Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

HNI Corp. (NYSE:HNI)

Q3 2008 Earnings Call

October 16, 2008 11:00 am ET

Executives

Marshall Bridges - VP and Treasurer

Stan Askren - Chairman, President and CEO

Bob Driessnack - VP and Controller

Kurt Tjaden - Chief Financial Officer

Analysts

Matt McCall - BB&T Capital Markets

Mark Rupe - Longbow Research

Chad Bowen - Raymond James

Christopher Agnew - Goldman Sachs

Todd Schwartzman - Sidoti & Company

Operator

Welcome you to the HNI Corporation's third quarter results. (Operator Instructions).

I'd now like to turn the conference over to our host Mr. Marshall Bridges, Treasurer and Vice President. Please go ahead, sir.

Marshall Bridges

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss third quarter 2008 results which were announced yesterday after the market closed. My name is Marshall Bridges, 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 posted a presentation intending to accompany this call to our website. It can be found by accessing the webcast link under the Investor Information section of our website. We encourage you to review the presentation with us during today's call.

Joining me on the line today from HNI Corporation are Bob Driessnack, Vice President and Controller, Kurt Tjaden, Vice President and Chief Financial Officer, and Stan Askren, Chairman President and Chief Executive Officer. 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 to the HNI Corporation website.

The corporation assumes no obligation to update any forward-looking statements made during the call.

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

Stan Askren

Thank you, Marshal. Good morning, everyone. I'll share a brief assessment of the third quarter and then turn the call over to Kurt Tjaden, our Vice President and Chief Financial Officer who will review some of the financial details. I'll then come back and share some thoughts on our outlook, and then finally, as is our custom we will open up the call up for questions.

Overall, we effectively adapted and responded to the economic challenges, facing our businesses during the quarter. Inflationary cost pressure and a weak demand environment negatively impacted our profitability as expected. We were able to partially offset these challenges with price realization and cost containment initiatives.

Third quarter sales were down 1.7 from the prior year. Demand was mixed in our channels. In the supply driven channel of our Office Furniture business, we generated very strong government sales, but demand from the channel's core small office customer continued to be weak.

Overall, the supply driven channel declined just under 5% in the quarter. The remainder of Office Furniture business was up over 7% driven by the acquisition of HBF and strong international sale. We continue to compete very effectively in these markets.

Overall, office furniture demand was volatile in the quarter influenced by the economic uncertainty, seasonal government sales and buy ahead activity related to our price increases.

In our Hearth business our investments in the alternative fuels category continue to generate strong growth in returns. We are taking measures to meet the unprecedented demand for biofuel products.

On the other end of the spectrum in the Heath business sales in the new construction channel were down almost 36% consistent with a negative housing market. Our Hearth business continues to manage well through this severe decline in new home construction.

As anticipated we experienced inflationary pressures in the quarter, input costs were up $30 million versus the prior year. We did not see significant impact from the recent declines in materials due to the nature of our contracts, many of which are based on an average market price in place during the preceding quarter.

We did benefit from our pricing actions taken at the beginning of the third quarter to offset the increased input costs, we realized $18 million of incremental price in the third quarter, Our price realization exceeded our expectations primarily due to a lower volume based discounting.

We expect to fully offset higher input cost pressures by the beginning of 2009 after our fourth quarter price increases become fully effective.

I'll provide more comments in the outlook, but now I will turn the call over to Kurt Tjaden, our Vice President and Chief Financial Officer to review some of the specific numbers for the third quarter. Kurt?

Kurt Tjaden

Thank you, Stan. If you would like to follow along, I'll occasionally make reference to the presentation, Marshal mentioned, was posted on our website. Please note that you do not need to view the presentation to understand our comments.

For the third quarter 2008, slide eight shows consolidated net sales decreased 1.7% to $663 million. Organic sales were down 6.3% or $42.4 million, due to weakness in the supplies driven channel of our Office Furniture businesses and the continuing decline in the new home construction channel of our Hearth business. Acquisitions added $30.9 million or 4.6 percentage points.

Slide nine shows net sales for the Office Furniture segment increased 0.3% to $561 million. This was driven by a 4.6% decline in the supplies driven channel, while the remainder of our Office Furniture business was approximately flat on an organic basis. Acquisitions added $17.8 million or 3.2 percentage points.

Slide 10 shows net sales for the Hearth product segment decreased 11.5% to $102 million. Organic sales declined 22.8%, due to a 35.7% decrease in new construction channel revenue. Acquisitions added $13 million or 11.3 percentage points.

