HNI Corporation ( HNI)

Q2 2011 Earnings Call

July 21, 2011 11:00 AM ET

Executives

Derek Schmidt – VP, Corporate Finance

Stanley Askren – Chairman, President and CEO

Kurt Tjaden – VP and CFO

Analysts

Leah Villalobos – Longbow Research

Budd Bugatch – Raymond James

Matt McCall – Portage Venture Partners

Joshua Chan – Robert W. Baird

Todd Schwartzman – Sidoti & Co.

Presentation

Operator

Good morning. My name is Sean and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the HNI Corporation Second Quarter Fiscal 2011 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). As a reminder, today’s conference call is being recorded. Thank you.

I’d now like to turn the call over to Mr. Derek Schmidt. Please go ahead, sir.

Derek Schmidt

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss second 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, please call 563-272-7927, and we will send it to you. The release is also available at our website, www.hnicorp.com.

A presentation intended to accompany this call has been posted to our website. This presentation contains details of our financial performance, including the non-GAAP to GAAP reconciliation. It can be found by accessing the webcast link under the Investor Information section of our website. We encourage you to review this presentation.

Joining me on the line today from HNI Corporation are Kurt Tjaden, Vice President and Chief Financial Officer, and Stan Askren, Chairman, President and CEO. Stan and Kurt will review the results and then open 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 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.

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

Stanley Askren

Good morning everyone. I’ll share an assessment of the second quarter of 2011 and provide some outlook thoughts regarding third quarter, while Kurt Tjaden, our CFO will then open the call up for questions.

We executed well and delivered solid results in the second quarter. Sales in our office furniture contract and international businesses remained especially strong and exceeded our expectations with 25% top line growth primarily driven by large projects.

Overall sales in our supplies business declined 5% year-over-year. Core demand in our supplies-driven business was relatively flat, consistent with uncertainty in small business confidence. The quarter was adversely impacted by a substantial inventory reduction of $12 million by our large wholesale partners, who took advantage of our streamlined fulfillment model and their initiatives to improve their return on invested capital.

Our Hearth business significantly exceeded expectations. Remodel-retrofit sales increased 32% as remodeling activity improved and our alternative fuel products were constantly impacted by higher oil prices. The new construction channel was down 11%, due to the difficult housing market and the prior year benefit comparison of the home buyer tax credit.

I’ll now turn the call over to Kurt to provide some specific financial data for the second quarter. Kurt?

Kurt Tjaden

Thank you, Stan. For the second quarter 2011, consolidated net sales increased 8.7% to $433 million. Sales for the Office Furniture segment increased 8.7% to $373 million, again, negatively impacted by the $12 million wholesale partner inventory reduction. Net sales for the Hearth Products segment increased 8.4% to $60 million, and consolidated gross margins decreased to 33.9% compared to 35.5% in the prior year quarter due to increased material costs, unfavorable mix of business, and lower price realization.

As a percent of net sales, total selling and administrative expenses improved 0.9 percentage points due to higher volume and lower restructuring charges, which were partially offset by increased fuel costs, investments in strategic growth initiatives and higher incentive-based compensation.

We ended the quarter with $47 million of cash. Operating activities used $8.4 million of cash during the first six months of 2011 compared to generating $1.5 million of cash during the same period last year. Our inventory increased $18 million from the same period last year. This was due to one, the timing of large contract projects that we expect to ship in the third quarter; two, an inventory investment made to level load to our production, which we expect to ship in the balance of 2011; and three, increased volumes and higher material costs.

I’ll now turn back to Stan.

Stanley Askren

Okay. Thank you, Kurt. Looking forward, we entered the third quarter well positioned to deliver solid sales and proper growth over prior year. Our contract brands are performing well. We anticipate continued double-digit growth in our contract business, driven by strong demand. Year-over-year growth rates within our contract channel are expected to moderate in the second half of the year, again, stronger prior year comparison.

We continue to see significant international growth, particularly in China. We’re aggressively expanding our geographical sales presence in the region and investing in new products. In our supplies channel, we expect growth to continue to be constrained in our day-to-day transaction business due to challenged small business confidence. We are executing well and continue to aggressively pursue cost reduction opportunities.

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