HNI Corporation Q3 2007 Earnings Call Transcript

Oct.18.07 | About: HNI Corporation (HNI)

HNI Corporation (NYSE:HNI)

Q3 2007 Earnings Call

October 18, 2007, 11:00 AM ET

Executives

Marshall H. Bridges - Treasurer and Director, Mergers and Acquisitions

Stan A. Askren - Chairman, President, and CEO

Jerald K. Dittmer - VP and CFO

Analysts

Budd Bugatch - Raymond James & Associates, Inc.

Chris Agnew - Goldman, Sachs & Co.

Sean P. Connor - BB&T Capital Markets

Operator

Ladies and gentlemen, we'd like to thank you for standing by and welcome you to the HNI Corporation Third Quarter Fiscal Year 2007 Results. At that time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, today's conference call will be recorded. I would now like to turn the conference over to your host, Mr. Marshall Bridges. Please go ahead sir.

Marshall H. Bridges - Treasurer and Director, Mergers and Acquisitions

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss third quarter 2007 results which were announced earlier today. My name is Marshall Bridges, Treasurer for HNI Corporation. If you have not received a copy of the financial news release, please call 563-272-7927 and we'll send it to you. The release is also available at our website, www.hnicorp.com.

Joining me on the line today from HNI Corporation is Jerry Dittmer, Vice President and Chief Financial Officer and Stan Askren, Chairman, President and Chief Executive Officer. Stan and Jerry will review 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 historical facts are forward-looking statements. These statements may include but are not limited to statements of business plans and objectives, capital structure and other financial items. Actual results could differ materially from those projected in any forward-looking statements and relying on forward-looking statements is subject to risk. Factors that could cause actual results to differ materially from those projected in any forward-looking statements are discussed in the Corporation's financial news release announcing the third quarter 2007 results and its most recent Form 10-K and other periodical filings with the Securities and Exchange Commission. The Corporation assumes no obligations 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?

Stan A. Askren - Chairman, President, and Chief Executive Officer

Thank you Marshall. Good morning everyone. I will share a brief assessment of the business and then turn the call over to Jerry Dittmer, our Vice President and Chief Financial Officer. He'll review some of the specific financial details. I'll then come back and share some thoughts on our outlook and then finally, as is usually our case, we'll open the call up for some questions.

During the third quarter, we continued to find ways to improve our business. We reduced structural costs and manage expenses. And as a result, we achieved record levels of earnings per share, operating cash flow and office furniture operating profit. Office furniture market conditions remain similar to those we experienced last quarter. Continued softness in the supply-driven channel and solid demand in our contract businesses. We were able to leverage modest sales growth into a 15% increase in operating profits despite restructuring charges and lower non-operating gains.

Our hearth business is facing increasingly difficult macroeconomic conditions like all building product businesses. Our hearth team continues to effectively deal with these conditions and profitably manage through them as they have done for nearly the past year. Despite experiencing that 22% sales decline, our hearth business generated a 7.5% operating profit margin. Consistent with our past practice, we remain focused on eliminating structural costs. Earlier this month, we made the decision to realign operations and close a Richmond, Virginia facility. The opportunity to provide our customers with a better, more cost effective fulfillment process led to the change. The move is expected to save in excess of $10 million annually once we have that fully implemented in 2009.

Concurrent with these cost reduction initiatives, though, we continue to invest in new products, brand building and other initiatives to accelerate long-term growth.

I'll provide more comments in our outlook, but will now turn the call over to Jerry Dittmer, our CFO, to review some of the specific numbers for the third quarter. Jerry?

Jerald K. Dittmer - Vice President and Chief Financial Officer

Thanks Stan. For the third quarter of 2007, consolidated net sales decreased 1.4% to $675 million. Acquisitions added $9 million or 1.4 percentage points. Organic sales growth was down due to the decline in the hearth business.

Gross margins were 35.6% compared to 34.6% in the prior year quarter. The improvement in gross margins was due to strong cost controls and price realizations generated by price increases implemented during the current quarter and late in the prior year.

