HNI Corporation
Q2 2009 Earnings Call Transcript

Published: 23 Jul 2009

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the HNI Corporation Second 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). And as a reminder, this conference is being recorded. I would now like to turn the conference over to Treasurer and Vice President, Marshall Bridges. Please go ahead.

[Marshall H. Bridges:]

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss second quarter 2009 results, which we announced yesterday after the market closed. My name is Marshall Bridges, Treasurer and Vice President for HNI Corporation. If you've 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 on our website www.hnicorp.com. We also posted a presentation intended to accompany this call at 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 slides with us during today's call. Joining me on the line today from HNI Corporation are 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 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 the actual results can be found in the conference call presentation, posted to the HNI Corporation website. Corporation assumes no obligations to update any forward-looking statements made during the call. Now, the pleasure of turning the call over to Stan Askren. Stan?

[Stan A. Askren:]

Thank you Marshall and good morning everyone. I'll share a brief assessment of the second quarter and turn the call over to Kurt Tjaden, our CFO to review some of the specific financial details. And then I'll comeback and share some thoughts on our outlook and then finally as Marshall said we'll open it up for questions. So let me start off and say overall during the quarter we made strong progress resetting our cost structure and generating cash flow on the base of highly challenging market conditions. Due to our cost reset actions we were able to increase operating income 17 million versus the first quarter despite lower revenue of 23 million. Our office furniture businesses in particular performed well given the negative economic backdrop. We held office furniture operating margins almost flat on a non-GAAP basis versus prior year, despite lower revenue of $191 million. We are pleased with our cost reset progress and we will continue to adjust our businesses to the marketplace conditions. We also continue to invest for the future with new products and selling initiatives for instance Gunlocke, HBF and Allsteel, we want to combine five gold and silver product awards at this year's new account Office Furniture Industry Show, more importantly our new product introductions are being well received by the market. We also continue to make strong progress on enhance selling initiatives. Cash generation was another bright spot in the quarter. We generated more free cash flow this quarter than the same period last year despite 38% lower revenue. We reduced debt $62 million, and in the quarter with the total debt of $254 million and a debt-to-EBITDA ratio of just under two times. This gives us ample room on to our three times debt-to-EBITDA bank covenants. Our total debt is now almost a $160 million lower or approximately 40% left than it was at the beginning of last year's second quarter. Looking at marketplace conditions, demand was consistently weak across our major channels as we expected. Sales in the supply driven channel of our Office Furniture business were down 36%. As discussed in last quarter's earnings call many of our large customers in this channel were adjusting their inventory levels. We now believe de-stocking has stopped and only modestly impacted the second quarter decline. The remainder of our Office Furniture businesses declined 38%. The day-to-day contract business remains weak with project as competitive as ever. In our Hearth business remodel-retrofit sales including alternative fuel products were down 37%. Lower energy prices and the negative retail environment continue to pressure this channel. The new home construction channel in our Hearth business remained highly challenged with sales down 43% in the quarter. Office Furniture demand appears to be stabilizing particularly in the supply-driven channel. We are currently seeing our historical seasonal upturn in most of our businesses and sequential order rates are generally improving. I'll discuss this more in the outlook. I'll now turn the call over to Kurt Tjaden. Kurt?

[Kurt A. Tjaden:]

Thank you, Stan. If you like to follow along in case we make reference to the presentation Marshall mentioned is posted on our website. I'm going to cover the second quarter 2009 results. As you can see on slide eight, consolidated net sales decreased 37.5% to $383 million,. Sales for the Office Furniture segment decrease 37% to $344 million driven by substantial weakness in both the supplies-driven and contract channels as shown on slide nine. Net sales for the Hearth product segment decreased 40.1% to $59 million driven by significant declines in both the new construction and remodel-retrofit channels. Consolidated growth margins were 33.8% compared to 34.2% in the prior year quarter. This 0.4 percentage points decline was due to decreased volume, which was partially offset by increased price realization and cost reduction initiatives. SG&A, including restructuring and impairment charges as a percentage of sales was 33.6% versus 30.1% in the prior year quarter. While the percentage of sales increased, this due primarily to volume de-leverage, actual SG&A dollars declined due to cost control initiatives, lower volume related costs, reduced incentive based compensation expense and a gain on the sale of the corporate aircraft. Freight and distribution expense, which is included in SG&A, totaled 9.7% of sales during the second quarter. This compares to 10.5% during the same period last year. And this decrease is primarily due to reduced fuel costs and network improvements. Second quarter 2009 included $5.2 million of restructuring and impairment costs of which $1.4 million were included in cost of sales. These included $3.7 million associated with the shutdown and consolidation of two Office Furniture manufacturing facilities and $1.5 million related to the disposition and restructuring of Hearth operations. For comparison, we recorded $3.5 million of restructuring and transition costs in the second quarter of 2008 of which $1.5 million were included in cost of sales. More details concerning these restructuring and transition charges can be seen on slide 10, which reconciles our non-GAAP results to our GAAP results. Year-to-date to cash flow from operations was $49 million compared to $60 million in the prior year. This change was driven by lower earnings which was partially offset by strong working capital management. We reduced total debt by $68 million during the first six months of 2009 using cash flow from operations, excess cash, the proceeds from the sale of long-term investments. That wraps up the financial comments. Now I'll turn the call back over to Stan.

[Stan A. Askren:]

Thank you, Kurt. As we look forward the visibility remains limited and order rate continue to be volatile. That said, we'll share with our best current view of the third quarter. Market conditions remain difficult, but as I said earlier in the call, we are seeing some stabilization particularly in our Office Furniture businesses. Overall we expect our historical seasonal demand patterns to generally hold and drive third quarter revenue above second quarter levels. In particular, we expect the supply-driven channel of our Office Furniture business to benefit from reset channel inventory levels and solid government and educational business. The rest of our Office Furniture businesses are seen early signs of stabilization but remains a great deal of uncertainty and the competitive environment continues to be highly challenging. Overall we feel good about our cost position, market coverage and selling models in this environment. We're also seeing initial signs of stabilization in our Hearth business but at very lower demand levels. We are expecting remodel-retrofit seasonality to drive sequential growth and are encouraged by the recent of month-over-month growth in housing starts. That said, with these low demand levels we are expecting a relatively small lots in the Hearth business for the third quarter. We continue to adjust our Hearth cost structure. On a consolidated basis we're optimistic about the impact of the seasonal upturns given our lower cost structure; we'll continue to reduce cost, generate strong cash flow and lower our debt. We believe these actions together with our investments in new products and selling initiatives position us well for the future. I'll let Kurt provide the financial outlook for the third quarter, and then I'll come back and we'll close. Kurt?

[Kurt A. Tjaden:]

Thank you, Stan. For the third quarter 2009, we anticipate overall sales in each of our operating segments to be down 30 to 36%. Within Office Furniture we expect the supplies driven channel to decline towards the lower end of this range. The rest of the segment is expected to decline a few percentage points more and be closer to the upper end of the 30 to 36% range. Hearth sales are also anticipated to decline 30 to 36% driven by declines in both the new construction and remodel-retrofit channels. Gross profit margin excluding restructuring charges is expected to increase approximately 1 to 1.5 percentage points from the prior year quarter results of 33.9%. This increase will be driven by continued cost reset actions, price realization and favorable material costs. Included in cost of sales will be approximately $700,000 of restructuring and transition charges. SG&A as a percentage of sales excluding restructuring and transition charges is expected to increase 1 and 1.5 to 2 percentage points from third quarter 2008 non-GAAP results when it was 28.6%; while the percentage of sales increases primarily due to volume de-leverage actual SG&A dollars are projected to decline significantly. We anticipate SG&A related restructuring costs to be approximately $1.4 million in the third quarter. Net interest expense is projected to be $2.7 million and the effective tax rate is anticipated to be 35% during the third quarter. We expect to end the third quarter with the debt-to-EBITDA ratio of approximately two times essentially flat with the second quarter level. This summarizes our outlook for the third quarter 2009. I'll now turn the call back to Stan for closing comments.

[Stan A. Askren:]

Alright, thank you Kurt. So let me close this out by saying that we've made some strong progress in resetting our cost structure and generating cash flow. You should expect more of the same as we continue to adjust to the new marketplace realities. We are excited about the future given these actions, the signs of stabilization we're seeing, and the investments we're making to improve our competitive position. With those comments complete, we'll now open it up for questions.

[Operator:]

(Operator Instructions). Our first question comes from the line of Mark Rupe with Longbow Research. Please go ahead.

[Mark Rupe:]

Hi, guys. Congratulations on the execution again, unbelievable. On the gross margin, could you go through the factors again? I got price realization in raw materials, but curious to see if there is any kind of priority or the significance of each one of those relative to the others than relative to the current quarter you just released, there are any different factors that are coming into play that the gross margin as we go forward?

[Kurt Tjaden:]

Yeah really Mark, this is Kurt. Really that was driven by cost containment that the gross margin level and what we saw in the quarter was an acceleration really attribute to the operating companies and the members. And what they were able to do accelerate cost reductions, right size or staffing and manage are day-to-day operating costs.

[Stan Askren:]

And we would expect the same on quarter numbers no significant change in that sort of process or priority.

[Mark Rupe:]

Okay. As far as like lower steel costs, did they have much more of an impact, I mean you started to see the benefit of that in the second quarter and then going is that going to be a bigger piece?

[Stan Askren:]

Yeah in the second quarter Mark we saw input costs reduced by about $6 million when and there was a couple of million dollars of the steel saving which were offset by other materials, really the second quarter was driven by lower fuel costs.

[Mark Rupe:]

Okay.

[Stan Askren:]

But what we expect to see in the third quarter is input cost down about $10 million and roughly half of that is in steel.

[Mark Rupe:]

Okay, perfect. Thank you for the color that. And just on the Hearth division the restructuring, can you go quickly through kind of what the talks on, what you're doing there and how I mean, obviously taken a time of costs out of that business already and obviously it's been weaker here this year and probably what you expect to go in end of the year? How much more can you get out of that or what kind of, what are some of the actions that you took to reset it again?

[Kurt Tjaden:]

Yeah. It's Kurt, clearly due to the extreme remark -- clearly due to the significant declines here it is tougher, okay. Fixed costs on our business would have negatively impact in the long term competitive environment.

[Mark Rupe:]

Right.

[Kurt Tjaden:]

That said we continue to look for structural of cost. And we have some significant sort of analysis evaluations underway now and I prepare to announce things but we still do feel like there is an additional cost of that team can remove in that business. We've done a lot of consolidation and restructuring of smaller locations somewhere between a dozen and dozen and half sort of smaller consolidations, restructuring, sales, divestments those sorts of things that kind of remove structural cost from that business and we'll continue to do that as well as look for bigger items and then finally grow day-to-day expense management there.

[Mark Rupe:]

Okay. And just lastly on the SG&A, you had mentioned the incentive based comp expense being lower, was that different than previous quarters that the impact of that is that sustainable?

[Stan Askren:]

It's not different than the previous quarters and certainly and the answer is yes, although what I would say there is our hope. Basically, as we insist that members of HNI, sort of do their job, do a better job, meet the challenges, there maybe more of incentive competition going forward. That's yet to be determined based on how well we do against this objectives or not.

[Mark Rupe:]

Perfect, great job again guys. Thanks.

[Stan Askren:]

Thanks Mark.

[Operator:]

Next we go to line of Budd Bugatch with Raymond James. Please go ahead.

[Unidentified Analyst:]

Good morning, gentleman it's actually Chad (ph) filling in going in for Budd. I have got couple of questions. I guess first may be piggy backing of Mark's first question. Could you quantify for us the impact of pricing in the quarter and give us a sense for what is assumed in your 3Q guidance?