Gross margins were 33.9% compared to 35.6% in the prior year quarter. This 1.7 percentage point decline was due to decreased volume and increased material costs, which were partially offset by price increases.

SG&A as a percent of sales was 28.8% versus 26.9% in the prior year quarter. This increase was driven by higher freight cost and non-operating gains included in prior year results. These were offset partially by lower volume related spending; incentive based compensation and restructuring costs, as well as, cost containment initiatives.

I would like to remind you that $3 million of the prior year's quarter's $5 million non-operating gain benefited unallocated corporate overhead. When excluding the non-operating gain unallocated corporate overhead decreased 9.5% versus the prior year quarter. The remaining $2 million of the non-operating gain was reported in the Office Furniture segment.

Included in SG&A were freight and distribution costs, which as a percentage of sales were 10.8% during the third quarter versus 9.3% during the same period last year. This increase is primarily due to higher fuel cost. Slide 11 illustrates the change in freight and distribution cost.

Third quarter 2008 included $1.5 million of restructuring charges and transition cost in connection with the facility shutdown, a facility ramp up, closure of two distribution centers, and consolidation and startup of a new distribution center compared to $4.3 million in the same quarter last year.

The effective tax rate for third quarter 2008 was 34.1% compared to 35.4% in third quarter 2007. The lower tax rate was primarily due to a reduction in the state taxes.

Year-to-date operating cash flow was $105 million compared to $178 million in the prior year quarter. This decline was due to lower earnings and less favorable working capital reductions.

That wraps up the financial comments for the third quarter. Now I'll turn the call back over to Stan.

Stan Askren

Thank you, Kurt. As we look forward to this unprecedented financial market turmoil, ongoing housing crisis, and resulting economic fall out makes it extremely difficult for us to forecast the future, although, we expect very challenging conditions, our recent office furniture order activity has been solid, generally driven by late season government purchases and buy ahead activity in advance for price increases.

Due to these orders, which were put in motion before the recent economic turmoil, we have reasonable visibility to mid-quarter. Our ability to forecast beyond that point however is very limited.

We are anticipating and planning for a more negative economic environment. In response, we are attacking input costs, reducing discretionary spending and evaluating further structural cost elimination.

We also are carefully prioritizing our SG&A spending on fewer stronger initiatives. We will continue to invest in new product development and focus selling growth initiatives. I think we are effectively positioning our businesses for the challenges ahead.

That said we'll share our best current view of the fourth quarter with the understanding we may need to update the outlook in the coming weeks as the demand picture clears up.

So we expect continuing mix demand in the fourth quarter. We anticipate substantial weakness in the supplies driven channel of our Office Furniture business, as I previously said, recent order activity has been solid.

Before the global financial crisis, we expected a drop off in the last half of the quarter as the government and buy ahead activity tapered off, now we believe the decline will be more severe as small office customers reduced spending and hiring due to reduced credit access, slowing economy, and general lost of confidence.

We expect the rest of our Office Furniture business to grow, driven by the acquisition of HBF and projects that were already in process.

The alternative fuel category of our Hearth business will continue to be a bright spot for the Hearth business and the Corporation overall. We expect the Hearth business to grow in the fourth quarter as the strength of this category offsets continued new home construction channel weakness.

I'll have Kurt provide the financial outlook for the fourth quarter 2008 and then I'll come back with final comments.

Kurt Tjaden

Thank you, Stan. I'd like to reinforce our lack of visibility given the recent economic developments. What I am about to cover, reflects our best view at this time, which we may need to update in the coming weeks as the full impact of the economic and financial turmoil is clarified. As such, the outlook for the fourth quarter 2008 is as follows.

We anticipate overall sales to be down 1% to 7%. For the Office Furniture segment, we expect sales to decline 3% to 9%, driven by a substantial decline in the supplies driven channel, approximately, flat organic growth in the rest of the segment and the favorable impact of the acquisitions.

Hearth sales are anticipated to grow 5% to 10%, including the impact of acquisitions. Gross profit margin is expected to decline approximately 4 to 4.5 percentage points versus the prior year quarter. This decline is driven by higher input costs and volume deleverage.

As we communicated last quarter, we have implemented price increases and reduced our cost structure to offset the increased input cost. As a result of these price increases and lower volume based discounting, we expect to realize approximately $25 million in incremental price, during the fourth quarter.

However, we also anticipate input costs will increase approximately $35 million in the fourth quarter leaving us with a price cost gap. We do expect to fully close the price cost gap, when the price increases become fully effective at the end of this year.