SG&A as a percentage of sales was 26.9% compared to 25.7% in the prior year quarter.

Third quarter 2007 included $4.3 million of restructuring costs. These costs were offset by gains in the sale of a vacant office furniture facility and a corporate aircraft together totaling $5 million. Third quarter 2006 included a gain on the sale of a vacant office furniture facility of $3.4 million.

As Stan previously mentioned, we made a decision to close an office furniture facility in Richmond, Virginia and we'll move production into other HNI locations. During the quarter, we recorded a charge of $3.5 million in connection with the Richmond shutdown. In addition, we incurred $800,000 of current period charges related to the shutdown of the Monterrey facility which is now complete. Additional costs related to the Richmond shutdown of $2.5 million to $3.5 million are expected during the fourth quarter.

Interest expense was $4.8 million, reflecting a full quarter of interest on a current debt level. Our annualized tax rate remained at 35.4%, consistent with the previous quarter. Net income was favorably impacted $0.05 per share as a result of our share repurchase program. Approximately $38 million is remaining under the current authorization.

Year-to-date cash flow from operations achieved a record level and increased to $178 million from $71 million in the prior year quarter due to improvements in working capital.

That will wrap up the financial comments, and I'll turn it back over to Stan.

Stan A. Askren - Chairman, President, and Chief Executive Officer

Okay, thank you Jerry. And as we look forward, we expect a solid fourth quarter as we continue to implement business process improvements and reduce structural costs. We are maintaining our efforts to improve profitability by leveraging our manufacturing operations, transportation logistics, strategic sourcing and other initiatives. Based on our experience, we feel confident in our ability to meet current and future challenges.

We do anticipate an increase in SG&A spending due to the previously mentioned restructuring and as we implement investments in brand building, new products and general growth initiatives. As I said earlier, we continue to focus our business for long-term growth. We expect modest office furniture sales growth during the fourth quarter, we anticipate office furniture market conditions to remain similar to recent quarters, which is continued softness in the supply-driven channel and solid demand in our contract businesses.

Conditions in the hearth industry continue to deteriorate with the general housing market. The timing of any housing market recovery remains uncertain. That said, we will continue to reduce structural costs and profitably align expenses with anticipated demand levels. We are continuing to improve our strategic position even during these challenging conditions.

I will have Jerry provide the details of the financial outlook for the fourth quarter of 2007. Jerry?

Jerald K. Dittmer - Vice President and Chief Financial Officer

We anticipate overall sales to be comparable to the prior year quarter. Growth rates in office furniture revenue are expected to be in the low to mid single digits versus the prior year quarter. We forecast hearth sales to be down in the low to mid teens versus the prior year quarter. Gross profit margins are anticipated to be comparable to the third quarter '07 results. We expect SG&A, including restructuring charges as a percentage of sales to be comparable with the year-to-date run rate including restructuring charges. Additional charges related to our previously announced operations realignment and the implementation of our brand building, new product and general growth initiatives will drive this rate above our third quarter results. Stan?

Stan A. Askren - Chairman, President, and Chief Executive Officer

All right, Jerry. So just in conclusion, overall, we will continue to profitably manage through these changing market conditions and economic challenges. We will also continue to invest in growth and improve the strategic position of our businesses. Our members and businesses executed well during the third quarter, and I believe together we will deliver strong results in the future.

So that really wraps up our comments and now we'll open it up to questions.

Question And Answer

Operator

Ladies and gentleman, we will now begin the question and answer session of our conference. [Operator Instructions]. Our first question comes from the line of Budd Bugatch at Raymond James. Please go ahead.

Budd Bugatch - Raymond James & Associates, Inc.

Good morning.

Stan A. Askren - Chairman, President, and Chief Executive Officer

Good morning Budd.

Budd Bugatch - Raymond James & Associates, Inc.

Stan, good morning, Jerry, good morning Marshall. Jerry, would you do me a favor and just run over the SG&A guidance again kind of out? You went through that and I kind of lost you somewhere midstream.

