HNI Corp (HNI) 2011 Q3 法說會逐字稿

Good morning.

My name is Sean, and I will be your conference operator today.

At this time I would like to welcome everyone to the HNI Corporation third-quarter fiscal 2011 results conference call.

(Operator Instructions).

As a reminder, today's conference call is being recorded.

Thank you.

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

Derek Schmidt.

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss third-quarter 2011 results, which were announced yesterday after the market closed.

My name is Derek Schmidt, Treasurer and Vice President of Corporate Finance for HNI Corporation.

If you have not received a copy of the financial news release, it is available on our website, www.hnicorp.com.

A presentation intended to accompany this call has also been posted to our website under the Investor Information section.

We encourage you to review this presentation as it contains details of our financial performance, including the non-GAAP to GAAP reconciliation.

Joining me today on the line for HNI 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 up 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 both known and unknown risks.

Actual results could differ materially from expected results.

Additional information concerning factors that could affect actual results can be found in the conference call presentation posted to the HNI Corporation website.

The Corporation assumes no obligation to update any forward-looking statements made during this call.

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

Stan?

Thank you, Derek.

Good morning, everyone.

We will share our assessment of the third quarter of 2011 and then provide some thoughts on our outlook for fourth quarter and 2012.

We will then open the call up for your questions.

Strong execution across all of our businesses drove outstanding third-quarter results.

Sales and profit growth exceeded our expectations.

We increased sales 10%, and net income and earnings per share increased almost 60% versus prior year.

We aggressively managed working capital and generated over $70 million of free cash flow.

Our performance is a reflection of the power of our split and focused business model and strong returns from strategic investments.

Sales in our Office Furniture, contract and international businesses remains strong with 15% topline growth.

Operating leverage was solid and margins improved.

Despite low levels of small business confidence, our supplies-driven business improved 4%, exceeding expectations.

Our market leadership position is strong, and we continue to leverage the power of our brands to perform well in this challenging environment.

Our Hearth business continues to deliver outstanding performance.

Remodel retrofit sales increased 22% as strong demand for our alternative fuel products was driven by higher energy prices.

The new construction channel was up 4%, though overall housing conditions remain weak.

Profits more than doubled year-over-year as strong operational execution and cost containment drove excellent operating leverage.

I will now turn the call over to Kurt to review the specific financial data for the third quarter.

Kurt?

Thank you, Stan.

So, for the third-quarter 2011, consolidated net sales increased 9.9% to $504 million.

Sales for the Office Furniture segment increased 8.9% to $422 million, while net sales for the Hearth product segment increased 15.2% to $82 million.

Consolidated gross margin increased to 35.6% compared to 35.1% in the prior year quarter due to higher volume and improved price realization, which was partially offset by increased material costs.

As a percent of net sales, total selling and administrative expenses improved 0.8 percentage point due to higher volume, which was partially offset by increased fuel costs and higher incentive-based compensation.

We ended the quarter with $102 million of cash.

Operating activities generated $67 million of cash during the first nine months of 2011, which is up 36% from the same period last year.

We recently amended and restated our credit facility with strong support from our lender group.

Borrowing capacity was increased by $100 million to support our future business objectives, while also lowering costs and increasing flexibility.

I will now turn the call back to Stan.

Thank you, Kurt.

We entered the fourth quarter with strong momentum, and we are on track to deliver profit improvement in sales growth for the full-year 2011.

Our contract brands continued to compete well in their markets.

Year-over-year growth rates within the contract channel are expected to moderate in the fourth quarter against strong prior year comparisons.

Our international business remains a significant growth opportunity, particularly in China.

We have strong brand recognition and continued to aggressively invest in new products and expand sales distribution in that region of the world.

Growth in our supplies channel is expected to improve moderately, even though small business confidence remains uncertain.

We are executing well and continue to expand our competitive advantage by investing in our brands, product development and selling capabilities.

In our Hearth segment, we anticipate sales to be relatively flat to prior year.

Topline growth in the new construction channel is expected to be down slightly as single-family housing starts and permits remained depressed.

In the remodel retrofit business, demand for alternative fuel products is projected to remain strong.

Growth rates will be lower given strong prior year comparisons, which benefited from expiring the energy efficiency tax credits.

We continue to invest in resources to enhance our customers experience, expand into new channels and deliver innovative products to the market.

Looking to 2012, we are building capabilities to strengthen our market position and deliver profitable growth.

The economic outlook for next year remains uncertain, but we are well positioned to expand profits under multiple scenarios.

Kurt will now provide the financial outlook for the fourth quarter and 2012.

Kurt?