Excluding restructuring and transition charges, SG&A as a percent of sales is expected to increase 1.6 to 2.1 percentage points versus fourth quarter 2007 when it was 26.7%. Approximately, 1 percentage point of this anticipated SG&A increase is from the impact of higher fuel cost. In the fourth quarter of 2007, freight and distribution was 9.3% of sales.

The remainder of the year year-over-year increase primarily relates to acquisitions, product development, and selling initiatives. We anticipate SG&A related restructuring and transition cost to be approximately $500,000 in the fourth quarter.

Net interest expense is projected to be $4.2 million to $4.9 million. And the effective tax rate during the fourth quarter is forecasted to be 23.4%, due to the reinstatement of the research tax credit. For the year we expect the effective tax rate to be approximately 33.4%.

This summarizes our outlook for the fourth quarter. I'll now, turn the call back to Stan for closing comments.

Stan Askren

Thank you, Kurt. So let me summarize here briefly. We are responding to these unprecedented and uncertain times. We are aggressively adapting our business to the economic conditions. We continue to invest to improve our competitive position, with very focused initiatives. And I am confident that we will respond well to these challenges and I continue to be excited about the future of HNI.

With those comments complete, we're glad to open it up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question from the line of Matt McCall with BB&T Capital Markets.

Matt McCall - BB&T Capital Markets

Thank you.

Stan Askren

Good morning, Matt.

Matt McCall - BB&T Capital Markets

Kurt, first on the guidance you said to look at 1.6 to 2.1 percentage points on top of a 26.7%. I'm just making sure I've got the adjustments right, that we are talking apples-to-apples here that's on 26.7% number from last year. What gross margin are you using when you talk about 4 to 4.5 points lower?

Kurt Tjaden

Matt, prior year 2007 Q4 was 36.4%.

Matt McCall - BB&T Capital Markets

That's what I had, just wanted to make sure I didn't forget any type of charge on that line. Maybe you've talked about in the past or you've announced a couple of units, you closed Richmond, we've also talked about some logistics cost savings efforts. Can you remind us of two parts, of the timing or the magnitude of the savings expected for each or remind us of the timing that you expect to occur. Did you recognize any of the cost savings from those efforts in Q3?

Stan Askren

I think overall when we did these figures there was savings of $15 million, lets say overall, but I don't have the numbers exactly here in front of me. I'll remind you, those were very, very large sort of changes for us, probably the biggest most complex projects we have ever undertaken, closing the facility, expand another facility, closing two distribution centers and opening up another distribution center. We were challenged with the complexity of that and as a result of this our savings have been delayed. We do anticipate fully realizing those savings in '09 as they come on line. So the impact for 2008 would probably be a couple of million dollars positive savings, and we expect to see the rest of that either cost savings or in a negative demand climate its more cost avoidance as well.

Matt McCall - BB&T Capital Markets

Did that $2 million occurred just in Q3 or is that going to be Q3 and Q4?

Stan Askren

It probably would be both, Matt.

Matt McCall - BB&T Capital Markets

Okay. Then from a pricing and inflation standpoint, it sounds like things are expected to get a little better in Q1, the pricing and cost that you gave was helpful. As we look forward to Q1, holding kind of everything constant, assuming you get the level of pricing that you expect, what's the ballpark figure or what that should look like from a pricing and cost perspective?

Stan Askren

Well the cost perspective, we can't even quite speculate on that yet. It's so dynamic. We are not anticipating any additional price increases at this point, so it will be simply factoring through what we put in place.

Matt McCall - BB&T Capital Markets

Okay. Thank you all.

Operator

Thank you. Next we go to the line of Mark Rupe with Longbow Research.

Mark Rupe - Longbow Research

Just a couple of questions. On the core office furniture, you had mentioned that I believe in your guidance that the remainder, which I assume is the core office, that the organic would be flat. Is that what you indicated?

Stan Askren

Correct.

Mark Rupe - Longbow Research

Okay. As it relates to, I know your visibility is probably not very strong right now, but where does the confidence lie on your ability to outperform the industry, relative in the next 12 months or so?

Stan Askren

Mark, we can't even speculate on that right now. It's just such a dynamic environment in the economy that, its tough to even understand where the industry is going to go.

Mark Rupe - Longbow Research

Okay. Secondly then I guess on the Hearth, obviously it's good to see that your guidance, your prospects are up for the fourth quarter. I mean in the last three quarters I know we are hitting the big season for you in the bio area, but the last three quarters the comparisons were much easier, I would say, and it seems like the fourth quarter comparisons one of the more challenging comparisons. You are actually looking for positive growth. Could you remind us how big that growth area is for you within the Hearth segment?