Jerald K. Dittmer - Vice President and Chief Financial Officer

Sure, I can do that Budd.

Budd Bugatch - Raymond James & Associates, Inc.

And just take it slow for this old ears.

Jerald K. Dittmer - Vice President and Chief Financial Officer

No problem. We expect the SG&A including our restructuring charges as a percentage of sales to be comparable with the year-to-date run rate. Our year-to-date run rate is about 27.5% range. Additional charges related to our previously announced operations realignment and implementation of our brand building, our new products, our growth initiatives etcetera is what's going to drive a little bit higher than when you just saw in the third quarter.

Budd Bugatch - Raymond James & Associates, Inc.

Okay. So the additional charges are included in the SG&A, though. That's still in that run rate?

Jerald K. Dittmer - Vice President and Chief Financial Officer

That is correct.

Budd Bugatch - Raymond James & Associates, Inc.

Okay. And when you look then at the EBIT margins when you look divisionally, you I think in the fourth quarter of '06 in hearth had just under a 7% pre-tax margin and for office furniture was a couple of basis... 30 basis points under 10%. How would you feel about that or what guidance can you give us on that?

Jerald K. Dittmer - Vice President and Chief Financial Officer

You asked about the breakdown, but we don't normally break it down, as you know, by the actual group.

Budd Bugatch - Raymond James & Associates, Inc.

I understand, but you have done such a good job this year in containing costs, particularly in hearth under just enormously challenging conditions, and both segments quite frankly. I just was hoping you could give a feel, because fourth quarter was when we really started to feel the pinch last year.

Jerald K. Dittmer - Vice President and Chief Financial Officer

Yes, and I think you are going to see in the hearth, Budd, if your remember, the hearth last year was the first quarter that it was really down.

Budd Bugatch - Raymond James & Associates, Inc.

Yes.

Jerald K. Dittmer - Vice President and Chief Financial Officer

So the comparison is going to be our fourth quarter run rate in the margins is going to be higher than it was in our third quarter that we just went through. So the numbers you gave us are going to be pretty well up 200 to 300 basis points. The office furniture is going to basically be flat.

Budd Bugatch - Raymond James & Associates, Inc.

Got you.

Jerald K. Dittmer - Vice President and Chief Financial Officer

Okay.

Stan A. Askren - Chairman, President, and Chief Executive Officer

You know what, and we'll caveat the hearth side too Budd... barring some major, major change. Certainly, it's very uncertain.

Budd Bugatch - Raymond James & Associates, Inc.

And you haven't seen... and like the downturn, you were late seeing it because fireplaces go pretty late in the building process, you'll probably be late seeing it on the upturn as well or what are you hearing from your customers if they are still there?

Stan A. Askren - Chairman, President, and Chief Executive Officer

Yes, I think certainly what we are hearing is they are not at the bottom yet.

Budd Bugatch - Raymond James & Associates, Inc.

Okay, all right, thanks. I'll let others ask questions.

Operator

Our next question comes from the line of Chris Agnew of Goldman Sachs. Please go ahead.

Chris Agnew - Goldman, Sachs & Co.

Thank you. Good morning gentlemen. I would like to ask about the supply-driven business, the continued softness that you are seeing. I was wondering if you could give us a little more color. I know you have limited visibility, but are there any rays of light? Maybe could you discuss are there any differences you are seeing maybe between products or geographies or particular types of business, because I know that's a mix of a whole different sort of go to market businesses. I'm just wondering if there is any more color there.

Jerald K. Dittmer - Vice President and Chief Financial Officer

Yes, Chris, I guess the only color I can provide is it really is there is no change as to what we have been... as to what we have seen in the previous two quarters regarding kind of business activity mix, geography and all that.

Chris Agnew - Goldman, Sachs & Co.

Okay. In terms of... I mean what are your... are there any comments that your customers or your sales people are providing back, provide any more color?