[Stan Askren:]

Yeah. In the second quarter Chad we saw about $30 million of price that hold on from year ago and what you should expect to see in the third quarter in those projection somewhere in the $20 million range.

[Kurt Tjaden:]

And I remind you Chad the 30 million was really closing the gap last year. We have that sort phenomenon where materials spike and we were -- we had to pick this as well and the close gap of price increases then sort of close that gap and that we're seeing now its going to returning that gap at the normal stage.

[Unidentified Analyst:]

I got you. And if I remember correctly based on the timing of a lot of those increases we should start to be lapping some of those initial benefits, would it be reasonable to think that 4Q is less than 3Q as far as the year-over-year benefit?

[Stan Askren:]

That is correct.

[Unidentified Analyst:]

Okay. And I guess looking forward if I remember correctly, I think catalog price for you guys look at it or reset it maybe every six months or so. Has there been any reset in the pricing there? Is there something going forward given the deflation that we've seen; would you expect pricing to come down the next time that issue comes up?

[Kurt Tjaden:]

No. I wouldn't, because we really haven't, I guess what I would say is, as we look at it on an ongoing basis, I don't anticipate it right now a price increase going forward. But I also don't anticipate a price decrease going forward either.

[Unidentified Analyst:]

Okay, great. And, obviously you did a great job on cash flow in the quarter, kind of incorporating your volume assumptions, what do you think you can do with working capital for the rest of the year? And do you have a specific target or level in mind for debt reduction?

[Kurt Tjaden:]

Yeah. I think that the similar level we talked last quarter Chad, we are looking at free cash flow of about $100 million, which is inline with what we did a year ago. And working capital continues to be a key area of focus for us as an element of that.

[Unidentified Analyst:]

Okay. And any specific on debt?

[Stan Askren:]

Debt, I think it's kind of $220 to 230 million year end position.

[Unidentified Analyst:]

Okay, great. And I think that does it for me. If I have another one I'll jump back in the queue.

[Kurt Tjaden:]

Alright. Thanks, Chad.

[Unidentified Analyst:]

Thanks.

[Operator:]

Next we go to the line of Todd A. Schwartzman with Sidoti & Company. Please go ahead.

[Todd Schwartzman:]

Hi, good morning gentlemen. Could you repeat that expected debt level at year end, please?

[Stan Askren:]

Sure, Todd it's 220 to $230 million.

[Todd Schwartzman:]

Alright. Thank you. And I wonder if you could discuss the timing of the benefits expected from the latest round of plant closures?

[Stan Askren:]

Yeah, if you think of the lowest part of that you'll not see that until 2010 as we wind down those operations through the back half of the year that's about $1.8 million we will start to see in 2010. Certainly South Gate which we talked about last quarter we are expecting to see about $3 million of savings in the back half of this year and $7 million on an annualized basis.

[Todd Schwartzman:]

Okay. And what was CapEx for the quarter and any projection for full year? Any change there?

[Kurt Tjaden:]

Full year projection -- $25 million range and for the quarter we were at about $3 million in the second quarter.

[Todd Schwartzman:]

And any additional commentary on order rates since quarter's end July versus June?

[Kurt Tjaden:]

No. I think we have covered it in the comments.

[Todd Schwartzman:]

Okay. Thanks a lot.

[Kurt Tjaden:]

You bet. Thank you.

[Operator:]

And next we go to the line of Matt McCall with BB&T. Please go ahead.

[Matthew McCall:]

Thanks, good morning everybody.

[Stan Askren:]

Good morning.

[Matthew McCall:]

Kurt I just have to clarify and make sure I am talking apples-to-apples here, when you gave your guidance the power point says gross profit margin excluding restructuring, related accelerated depreciation and then, and you said up to 1 to 1.5 and I think, you said the gross margin includes 700,000 in restructuring. So I was wondering what the right number year-over-year?

[Kurt Tjaden:]

Yeah, Matt. The one point, the 1 to 1.5 points were talked about is comparing the non-GAAP number of last year to non-GAAP number of the third quarter of this year and after that we had 700,000 of restructuring related, accelerated, depreciation.