Marshall Bridges

In the fourth quarter we are expecting the alternative fuels products to be in excess of 40% of the Hearth segment's revenue. That's what is driving the modest growth there, offsetting this severe decline in the new construction channel.

Mark Rupe - Longbow Research

Okay. Is there any chance that you have a comparable figure what that might have been on mix last fourth quarter?

Marshall Bridges

That's little bit distorted because of the Harman acquisition, it was done in the fourth quarter, so I don't really have a meaningful number for you.

Mark Rupe - Longbow Research

Okay. Obviously if you backed out Harman would you have thought that you would have up growth or is Harman really the reason why we are seeing the 5% to 10% growth year-over-year.

Marshal Bridges

Harman is a big part of that.

Mark Rupe - Longbow Research

Okay. Perfect. Thank you.

Stan Askren

Thank you.

Operator

Thank you. And we'll move then to the line of Chad Bowen from with Raymond James.

Chad Bowen - Raymond James

Good morning, guys. First of all I just really want to thank you for all the additional detail in the presentation on the website. I think it's fantastic and certainly very helpful for us. First, could I ask Kurt to repeat the dollar amount of the expected inflation in Q4? I think I got $25 million for pricing, but I missed the other part.

Kurt Tjaden

Let me come back to that. The pricing number was $35 million.

Chad Bowen from - Raymond James

Okay.

Kurt Tjaden

And the cost was $25 million.

Chad Bowen from - Raymond James

Okay.

Kurt Tjaden

You got it reversed.

Chad Bowen from - Raymond James

Thank you. That's very helpful. I guess we saw that you didn't buyback any stock during the quarter, but you did continue to generate some pretty solid free cash flow. What went into the decision there, is it just conservatism given what we are seeing out of the economy or could you talk a little bit about your priorities for cash?

Stan Askren

I think your comment about conservatism is well placed. We in this uncertain time want to make sure we maintain our financial flexibility.

Chad Bowen - Raymond James

Okay. And when I look at the segments and think about margin, probably, particularly in Hearth with the improved volume, I would imagine we would see a sequential improvement in margin, but are we still down year-over-year from Q4?

Bob Driessnack

This is Bob. For the fourth quarter in Hearth, what you are going to see is probably comparable dollars to the previous year, which is a percentage improvement from the third quarter to the fourth quarter. It would be just a tab below on the margin rate versus last year's fourth quarter, that's our current expectation.

Chad Bowen - Raymond James

That's very helpful and can you give us any help on the office side of it?

Stan Askren

Office furniture is where you are going to see the significant impact of both the volume that Kurt talked about as well as most of the material cost versus price gap as in office. I think that will be at least half or a little bit less than last year's rate.

Chad Bowen - Raymond James

Okay. That's very helpful. Thanks a lot, guys and good luck on rest of the year.

Kurt Tjaden

Thanks, Jeff.

Operator

Thank you. We'll take our next question then from the line of Christopher Agnew with Goldman Sachs. Please go ahead.

Christopher Agnew - Goldman Sachs

Couple of questions, first on commodities; we are seeing sharp pull back in commodity prices, could you just touch on across the board, I mean obviously steel is back down, but can you talk to all the other commodities that are inputs for your particle board wood etcetera?

Also comment on, in the last conference call I think you mentioned that as steel prices were going up, you had some long-term contracts, but those became ineffective. So on the way back down, how quickly will you start to see the benefits past through into the income statement? Thanks.

Stan Askren

Chris, first off, we are seeing in the market, you are seeing press about the spot prices going down around steel and oil etcetera. I'll remind you though, steel, for instance, the spot price, spot market now versus last year steel is still up some 70%. So it's coming down. It's looking more favorable, but it's still very, very high on a year-over-year comparison.

Oil is coming down. We do appreciate that in the freight cost, et cetera. We saw a minor benefit. Should see a little bit more benefit in '04. Overall though, we basically index many of our commodities to sort of an average market price on the way up. The benefit for us is it provides stability. So, we are able to price. The benefit on a rising market is we lag the market so we get the benefit of the delay.

Likewise, on a declining commodity price market, we lag as well. And so, the overall effect is a smoothing effect, but a little bit of disconnect on the way up, which is beneficial. A little bit of disconnect on the way down.

Christopher Agnew - Goldman Sachs

So steel and oil are obviously the big headline inflation. What about across the board in other commodities? Is that significant?

