HNI Corporation (HNI)
Q2 2012 Earnings Call
July 19, 2012 11:00 am ET
Derek Schmidt - Treasurer and VP, Corporate Finance
Kurt Tjaden - VP and CFO
Stan Askren - Chairman, President and CEO
Chad Bolen - Raymond James
Josh Borstein - Longbow Research
Matt McCall - BB&T Capital Markets
Peter Lisnic - Robert W. Baird
Todd Schwartzman - Sidoti & Company
At this time, I would like to welcome everyone to the HNI Corporation second quarter fiscal 2012 results conference call. (Operator Instructions) Mr. Schmidt, you may begin your conference.
Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss second quarter 2012 results, which were announced yesterday after the market closed. My name is Derek Schmidt, Treasurer and Vice President, 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 reconciliations.
Joining me on the line today from HNI Corporation are Kurt Tjaden, Vice President and CFO; 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?
Good morning. We executed well and delivered solid results in the second quarter. Our growth investments and market initiative drove solid sales improvement across both segments. Strong operational performance and market execution contributed to improved margins.
Performance in our Office Furniture supply driven business remained robust with organic growth at 12%. Our market leadership position is strong and growing in a continued leverage, the power of our brand to drive outstanding results.
As expected sales in our other office furniture businesses were flat against strong prior-year comparison in the second quarter. Last year we benefited from several large government projects. Demand in our international and non-government businesses remained strong in the quarter.
Our Hearth business continues to deliver excellent performance. Sales in new construction channel remained especially strong with 20% growth, as housing starts and builder sentiment improved. Remodel and retrofit sales decreased 11%, a decline in fuel prices and warm weather adversely impacted demand for alternative fuel products.
I'll turn the call over to Kurt, let him review some specific financial data for the second quarter. Kurt?
Thanks, Stan. So for the second quarter 2012, consolidated net sales increased 11% to $480 million or 5.2% on an organic basis. Sales for the Office Furniture segment increased 12.3% to $419 million or 5.6% on an organic basis. Net sales for our Hearth product segment increased 2.8% to $62 million.
Consolidated gross margin increased to 34.4%, which compares to 33.9% in the prior-year quarter due to higher volume, better price realization and lower material cost. These were partially offset by unfavorable mix and the impact of the acquisition of Sagus and higher restructuring and transition cost.
As a percent of sales, selling and administrative expenses, including restructuring and impairment charges were 31.6%, which were consistent with the prior year. Benefits from borrowing leverage were partially offset by investments in growth initiatives, higher incentive based compensation and the impact of the acquisition of Sagus.
We ended the quarter with $55 million of cash. Operating activities generated $6 million of cash in the first six months of 2012 compared to $8 million use of cash in the same period last year. Stan?
We enter the third quarter with strong momentum and are well positioned to deliver solid sales and profit growth for the year in both segments. I'm encouraged by the strong performance of our businesses, particularly in the Office Furniture supply driven business and hearth new construction channel, which both delivered double-digit growth in the first half of 2012.
Demand in our office supply driven business is expected to remain strong. Growth rates in the second half of the year will moderate relative to first half, given stronger prior year comparisons. Our momentum is strong and we continued to invest in product development, branding and fulfillment models to deliver continued profitable growth in the future.
Our Office Furniture contract brands continue to compete well in their markets. Year-over-year growth rates within the contract channel are expected to modestly increase in comparison to exceptionally strong double-digit growth in the prior year.
We expect continued strong performance in our international business, particularly in China, where we are well positioned to outperform the market. Despite challenging market conditions for government sales, we remain on target to deliver solid overall growth in both of our Office Furniture channel for the full year.
Our Hearth segment remains well positioned for continued strong profitable growth. Positive momentum in the new construction channel is expected to continue as single-family housing starts to improve. Topline growth in the remodel retrofit channels is expected to remain relatively flat in comparison to the exceptionally strong performance of our alternative fuel products last year.
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