HNI's CEO Discusses Q3 2011 Results - Earnings Call Transcript

HNI Corp ( HNI)

Q3 2011 Earnings Call

October 20, 2011 11:00 am ET

Executives

Derek Schmidt - Treasurer and VP, Corporate Finance

Stan Askren - Chairman, President and CEO

Kurt Tjaden - VP and CFO

Analysts

Saathoff William - Raymond James

Mark Rupe - Longbow Research

Matt McCall - BB&T Capital Markets

Peter Lisnic - Robert W Baird

Todd Schwartzman - Sidoti & Co.

Presentation

Operator

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. 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 would now like to turn the call over to Mr. Derek Schmidt.

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?

Stan Askren

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 in 2012. We will then open the call up for your question.

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 in earning per share increased almost 60% versus prior year. We aggressively manage working capital and generated over $70 million of free cash flow. Our performance is a reflection of the power of our split and focus business model and strong returns from strategic investments.

Sales in our office furniture contract international businesses remained strong with 15% top line growth. Operating leverage was solid and margins improved. Despite low levels of small business confidence, our supplies-driven business improved 4%, exceeding expectation.

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%, the overall business of housing conditions remained weak. Profit more than doubled year-over-year, a strong operational execution in cost containment drove excellent operating leverage.

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

Kurt Tjaden

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 Products segment increased 15.2% to $82 million.

Consolidated gross margins 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 cost.

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.

Stan Askren

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 continue to aggressively invest in new products and expand sales distribution in their region and the world. Growth in our supplies channels 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 by development and selling capabilities.

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