Stan A. Askren - Chairman, President, and Chief Executive Officer

Yes, again it's kind of a maybe not very exciting answer is we are... as I said, we really are looking forward as no change.

Chris Agnew - Goldman, Sachs & Co.

Okay, okay. And with the contract business, what sort of initiatives are you doing there? You talked about your investing in growth. Can you maybe discuss what parts of the business you are investing in? I know you are still challenged from the hearth side, but are there areas where you are investing for growth there, or are you putting all your money towards contract and international? Maybe can you discuss that?

Stan A. Askren - Chairman, President, and Chief Executive Officer

Yes, sure. I think it's a good question. In general, our strategy has been to pull two levers simultaneously. One is to look at the structural cost, the non-value added ways, which is part of our legacy of this lean continuous improvement and remove that. What we do is typically we take some of that and we plough it right back into the business. We are... we do that across the board generally. So we are investing in sales growth, top line growth, even in the hearth business through marketing programs, through advertising, through product development, through sales initiatives. Likewise, we are doing that in the supply-driven channel. I think you can anticipate in '08 that we will have a very high level of new product introductions across the office furniture business. I think if you... in many markets, you can hear advertising, radio advertising, you see print advertising around HON Company in particular. If you listen in the markets, you can see that they are advertising. I think you can see that we continue to invest in selling resources such as sales people, showrooms across the board. And so we really think about this kind of as working both levers simultaneously. Take the waste out, take the structural costs out, but think long term and plough that back in to really growing the top line. So as this... the macroeconomic conditions change as the businesses cycle out, including the hearth business that we really have a lot of momentum coming on through. So we are not just kind of harvesting; we are trimming and investing at the same time.

Chris Agnew - Goldman, Sachs & Co.

Can you touch on international? Is it possible to break out what that is, within the mix?

Stan A. Askren - Chairman, President, and Chief Executive Officer

We have not broken that out historically and, as I often say, we are relatively small in that area. We made some big steps in the last 24 months, primarily the acquisition of Lamex and our sales initiatives in Asia. What we can tell you is that it's going well, we are pleased with the results, it's meeting our strategic objectives, it's meeting our commitments and we anticipate that that will, as time goes on, become a even more important part of our business.

Chris Agnew - Goldman, Sachs & Co.

And do you think... your competitors are doing particularly well in Europe. Is that a geography that is of importance to you? Do you think you need to be positioned there?

Stan A. Askren - Chairman, President, and Chief Executive Officer

Yes, we don't comment on specific markets. I think certainly Europe recently has done well. I think it's still a very mature market. And the question always is is there a good entry point for us. So that's probably the extent of what I could comment on, Chris.

Chris Agnew - Goldman, Sachs & Co.

Okay, great. Thank you.

Stan A. Askren - Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Matt McCall of BB&T Capital Markets. Please go ahead.

Sean P. Connor - BB&T Capital Markets

Hi, this is Sean Connor for Matt McCall. I had... just want to get... try to understand a little bit further on the SG&A. That was kind of a surprise for us. I guess we were looking for something in line with Q2, and stripping out the restructuring, it was significantly better as a percent of sales against lower costs. Are there any surprises there that had lower, something that you guys weren't anticipating or when you were talking about that been in line with Q2, were you already kind of building in that, the restructuring from Richmond?

Stan A. Askren - Chairman, President, and Chief Executive Officer

Well, the restructuring, we weren't building it in. But I mean if you at the restructuring wound up being in that $4 million range. There are some non-operating gains that offset that by a little bit. It really comes down to the cost control and managing the business is really the key things we were doing during this quarter and still making sure we were investing for the future, which is why we talked about we're still going to be doing the brand building and new product and growth initiatives. There is a little bit of timing in there, and that's really all it is at this point.

Sean P. Connor - BB&T Capital Markets

Okay. I know you talked about like '09 when the restructuring is completely finished, you took on the $10 million of savings annually. Will we see any of that in the near term or at least some idea on what the savings might be for '08?