[Matthew McCall:]

Okay. So it's the talking about non-GAAP of 339, so I'll just take that and I add to 1 to 1.5 point.

[Kurt Tjaden:]

Correct.

[Matthew McCall:]

Okay, got it. Okay. And then so just clarification 28.6 was the non-GAAP SG&A up 1.5 to 2 points on that?

[Kurt Tjaden:]

Correct.

[Matthew McCall:]

Okay. Sorry just making sure. And so I want to talk on my last question, outside of so Louisburg 1.8 million in the back half; South Gate 3 million I am sorry, Louisburg is 2010 and South Gate in back half 3 million 7 and million annualized so that's 4 million in the out year, anything else from a cost perspective we need to look at, you said it sound like you got a little, you did a little better from a timing perspective on taking some costs out but anything else its going to come out in the back half?

[Stan Askren:]

Well. As usual Scott we don't announce things sort of pre-for using cash. I am sorry Matt.

[Matthew McCall:]

That's alright. One name...

[Stan Askren:]

One click here.

[Matthew McCall:]

That's alright.

[Kurt Tjaden:]

Meet over a cup of coffee. We don't sort of announcing sort of pre but I think it's fair to say you kind of look at our track record on what we're doing with cost reductions and structural cost. As long as we maintain the sort of down level of where the market depth, you should anticipate more cost restructuring going forward in the foreseeable future. Similar to what we've been doing.

[Matthew McCall:]

Okay. And then another point of clarification, Kurt, you said Q2 costs were down $6 million. That's a year-over-year number correct?

[Kurt Tjaden:]

Correct.

[Matthew McCall:]

And you're going to be down 10 million in Q3?

[Kurt Tjaden:]

Correct.

[Matthew McCall:]

And what was the transportation cost as a percent of sales in the quarter?

[Kurt Tjaden:]

Transportation for the quarter was down about 8% for the quarter. We were 9.7%.

[Matthew McCall:]

And any -- how much of that was related just to the cost of fuel, how much of that was related to so many initiatives you've worked on trying to bring that number down?

[Kurt Tjaden:]

Well, half of that was related to fuel and the rest was network improvements and our key utilization and the improvements.

[Matthew McCall:]

And what's kind of a target six, 12 months out for that number based on flat fuel prices?

[Kurt Tjaden:]

I don't -- more of the same here same numbers.

[Matthew McCall:]

Okay. And then finally, the Hearth business it sounds like you said Stan modest loss and the guidance looks like about $70 million top line. Is that roughly going to be looked as breakeven in that $70 million range?

[Stan Askren:]

A little bit lower.

[Matthew McCall:]

Little bit lower is breakeven.

[Stan Askren:]

Could you make sure you understand your question.

[Matthew McCall:]

Sure sir, I'm sorry. I said based on your guidance it looks like you're talking about, if you take the mid point the decline about $69 million in revenue and you said a modest loss is that I don't know, I am just trying to get an idea where the breakeven point is for that business?

[Stan Askren:]

I think for the third quarter given the seasonality math that 65 to $70 million range is probably the breakeven for Hearth. We'll continue to reset our cost structures that we're attempting to lower that and expect to continue to lower it.

[Matthew McCall:]

Okay. Got it, okay. Thank you all.

[Stan Askren:]

Thank you, Matt.

[Kurt Tjaden:]

Thank you Matt.

[Operator:]

(Operator Instructions).

[Stan Askren:]

Okay. Well, thank you very much for your interest in HNI and for joining us on the call. We look forward to talk to you in the future. Have a great day.

[Operator:]

Thank you everyone. That does conclude our conference for today. Thank you for your participation. If you using an AT&T Executive Teleconference you may access this call via the replay system by dialing 1800-475-6701 and entering an access code 106074. Again the number is 1800-475-6701 with an access code of 106074. Once again we appreciate your joining us today. You may now disconnect.