Stan Askren

Yes. I think it's very dynamic right now, because what you have, again because of this lag, as you have which economy are we in? Are we in the rising commodity cost or are we in a softening market? And so it's very, very dynamic. We're sorting through that now. I think it's going to have to play out a bit for us to have a really good handle on that. We're not anticipating any major sort of changes, inflection points at this point.

Christopher Agnew - Goldman Sachs

Okay. Final question, could you go through the restructuring charges again, and I take it you say SG&A guidance excludes restructuring charges. I just want to make sure the rest of the guidance excluded restructuring charges. And then it says in the outlook 500. I guess that's about $0.5 dollars. And could this change in the fourth quarter, you said you outlooked through for the first half of the quarter?

Bob Driessnack

This is Bob. On the restructuring in the third quarter you can see the numbers, we had about $1.5 million this year versus about $4.3 last year. For the fourth quarter, we are anticipating about a $0.5 million. That is not included in the SG&A guidance, the other SG&A guidance, so it is separate. That would exclude any future or additional activities that may be planned.

Christopher Agnew - Goldman Sachs

I guess given the timing, would it be more likely that any additional activities would be impacting 2009 I guess is my question.

Stan Askren

We are sorting that through now Chris. There may be some in fourth quarter 2008. There may be in 2009. It too early for us to state that I think.

Christopher Agnew - Goldman Sachs

Okay. Thank you very much. Thank you.

Stan Askren

Thank you, Chris.

Operator

Thank you. And we'll move next to the line of Todd Schwartzman with Sidoti & Company. Please go ahead.

Todd Schwartzman - Sidoti & Company

Could you talk about inventory by segment, adjusting for any acquisitions and divestitures from last year?

Kurt Tjaden

We don't break inventory out by segment, Todd, more specifically what you are interested in?

Todd Schwartzman - Sidoti & Company

Just the delta by segment.

Stan Askren

Well, I will tell you overall that inventory is improving, inventory turns are improving, Todd and that's probably the standard what we can share with you.

Todd Schwartzman - Sidoti & Company

Okay. Fair enough. Maybe some color on the alternative energy products please, any particular pockets of strength geographically or is that pretty much widespread?

Stan Askren

Well, what drives the biofuel category primarily is cold weather number one, but even more so the alternative fuel source. So fuel oil in particular is at very high level and northeast is a big fuel oil market, so the northeast is very, very strong.

The other markets are really related to LP, liquid propane markets, those are strong. As you get south, obviously it's less of an issue and then where there's wood products, so the Midwest, the west cordwood appliances are a very hot item.

Todd Schwartzman - Sidoti & Company

All right. In terms of additional cost saving opportunities, discretionary spending cuts, any more color could you give on that, if already alluded to?

Stan Askren

No. I think we probably covered that and if you look at our history, we take a very broad base approach to this. We look first at the day-to-day, just old-fashioned cost control. Second, we look at mid level type of improvements to change how we buy something or consolidate, etcetera. Finally we look at major structural cost reduction, elimination. I think you should expect more of the same in the future.

Todd Schwartzman - Sidoti & Company

Is it fair to say that you are closer to the end in terms of discovering additional costs? Are you closer to the end on the Hearth side of the business?

Stan Askren

Certainly Hearth becomes more challenging. I think as we have showed in the past, the big question is at what point do you adjust capacity. We believe that housing is going to recover. So, we have got world-class operations, and so taking a plant offline right now does not make a lot of sense to us. That said there are always opportunities to reduce costs. As a lean company, we never ever say we are getting close to eliminating cost.

Todd Schwartzman - Sidoti & Company

Got it. My final question, I know you spoke to this before, but I missed, did you buy back any shares in the third quarter, and if so, how many?

Kurt Tjaden

We did not buyback any stock, Todd.

Todd Schwartzman - Sidoti & Company

Okay. Thanks.

Stan Askren

You bet.

Operator

Thank you. And presenters, we have no further questions at this time.

Stan Askren

Okay. Well, thank you very much for everybody's attention and interest in HNI and we look forward to updating you in the future.

Operator

That concludes this conference call. However, it will be made available for replay after 12.00 PM today through October 23, at midnight. You may access AT&T's Executive Playback Service at anytime by dialing 1800-475-6701 and entering the access code 960644. And international participants please dial 1320-365-3844. And again those numbers are 1800-475-6701 and international 1320-365-3844 with an access code of 960644.

We thank you for your participation today and for using AT&T's Executive Teleconference Service.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts