HNI Corp (HNI) 2011 Q4 法說會逐字稿

Good morning, my name is Amanda and I will be your conference operator today.

At this time I would like to welcome everyone to the HNI Corporation fourth-quarter and year-end 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.

Mr.

Schmidt, you may begin your conference.

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss fourth-quarter and full-year 2011 results, which were announced yesterday after the Market close.

My name is Derek Schmidt, Vice President of corporate finance for HNI Corporation.

If you've 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 the this presentation as it contains details of our financial performance, including the non-GAAP to Reconciliation.

Joining me today on the line for 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 question.

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 risk.

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 Stan Askren.

Stan?

Thank you, Derek.

I'll start out by wishing everyone a good morning.

Pleased with our performance in 2011.

It was a strong year of profitable growth for HNI Corporation.

Our strategic investments in market initiatives delivered solid 8% top-line growth.

Outstanding execution across all businesses resulted in a 40% improvement in operating income.

Very strong working capital performance drove strong operating cash flow in excess of $130 million.

We accelerated our growth investments, strengthen our competitive position and made significant progress on our long-term strategies.

Growth and profit improvement in the fourth quarter was solid and we ended the year with strong momentum.

Sales in our office furniture contract and international businesses remained strong with 7% top-line growth.

Our supply-driven business grew 3%, small business confidence is improving, and our strong brands are well-positioned for profitable growth.

Our Hearth business executed well and exceeded expectations.

Remodel and retrofit sales increased 8% on stronger remodeling activity.

The new construction channel was up 6%, as homebuilder sentiment continue to improve.

I'll turn the call over to Kurt to review the specific financial data for the fourth quarter.

Thank you, Stan.

For the fourth-quarter 2011 consolidated net sales increased 7.3% to $500 million, or 5.5% on an organic basis.

Sales for the office furniture segment increased 7.4% to $402 million, or 5.2% on organic basis.

Net sales for the Hearth product segment increased 7.1% to $98 million.

Consolidated gross margin's increased to 35.6% compared to 35.2% in the prior-year quarter due to higher volume and improved price utilization, which was partially offset by increased material cost.

As a percent of net sales, total selling and administrative expenses, including restructuring and impairment charges, improved 1.4 percentage points due to higher volume and lower restructuring and impairment charges, partially offset by increased fuel costs, higher incentive-based compensation and acquisition-related cost.

We ended the year with $73 million of cash and operating activities generated $134 million of cash during 2011, up 42% from last year.

Stan?

Looking forward we entered 2012 with strong momentum and we're on track to deliver sales growth and profit improvement in all businesses.

Our strategy remains focused.

We're investing in our core North American businesses to capture new growth opportunities and aggressively pursuing attractive prospects in key vertical and fast-growing international markets.

I'm pleased to announce that we successfully completed the acquisition of Sagus International last quarter.

HNI is now the industry leader in K-12 education furniture market.

In the short term growth in this business will likely be restrained by reduced state and local government funding; however, we are excited about the long-term value creation prospect this investment offers our shareholders.

Our office furniture contract brands continued to compete well in their markets.

Year-over-year growth rates within the contract channel are expected to ease against strong prior-year comparisons.

Improved corporate spending is projected to drive moderate single-digit growth in the channel.

Our international business remains a significant growth opportunity, particularly in China where we are well-positioned to outperform the market.

Growth in our supply-driven channels is expected to improve as small business confidence strengthens.

Our investment in branding, product development and selling capabilities is projected to drive solid growth.

In our Hearth segment we anticipate sales growth to be relatively modest compared to strong 2011 results.

Top-line growth in the new construction channel is expected to rebound modestly as single-family starts and housing permits improve.

In the remodel retrofit business demand should benefit from stronger remodeling trends, but overall channel growth is expected to be modest compared to the exceptionally strong performance of our alternative fuel products last year.

With the Hearth industry's strongest brands, best products and superior manufacturing and distribution capabilities we remain well-positioned for continued strong profitable growth.

Across all businesses we're aggressively investing for future growth.

I'm excited about our new product and platform initiatives across all businesses in 2012.

They're innovative and highly relevant to the changing needs of the marketplace.

We continue to invest in opportunities for significant and transformative cost improvement.

We remain relentless in our pursuit of Lean opportunities and structural cost reduction.

We are leveraging our RCI culture and discipline to champion full process improvement throughout the Company and we are investing in a comprehensive business system transformation.

We are investing in our core and building strong businesses to perform over the long term.

Kurt will now provide the financial outlook for the first quarter and full year of 2012.

So for the first quarter of 2012 we anticipate overall sales to be up 10% to 13%.

Office furniture sales are expected to be up 12% to 15%.

Including sales from acquisitions, we're up 7% to 10% organically.

Organic sales in the supplies-driven channel are expected to be up 7% to 9%.

And sales in the rest of our office furniture businesses are expected to increase 8% to 10%.

Hearth sales are expected to be flat to up 4%.

Gross profit margins is expected to decrease marginally versus first-quarter 2011 when it was 34%, excluding restructuring and transition charges.

SG&A as a percentage of sales, excluding restructuring and transition charges, is expected to be slightly lower than first-quarter 2011 when it was 33.4%.

Net interest expense is projected to be $2.6 million and the effective tax rate is projected to be approximately 36% during the first quarter.

For the year, we are expecting capital expenditures to be $50 million to $55 million and we project full-year 2012 depreciation and amortization to be approximately in line with 2011.

Our estimate of non-GAAP earnings per diluted share for the first quarter is in the range of a $0.05 loss to breakeven.

And for the full-year 2012 we are reaffirming our estimate of non-GAAP earnings per diluted share in the range of $1.30 to $1.50, consistent with the outlook provided last quarter.

To summarize our outlook for the first quarter and full year I'll turn it back to Stan.

Thank you, Kurt.

I'm encouraged by the ongoing recovery in our economy and remain optimistic about our markets and growth prospects.

We will continue to aggressively invest for future growth while pursuing opportunities for structural and operating cost reductions.

Our businesses are strong, competitive and agile and we are well-positioned for long-term profitable growth.

With those comments complete, we'll now open it up for questions.

(Operator Instructions) Your first question comes from the line of Budd Bugatch at Raymond James.

Your line is open.

Good morning, Stan, Kurt, Derek, this is actually Chad filling in for Budd.

Good morning, Chad.

Good morning.

Congratulations for the strong performance in the quarter.

Thanks.

A couple of things.

Stan, as I look at the upside relative to your original revenue guidance it looks like it came pretty significantly from Hearth.

What drove the surprise there versus your internal expectations?

And then, as we look forward to the guidance for Q1, looks like you're guiding for the growth rate to slow sequentially although I think the comparison's a little bit easier than it was in Q4.

Just help us understand the dynamics there.

Okay, I'm going to need you to ask that second question here after I answer the first here.

Hearth was a key driver for us.

Sentiment in new construction was stronger than we anticipated.

We saw strong growth in the remodel retrofit channel around things other than alternative fuels.

Gas category grew nicely there.

I think overall that part of the economy is improving.

And that business executed very well.

We continue to be pleased with how they performed.

The moves that we made during the downturn are paying off and we're seeing strong market momentum and strong operational cost performance.

Okay.

Second -- restate that second part --

The second part is you're guiding Hearth to 0% to 4% growth, which slows versus what you delivered in Q4 and I think the prior-year comparison actually gets easier for you in Q1, at least in terms of the revenue growth.

What's driving that dynamic?

Is it seasonality or is it something else going on?

Well, there's several factors moving that business, so one is new construction we think is going to improve modestly.

Second, the remodel retrofit activity should improve modestly.

The big change is the alternative fuel.

Warm weather drives lower sales of alternative fuel.

As you can imagine, if you're sitting there watching the meter run on your fuel oil meter or you're sitting there chilled or there's a power outage due to a ice storm that drives you to thinking about alternative fuel appliances or alternative heat.

When it's warm, that changes that whole dynamic.

So you, I'm sure, are watching and experiencing what we are, which is a much warmer winter and that will carry over in the first quarter and first half of 2012.

Okay, that definitely makes sense.

I guess switching over to the office side.

Your guidance for Q1 is 7% to 10% organic growth and with 8% to 10% in the rest of the business, ex supplies driven.

That obviously looks very strong relative to the trends that we're seeing from BIFMA and some of the trends that we've heard from some of your primary competitors.

What's driving the growth rate that you're expecting there?

And I guess the second part -- don't want to hit you with too many two-part questions today -- but the big macro worries everybody's focused on is government project business and Europe.

Could you remind us of what your exposure to those two areas is, please?

Sure, let me take a whack at this, Chad.

We are feeling good solid momentum in office furniture, in both the supply side of the business and in the contract international side.

Supplies are seeing improved small business confidence.

We feel good about our market position, the investments we've made in the past and how they're going to pay off in that category.

Our contract business has continued to see solid pipeline activities, solid business order activity and so although it's likely to -- the industry's likely to off a bit we think there's still strong growth there as we look forward.

And then finally, our international experience -- exposure is primarily around China and Asia.

We expect that to continue to be strong.

You read in the paper that China GDP is going to come down from 9.5% to 8.5% or 8.9%, still very strong growth.

Those businesses -- our businesses there are performing very well and so that's going to continue to buoy our sales.

Our exposure to government is we've had significant growth in both federal and state and local.

We think that state and local's going to slow more than federal.

Federal is going to slow but, again, we think we're well-positioned and should continue to do well in those segments.

Okay, last question for me.

As I work through some of the math on your guidance for Q1, looking at the contribution margins and then compare that to the full year, for Q1 on a double-digit increase in sales, I actually get about -- at the midpoint maybe $1.5 million or so reduction in operating income.

But then as I look at the full-year guidance, it seems to imply more of a normative 25% to 30% contribution margin.

So what are some of the moving parts that are affecting Q1 and then how do you get from not a whole lot of incremental profit in Q1 to the assumptions for the full year?

Yes, Chad, this is Kurt.

So, consistent with past experience it can be really choppy between the quarter.

So what we can have rolling in terms of mix of our business and that, as you know, given our diversity will cut across multiple elements, whether that's channels, customers, geographies will certainly have a key impact on that.

Stan talked -- we've got education, which exacerbates that even a little more this year with that addition, and those really get to be the key drivers on that.

So, in other words saying this, Chad, is we have lots of factors or variables that move around.

It has to do with mix, spending, often material price gap, all sorts of things, and what we are reporting this first quarter is going to be a little bit less but we don't really manage for the quarter, we manage for the year.

We maintain the same level of optimism about the year and first quarter moves around a little bit differently than some of the other quarters based on all those factors that Kurt just talked about.

Got you.

Well, thanks, guys, for taking my questions and good luck to you on the balance of the year.

Thanks, Chad.

Your next question comes from the line Matt McCall at BB&T Capital Market.

Your line is open.

Thanks, good morning, everybody.

Hey, Matt.

I'm going to follow up on a couple of the previous questions.

The first one, Stan, I didn't hear, I think he asked what's your exposure to some of those end markets.

If I asked you state and local, federal then lump in public education, both K-12 and higher ed, what are we talking about there as a percent of total?

I think that's where the growth rate pops out at me.

If those are expected to slow 8% to 10% looks pretty darn good.

Yes, government is approximately 15% to 20% of our combined office furniture business, Matt.

I don't think we've broken out the gover -- excuse me, the education, but -- and some of those intertwined, as well.

Certainly, we expect government this year to be less of a contributor to our growth.

We still expect to do good business there and, quite frankly, outperform the market.

What that means is we expect then even better growth or stronger growth in the office side and the commercial side of our businesses.

Okay.

And so back to -- I guess switching over to the contribution margin side, looking at Q4 specifically, if my math's right in my model it was a negative contribution margin in Hearth despite that strength.

Was it -- I know you said that it's a quarter-to-quarter thing, you're not managing the quarter, I'm just trying to understand specifically is it a mix issue, was it a price/cost issue, what impacted Hearth incremental profit in Q4?

Yes, so Matt, this is Kurt.

As part of that incremental margin, if you look through the year in 2010 and look for the year had really strong performance, so it gets choppy and fourth quarter is a great example.

If you go back to fourth-quarter 2010, we had some really strong performance and some one-time events that accelerated that.

But I think if you looked at core leverage on that business for the year and the quarter, we feel -- I think the year is more indicative of where that business is leveraging.

Okay, all right.

And then one follow on then I have a clarification.

You mentioned some of the successes you're having with the investments that you've made and specifically I'm curious about the supplies chain.

It sounds like you're seeing optimism improve, but do you think that the market's growing as much as you are, do you think there's a share gain?

Are you gaining some share in that business based on -- it sounds like that was what you were implying?

And then the final question I have was just can you repeat that gross margin guidance, I missed that?

Do you want to go with the gross margin?

Yes, sure.

So for first quarter, Matt, we expect gross margin to decrease marginally versus year-ago and last year it was 34%.

Got you.

That's excluding restructuring and transition charges.

Okay, thank you.

I'll answer the question then around market momentum.

I'm always hesitant, Matt, to claim market share movement in this industry on a quarterly basis.

That said, clearly I think that we are performing well in the markets -- in that segment of the market where we compete.

We've been working that very aggressively over the last couple of years, investing in selling, branding, product, growing our distribution, programs, on and on you go, and I think we're getting some traction in that.

And so, do I think we're going to outperformed the market?

The answer is, yes, I do, and I also think that the core market is improving slowly as new business confidence comes forward.

And would the expectation be focused mostly on supplies there, would you expect the greatest level of outperformance to be in supplies, in Hearth, in contract, in international, where would you -- if you have to rank your expected outperformance?

Well, I'm telling my team we better outperform in every segment, Matt, so --

And if you had to your team which one you want to rank?

We should outperform the same in both.

Okay, all right.

All right, thank you all.

You bet.

Your next question comes from the line of Leah Villalobos from Longbow Research.

Your line is open.

Good morning.

I was wondering if you could talk a little bit more about your CapEx budget for the year.

It seems like there's a bit of an increase there, where you're investing in terms of capital?

So, we are -- as we go forward we are continuing to invest, Leah, in new products.

We -- as we've looked at the year and we've done our strategic thinking and planning, we find that there's some investments, not so much in new facilities but in improving the productivity and efficiency of our existing operations.

And then finally, we are investing in a major business system transformation project.

So if you go back to our -- the core of who we are, it's about driving rapid continuous improvement, driving our internal business processes and our operational performance.

As we step back and look at our business we see significant opportunity for us to come together and link a lot of the great work that the team has done around internal business processes and driving a major business system transformation initiative.

And in terms of the segment's office furniture versus the Hearth segment is that just like an overall investment corporate wide, or is there more of an investment in one versus the other?

Well, we don't really break out our CapEx Investments by those businesses but I would say it's overall.

Okay.

And then if you could just give us an update in terms of, you've had Sagus now for a couple of months, how the integration's going and if there's been any surprises and how you look at that opportunity longer term?

Well, we're very early in that process so I don't think there's anything new to report.

It's on track with what we expected but we've got a lot of work to do to really capture the full benefit of that acquisition.

Okay, thanks.

Best of luck.

Okay, thank you, Leah.

Your next question comes from the line of Todd Schwartzman, Sidoti & Co.

Your line is open.

Hi, good morning, gentlemen.

On the price realization for the fourth quarter, in which segment did you see the better realization?

And looking forward, as well, what is your outlook there?

Where is the greater opportunity to take additional pricing in 2012?

I would say, Todd, our price realization's been consistent across our businesses and our pricing process continues to be the same, which is where we can get price, the market will accept price, then we will get it.

But providing any more detail beyond that I think would not be value add.

Okay.

And on the international side, ex China, is there anything you'd want to highlight, pockets of strength, weakness?

No, I think our focus is primarily in China and I think that summarizes it well.

And roughly how big is the China business now?

Our international business is somewhere around -- it's a little bit less than 10%.

Okay.

And as far as your guidance -- the full-year guidance that is for 2012, at both the top end and the low end what's incorporated as far as your outlook for steel and other input cost?

Well, I think, Todd, consistent with the markets we've seen commodity prices stabilize.

Year-on-year we'd expect to see some commodity inflation in the first half of the year and we'll see where it goes in the second half.

You don't care to make any comment as far as the spread between that $1.30 and the $1,50?

No, I think we're comfortable within that range at this point.

Okay, thanks a lot.

All right, thanks, Todd.

There are no further questions at this time, I'll turn the call back over to the presenters.

Thank you so much for your interest in HNI.

We appreciate your time and look forward to talking to you in the future.

Have a good day.

This concludes today's conference call, you may now disconnect.