So, for the fourth quarter of 2011, we anticipate overall sales to be up 2% to 5%.

Office Furniture sales are expected to be up 3% to 6% with sales in the supplies-driven channel expected to be up 2% to 5%, and sales in the rest of our Office Furniture businesses are expected to increase 4% to 6%.

Hearth sales are expected to be relatively flat versus prior year.

Gross profit margin is expected to be in line with fourth-quarter 2010 when it was 35.3%, excluding restructuring and transition charges.

SG&A as a percentage of sales, excluding restructuring and transition charges, is expected to be in line with fourth-quarter 2010 when it was 29.4%.

Net interest expense is projected to be $2.5 million.

The effective tax rate is projected to be approximately 37% during the fourth quarter.

As a reminder, the tax rate last year in the fourth quarter reflected the full-year benefit of the reinstatement of the R&D tax credit.

Capital expenditures are expected to be approximately $30 million, which is primarily focused on new products.

We project depreciation and amortization will be $46 million to $48 million for the year.

So, for the full-year 2011, we now expect non-GAAP earnings per diluted share in the range of $1.00 to $1.05.

Looking towards 2012, our preliminary estimate of non-GAAP earnings per diluted share is in the range to $1.30 to $1.50.

These estimates reflect our best view of next year's market conditions, although the economic outlook remains dynamic.

For our Office Furniture segment, we expect low to moderate single-digit growth next year given stronger comparables.

We are projecting margin improvement driven by continued reductions in our structural costs, mix improvement, pricing carryover from 2011 combined with stable commodity costs, and benefits from our growth investments.

Our Hearth business is expected to deliver mid single-digit sales growth in 2012, driven by continued strength in our alternative fuel products.

New construction will be challenged by continuing weakness in the housing market, but is anticipated to steadily recover next year.

This summarizes our outlook for fourth-quarter 2011 and full-year 2012.

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

So we feel good about our results for third-quarter 2011.

I'm positive about our markets and the prospects of our businesses in the future.

We are on track to increase sales and profits in 2011 and set to drive profitable growth in 2012.

We continue to invest in long-term growth initiatives, aggressively reduce costs and improve operations and focus on cash generation to create shareholder value.

The Company is financially strong, and our businesses are well positioned for the future.

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

(Operator Instructions).

Budd Bugatch, Raymond James.

This is actually [Chad] filling in for Budd.

Congratulations on the strong operating performance in the quarter.

I just wanted to drill down first, if I could, into the segments.

You put up a very strong 35% incremental margin in the Hearth segment.

Office was a little subdued.

I calculate a 21% contribution margin.

I know you called out volume favorable pricing in both segments offset by higher costs.

So I was just wondering if you could give us maybe a little bit more insight into the delta there?

Was it that maybe that Hearth had a better pricing realization, or did you have some strategic investments or spend in Office?

Just your thoughts there.

I will take a shot at it here, and we will let Kurt fill in details that I don't cover here if there are any.

I guess, as we look at that, the Hearth business is benefiting from lots of structural moves that we've made over recent years.

They are in a very solid position from a cost structure.

They did a very nice job of executing.

The challenge with -- and by the way, Office Furniture, I think, did a nice job of leverage, one of the better, I think, in the industry for this period.

They are impacted by some different things around more dynamic pricing, customer mix.

So it depends on any one quarter as far as what they have for material price or material cost price gap.

It depends on large project versus day-to-day business.

It depends on the type of customer, whether it is a large -- a larger higher volume customer and all those sorts of things.

So our goal still is 30% leverage as we look forward, all else equal, but you will see some different movement in the quarter based on price and material costs, etc.

Okay.

And I guess as you -- Kurt gave us some preliminary comments about 2012 and from what I gather mid single-digit sales growth on average in $1.30 to $1.50.

I have not had the chance to go through the math, but I guess what type of contribution margin are you implying by the guidance and the initial thoughts on next year?

I think we are at a higher level as we look out this at the outlook.

So, again, there are some key assumptions in there around mix improvement, around price cost basically being closed, benefit of structural costs.

So there is not any specific contribution margin target in there, other than, as Stan said, I would reiterate that 30% leverage objective is what we target for both our businesses going forward.

Okay.

And if I could, maybe completing the contribution margin trifecta, thinking a little bit about Q4, could you walk me through some of the buckets in terms of how you see it playing out?

Things like price, costs, any strategic investment, how are you thinking about those elements in the Q4 guidance?

Yes, so there are a couple of things in Q4 to take into account.

First of all, you have to tax adjust last year for a comparable basis.

So, if you look at guidance, we would -- and take that unique one-time full-year benefit out of 2010, we are showing -- predicting earnings improvement.

You have got core operatings earnings improving as we look at the quarter.

So price cost is closed as we had talked earlier in the year.

We have got a few negative prior year items around some LIFO adjustments, some corporate things and timing that bring that down slightly.

But, again, I think that core operating leverage I would say modest, kind of in line with expectations.

Okay.

Well, thanks, guys, for taking my questions.

Congrats, again, on the quarter, and good luck to you on the balance of the year.

Mark Rupe, Longbow Research.

Hey, guys.

Good quarter.

On the 2012, obviously I think if you are commenting on next year, you obviously have a decent degree or a certain degree of confidence in the range.

On some of the items that you cited that you are taking into account, is there a couple that have a little bit more weight than the others?

I know that the whole steel costs and commodity and the pricing, that kind of the mismatch can happen and can sway certain periods or certain years one way or another.

Does that play a bigger role than some of the other assumptions, or is it all equal?

Let me comment in general on what we are trying to do here, and then Kurt can fill in.

So our strategy or our objective here is to give shareholders the best view looking forward to what we know today.

And it is really the attempt to step up some transparency, and then we are going to adjust this as we go forward.

So the core here is we are really assuming sort of all else equal things are continuing as they are today, which I would say would be steady but modest demand in both businesses, an inflationary environment that is under control.

There is no significant price changes incorporated in here.

It takes into effect our continued current investment profile as we go forward.

So anything around an accelerating environment around inflation or a recovery in the economy or that would be the plus and minus side or in the event there is some extraordinary global economic political event and there is a lot of that action, then we would come back and say, based on what we know today going forward, this is the new call.

So this is a view as we look forward in 2012 of things continuing as they are today.

Okay.

Is it fair to say the wider range gives you a little bit of flexibility around some of those uncertain items or events?

That is correct.

That is the objective.

And then you commented -- I know that you -- the gross investments has been a topic of several conference calls over the last year.

And correct me if I'm wrong, is it a 12- to 18-month payback, or is it an 18-month payback?

It is 18- to 24-month payback would be more (multiple speakers) consistent, and they range all over the place depending on the investment, depending on the operating company, etc.

And we are kind of at our current run rate as of right now.

Right.

But you cited that as one of the positives heading into next year.

So you definitely expect to start seeing some of that?

Yes, I think we are seeing some of that now as a matter of fact.

Perfect, okay.

And then just lastly, on the supplies channel, it sounds like you are positively surprised there.

And I know in last year's fourth quarter, that piece of the segment actually had a pretty good performance.

I know that there may have been a little bit of pull forward going on.

But just your obviously positive growth commentary for that in the fourth quarter, does that suggest that it is maybe continuing to be that positively surprising you?

Given that maybe (multiple speakers) compares a little bit harder?

Yes, I think, again, as we look at these things, the quarters move around a little bit as the different project activity, even in this segment, different movements by some of the large customers in that segment, etc.

But overall we feel it is not a sensational sort of growth momentum, but it is a very solid, steady, modest improvement there, and we see that going forward into fourth quarter.

We feel like there is some good solid steady momentum that we expect to continue into 4Q.

Perfect.

I guess just one last one.

On the contract and international piece, international, I assume, has been outperforming the domestic stuff.

Number one, is that still accurate?

And number two, any updates on the plans there and the investments there on the international side?

Yes, the answer to your first question is, in fact, it is still relatively small for our total business, but it is outperforming all of our businesses.

As far as plans going forward, it is really to continue to invest where we can drive really solid profitable growth there.

So it is an intense area of focus for the corporation of me and of the rest of the team to make sure that we are continuing to grow that business going forward and position ourselves for long-term shareholder value creation in that part of the world.

Matt McCall, BB&T Capital Markets.

I'm going to continue on a couple of the previous questions.

Stan, you were talking about the assumptions in next year.

Kind of assuming things continue as they are today, I'm just trying to understand what that means.

I think the outlook, economic outlook is more tepid than the actual data has been.

So I'm trying to understand a), what is the specific macro backdrop now that you are assuming?

I will let you pick your metric.

And then what would be the assumption, say, from a BIFMA perspective next year in your guidance?

Well, first off, let's talk about BIFMA.

I think BIFMA is projecting 7.5% shipment or something like that.

BIFMA is like any forecast.

Global Insight does the forecast for BIFMA, and it is based on lots of factors.

And what I'm always sure of is, whatever the forecast is, it is going to be wrong.

It is often wrong on the upside, and it is often wrong on the downside.

So we used that as a general factor.

