all the way up to A&D specified.

It's such a broad mix, I'm not sure any of that would even be valuable.

What we do believe is that as the economy improves, the office furniture continues to improve, small business, and I think you do a pretty good job of tracking small business, we're waiting for that to continue to accelerate.

I think the small business owner is feeling better.

It's not yet transferring to employment growth in capital spending.

I think it will.

On the contract side, certainly we're seeing that pent-up demand around churn pick up, I think that will start to work through and then I think what we're going to see is the normal type of growth begin to happen.

Driven by, obviously, it gets the absorption of service sector employment growth.

And, the one question is government.

Government has been a significant growth engine for us in the past, it was last year, we anticipate that to continue to go as well.

So, you look at activities, activity continues to be very healthy driven by different factors across our businesses.

You jumped ahead of me on government, I was going to ask that next.

Your comment there was we expect to be healthy, is that kind of a relative statement, is that more growth, is it remaining at elevated levels.

Just how do we compare it to 2010?

This is a guess, too, Todd, because-- excuse me, I keep calling you Todd, Matt, sorry, Matt, because it's hard to say how all of this is going to work out with the states and what the federal government's going to do.

We anticipate it's going to continue to grow in 2011.

How much, I don't know.

I think it's likely to come back down a bit as to where it was in 2010, but it should still be healthy.

Okay.

And, then, Kurt, you-- to an earlier question, you talked about some of the maybe those one-time benefits to hearth.

So, and I think you talked about inventory, some inventory adjustments, some-- what was the other one, and better mix.

Is the way to look at that, that it is kind of one-time in nature?

I guess the inventory adjustment would be, but-- and, if so, what was the-- can you quantify the benefits, so when we're looking out at Q4 next year we can keep that in mind?

Yes, the inventory benefit was a little north of $1 million, Matt, at hearth.

So, you wouldn't expect to see that roll through.

And, mix will vary quarter to quarter, based on the season.

So, I would not probably model that through as I looked at that either.

Got it.

Okay and, then, finally, a little bit more restructuring costs I guess showing up next quarter, I think you said $750,000, maybe on top of a question earlier, what's the expected benefit that we can start to bake in, is there any incremental benefit?

And, how many more quarters are we going to see these restructuring costs, I guess, associated with what's been announced thus far, show up?

Yes, so, we've about $700,000, I think $750,000 I called out, and it's the tail end of things on-- really on things we previously announced, on manufacturing consolidations, on office and a little bit on hearth.

So, most of that you should see rolling through there, Matt, as we've talked about incremental savings in 2010 we saw north of $10 million I think rolling through that should be anniversaried at this point.

So-- okay, so no incremental.

And, then any incremental restructuring post the $750,000?

Well, as you know, Matt, we always are looking at structural cost that will drive a longer term benefit.

We don't announce those prospectively.

I think we're getting to the place where there'll be less and less of that going forward.

Okay, okay.And, I am going to sneak another one in, I think I'm last anyway.

But, we talked about incremental margin on the hearth side, what about in furniture?

I guess it was a little lower than we expected.

What would the outlook be as we move through FY 2011 overall?

So, we still talk about this 30% core leverage.

That said, what we've said is that we're going to invest incrementally in these strategic growth initiatives to fund future growth, that's number one.

Number two, there often is this movement around material costs price, then they impact that as well.

I don't know, Kurt, other than not it's--

No, I think we would expect to see those investments start to pay back and you'd see leverage start to accelerate as we get into the back half in 2011 and 2012.

But as-- you-- we've talked this, Matt, it'll be lumpy quarter to quarter but that's still the right objective, as we look at that segment of the business.

Okay, okay.

Got it.Thank you, guys.

Thank you, Matt.

Thank you.

Our next question comes from the line of Stephen Chick from FBR.

Hi, thanks.

Congratulations.

I-- just a follow-up question on I guess the first-quarter sales guidance, as it relates to office furniture.

The-- there were some comments about weather and it kind of sounds like there was some inventory purchase activity for the fourth quarter, but I don't-- it didn't sound like that was too significant.

But the up 9% to 11% expectation, can you discuss a little bit of the-- what the thoughts are behind that target and is it-- slightly for compares or what-- or maybe even what you're seeing currently would help too?

Stephen, you're going to have to narrow that question down a little bit for me, please.

Well, I guess you came off a very strong quarter in sales growth in office furniture and, it sounds like for the first quarter it's still a healthy rate of growth but it's at a decelerated pace.

I think you're targeting up 9% to 11% coming off of a 16% rate of growth and just curious as to the thinking behind the trend.

Yes, a lot of it is driven by seasonality, comparable over previous year.

Some of it has to do with fourth quarter we had as we said an inventory buy under the supply side of the business.

And, so, it's driven by many factors, many different segments of the market and driven by different timing.

Okay.

And, the inventory buy portion, is that quantifiable or is it kind of tough to narrow down what that might have helped to the top line trend by in the quarter?

Yes, we've got a shot of that.

I mean we've estimated that the fourth quarter is somewhere between $5 million and $6 million that was a buy ahead.

Okay.

All right, that's helpful.Thanks.

Thank you.

Okay, thank you.

And, we have no further questions at this time.

Okay, well, thank you all very much for your interest here in HNI.

We look forward to talking to you in the future.

Have a good day.

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