Stan A. Askren - Chairman, President, and Chief Executive Officer

In '08, it pretty well nets out. As we had in the press release, we said that... if I can grab it here... the cost in '08, we are going to be in that $78 million range, the savings will be not quite at that same level, so the cost will still be a little bit higher. But it pretty well nets out for '08 and then by '09 is when you really see that $9 million to $10 million in savings. So we will see some of the savings in '08, but not enough to totally overcome all the costs.

Sean P. Connor - BB&T Capital Markets

Okay. I think at the last call you guys had talked about on the supplies channel business that I guess it wasn't getting any worse, and even maybe being more positive than negative. Is that when you say the same, is that kind of what you are seeing now for October and heading... maybe expecting that trend to go forward through the end of the year?

Stan A. Askren - Chairman, President, and Chief Executive Officer

Correct.

Sean P. Connor - BB&T Capital Markets

Okay, great. Thank you.

Stan A. Askren - Chairman, President, and Chief Executive Officer

All right, thank you.

Operator

Our next question comes from the line of Budd of Raymond James. Please go ahead.

Stan A. Askren - Chairman, President, and Chief Executive Officer

Budd, are you there?

Budd Bugatch - Raymond James & Associates, Inc.

Yes, can you hear me?

Stan A. Askren - Chairman, President, and Chief Executive Officer

Sure, go ahead.

Budd Bugatch - Raymond James & Associates, Inc.

I am sorry. On looking at the sales line for the fourth quarter in your mid teens down for hearth, have you got much included in Harman on that?

Stan A. Askren - Chairman, President, and Chief Executive Officer

There is nothing including in Harman on that.

Budd Bugatch - Raymond James & Associates, Inc.

So Harman has not closed?

Stan A. Askren - Chairman, President, and Chief Executive Officer

That is correct.

Budd Bugatch - Raymond James & Associates, Inc.

And you still expect to close it in the fourth quarter? Are there any issues that have come up?

Stan A. Askren - Chairman, President, and Chief Executive Officer

I think, Budd, what we would say on this is... would be to take kind of a cautious approach on this is it has not closed and it's uncertain as to whether it will close at this point. And so we are not factoring that into our numbers, and I would recommend that you do likewise.

Budd Bugatch - Raymond James & Associates, Inc.

I see. So I take it from that, Jerry, that what you are telling us is that there may have come up with an issue with the creditor issue on this. And I don't expect you to comment on it, so I'll just tell you that's my aside. So when you look at the other side of this is you did have some acquisition revenues in the third quarter, what's left in the acquisition run off essentially for the fourth quarter?

Jerald K. Dittmer - Vice President and Chief Financial Officer

Yes, Budd, for the fourth quarter, it's $15 million roughly.

Budd Bugatch - Raymond James & Associates, Inc.

And which acquisitions are that?

Jerald K. Dittmer - Vice President and Chief Financial Officer

It's mostly an office furniture acquisition that we made down in North Carolina.

Budd Bugatch - Raymond James & Associates, Inc.

Okay. Thank you very much.

Stan A. Askren - Chairman, President, and Chief Executive Officer

Thank you, Budd.

Operator

[Operator Instructions].

Stan A. Askren - Chairman, President, and Chief Executive Officer

Okay.

Operator

There are no further questions in queue. Please continue.

Stan A. Askren - Chairman, President, and Chief Executive Officer

All right, well thank you very much for joining the third quarter call. Have a good day and we look forward to talking with you soon. Bye bye.

Operator

Ladies and gentlemen, that does conclude our conference call for today, which will made available for replay from today at 1:30 Central Time until October 25, 2007 midnight of that day. You may access that conference by dialing 1-800-475-6701 and entering the access code 887382. If you happen to be dialing from an international location, please dial 1-320-365-3844 and enter the same access code 887382. Those dial-in numbers once again for domestic are 1-800-475-6701 and the international number is 1-320-365-3844 and the access code for both numbers is 887382. On behalf of today's panel, I would like to thank you for your participation and I would like to thank you for using AT&T Teleconference. You may now disconnect and have a good day.

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