And I would also remind you, BIFMA does not take into account roughly half of our business, which is the supplies-driven part of the business.

It is a pretty good proxy for contract, but even there, there is a variance.

So what we are simply looking at is, what has happening to small business demand?

That is a major driver of that supplies side of the business, number one.

Number two, what are we forecasting in international?

I think international, China is going to be still very strong, maybe down a little bit over what it was.

And contract is starting to run up to some more steep comparables.

I think overall we are seeing the market maybe step down a bit even as it relates to BIFMA.

And so we are factoring all that together along with our investments, along with our momentum, and we are coming up with our best guess as to what we think the topline growth will be next year.

And on the small business side, it is interesting to hear you talk about growth there just given the backdrop with all the small business data.

I assume it is a share gain story at this point, or are you seeing actual market growth there?

Well, you know, it is always hard to say.

I am reticent to jump on share gains in the short-term.

Certainly one could conclude that we are making progress vis-a-vis the market in that segment of the market.

Okay.

And Kurt, this one, I think, is for you.

I think you gave the answer earlier.

Some of the inputs to your gross margin outlook, your profitability outlook for next year, you mentioned mix improvement, you mentioned price costs, and you mentioned structural costs.

I think you said from plant closures it is about $11 million, and I don't know if I understood correctly.

Just now it sounded like most of that is in the current run rate.

If not, please correct me.

And then the other part is the price cost.

How should we look at that relative to what pressure you faced or will face in total for 2011?

Right.

So two comments on that.

One on price cost.

If you look where we will end this year based on the outlook, if they carry through, we should see somewhere around a $10 million benefit carried through into 2012.

So that would be the first one.

On the structural costs, what I think you were referring to is our recent announcement, which we really see the benefit of that in 2012, not in the last quarter here of 2011.

And most of that gets baked in, and I think as we released it, that is around $10 million on an annualized basis as well.

Okay.

And then just making sure I understand how to look at that 30% leverage objective, is that inclusive of those structural cost reduction initiatives?

Yes, I would think about that being inclusive of that.

Okay.

All right.

One final question and I will hop off.

End market trends, I think there is a lot of concern about slowdown in the government sector.

Can you talk about government specifically?

And then beyond government, any other end market color that you can add specifically in contract?

Yes, so I will talk about government.

Certainly government has been a large part of our business, our growth story in recent years.

Government is going to slow down, I think, modestly.

We are, I would say, flat for the year.

We still think, though, there is lots of room for continued growth in that as we look out.

I would say we are forecasting 2012 to be modestly down both in state and local for all of the reasons, the Federal stimulus money kind of washing through and just states managing budgets.

And then we think Federal is going to be down modestly to flat.

That is a big question yet, I think, as we forecast 2012.

The government is focused on controlling spending, but likewise, they are also working on a leaner government.

And you think about their white-collar employment, and that is going to drive, I think, furniture events that could continue to make that a very positive part of our business as we look forward.

Contract, I think CEO confidence is still relatively good.

There are still a lot of furniture events around real estate strategies and consolidation and merger and acquisitions.

I think we are just simply seeing, as we look into 2012 versus 2011, working through a lot of that pent-up demand, and we are running up against comparables.

So you net all that out, as we say, we think there is still good, solid, steady growth at lower levels than it has been here in the last 24 months, but still good, solid growth barring any sort of economic or global political disruption.

Peter Lisnic, Robert W.

Baird.

I guess first question on 2012, Kurt, if you can just give us a little help on what free cash flow conversion might look like on that $1.30 to $1.50 on EPS.

I think similar to, as we look at this year, it is a $75 million to $85 million kind of free cash flow for next year.

Okay.

Perfect.

And then if I look at the growth that you are forecasting for Office next year, low to mid single, is there a way of maybe calling out what piece of that would be international?

I know it is a small piece of the overall pie, but I am was wondering how significant that is to the growth profile next year.

Yes, again, here our international is less than 10%.

So it is not meaningful.

It will be a multiple of that, but we don't break that out specifically.

But you can count on it being significantly more than the base.

All right.

Fine.

And then I was wondering as well, the incremental margin in Office in the third quarter looked really healthy compared to at least where our incorrect forecast was.

Can you give us a sense, just ignoring price costs and investments, but what is happening trend-wise to the level of price competition or discounting in the industry?

Maybe talk about it on a sequential basis versus the second quarter, just kind of what you have seen from a price competition standpoint.

I think that price competition has reached the equilibrium here based on -- it all depends on the size of the project, and it depends on the level of how it has competed, I guess.

So these large Federal projects are very transparent, and it has chewed out the O.K.

Corral.

As you begin to move down and there's somewhat better margins, there is a higher cost of service sometimes there as well.

But overall I think we are at equilibrium based on project by project, size by size sort of opportunity.

Okay.

Perfect.

And then last question if I could.

On the 2012 picture, say the macro, I mean given what you read in the press, maybe the macro is a bit worse than what you might be expecting.

What sorts of levers if any do you think you have to pull or might you pull next year if, indeed, the forecast turns out to be too optimistic?

We have this long history of running these multiple scenarios.

It is also where our split and focus the business model where we have these businesses that are tuned and tailored for each segment of the market in each demand segment run by some really sharp management teams, great groups of members that understand how to track and monitor the market and how to adjust costs.

And so it is the same thing that we have done here historically is it is adjusting spending, it is continuing to attack structural costs, it is continuing to find ways for us to leverage sort of the HNI scale to drive structural costs, and so it is really more of the same that we have demonstrated, I think, over here the last several years to manage this.

Okay.

Perfect and then I'm sorry, I forgot one.

But if I look at the free cash flow picture for next year and I look at a near 9 point sequential decline and that debt to cap, is there any change, or do you want to discuss capital allocation priorities just to give us a better sense of where that might head next year with the cash flow you are generating?

Yes, I mean our capital allocation plans are basically unchanged over what we have been doing, which is a), we are looking at a strong dividend for shareholders; b), we are always looking for acquisitions that we think we can understand and create value with; and then c), we go from there.

We look at potentially special dividends.

Share repurchase is always part of that process.

And so it is really kind of the same I think priorities, the same sort of process that we have been following historically.

Todd Schwartzman, Sidoti & Co.

First of all, in the third quarter, did your insight, did your visibility into the commercial contract business change at all, and if so, what was the trend there?

I'm not sure I understand the question.

Run that by me again.

The confidence in future orders on the commercial side of the contract channel, less confident, more confident, about the same as the quarter progressed July through September?

Well, I think, Todd, as we sort of look at what transpired, during this whole nonsense in Washington around the debt ceiling discussion, etc., I think everybody in the economy sort of hit pause.

And then I think we saw, as time transpired in the third quarter, we started to see business activity come back to, I think, what is the normal or the standard equilibrium.

And so certainly it was a little bit moderated down a little bit, and then I think come back on to, as I described earlier in the call, I think a modest but steady sort of momentum.

Okay.

And on the fourth-quarter outlook, the guidance specifically, the SG&A margin and the gross margin as well, is that -- approximating the year ago level, is that sort of your midpoint, if you will, or is that a worst-case scenario?

I think I would say that is our best view of where we look.

You have got to take into account seasonality and where we play between the segments.

But I think -- and the other part, as you look at gross margin, we closed that price cost gap.

So that, assuming as Stan said, commodities remained relatively stable, we are of the view to expect to see that continue from a run-rate basis going into 2012.

There is nothing unique that would say that is worse case for SG&A in the fourth quarter.

That helps.

My math may be off a little bit here.

Maybe you could help me with this.

Based on your previous full-year 2011 earnings guidance, the implied Q4 guidance seemed to be around the $0.45, $0.46 range.

Now it is looking more like $0.36, $0.41.

So essentially down about $0.07 or $0.08.

Is this correct, and if so, what are you seeing?

What are you seeing that is altering your forecast from three months ago?

I think, as Stan talked, it is choppy quarter to quarter here.

So there is adjustments on volume, there is adjustments as we look at our mix of business and our margins, and as we dial in on our SG&A estimates.

So quarter to quarter there are going to be some of those swings, and we are updating to give you our best view and outlook for the balance of the year.

So third quarter essentially was a little less choppy than maybe you were anticipating?

No, I would say that choppiness actually probably continued given where we came out on the beat.

It was -- quarter to quarter it is tough out there.

Okay.

And on the channel investments, obviously if you had anything to announce that new and different, we would have heard it today.

But, as we enter 2012, what are your thoughts on similar investments?

Well, I think we are continuing our same process, which is I have described in the past.

Each operating company that plays in their particular segment serves their customer base is challenged to find ways to continue to invest money to grow the business.

And so it is a lot of little things across the board depending on the op company, depending on the market, etc.

We don't foresee anything major here.

It is more of a continuation of the same sort of process.

So nothing really new baked into the $1.30, $1.50?

No.

There are no further questions at this time.

I turn the call back to the presenters.

Okay.

Well, thank you very much for your interest and your time this morning, your time and investment in HNI, and we look forward to talking with you in the future and updating you on our progress.

Have a great day.

Bye, bye.

This concludes today's conference.

You may now disconnect.