HNI Corp (HNI) 2012 Q1 法說會逐字稿

Good morning.

My name is Sarah, and I will be your conference operator, today.

At this time, I would like to welcome everyone to the HNI Corporation First Quarter Fiscal 2012 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).

And 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 first 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 does contain 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 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.

Thank you, Derek.

Good morning, everyone.

We will share our assessment of the first quarter of 2012, and then provide thoughts on our outlook for second quarter and full year 2012.

We'll then open the call up for questions.

We're pleased with our improved performance over prior year.

Both segments delivered solid sales growth, and our operating results reflect strong execution of our split focus business model.

Performance in our office furniture supply driven business was particularly strong as organic growth at 10% exceeded expectations.

We're executing well and encouraged by the improving trend in this market.

Likewise, demand in our contract and international businesses remained robust with 9% top line growth.

So we're excited that the fact that both of these segments of office furniture are performing well at this point.

Our hearth business continues to deliver strong performance.

Sales in the new construction channel increased 16%, as housing starts improved.

Remodel and retrofit sales decreased 6%, as unseasonably warm weather adversely impacted short-term demand for our alternative fuel products.

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

Thank you, Stan.

So as a reminder, the first quarter of 2012 includes results related to Sagus, which we acquired in November of last year.

So, for the first quarter, 2012, consolidated net sales increased 12.4% to $445 million or 8.5% on an organic basis.

Sales for the office furniture segment increased 14.3% to $379 million or 9.7% on an organic basis.

And net sales for the hearth products segment increased 2.4%, to $67 million.

Consolidated gross margins decreased to 33%, compared to 34% in the prior year quarter, due to higher material costs, unfavorable mix, and the impact of the Sagus acquisition, which was partially offset by higher volume and improved price realization.

Importantly, excluding Sagus, consolidated gross margins were in line with the prior year quarter results.

As a percent of net sales, total selling and administrative expenses including restructuring and impairment charges, improved 1.3 percentage points, due to higher volume and lower restructuring and impairment charges, partially offset by increased fuel costs, investments in growth initiatives, higher incentive based compensation and acquisition related costs.

We ended the quarter with $57 million of cash on the balance sheet.

We used $28 million of cash in the quarter, compared to $22 million in the prior year quarter.

I will remind you the first quarter is typically our lowest quarter for operating cash flow, due to business seasonality and funding requirements.

Stan.

Looking forward, we entered the second 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 recent stabilization in the economy, improving conditions in our core markets, and strong performance of our businesses.

We continue to identify and aggressively pursue attractive investment opportunities for long-term profitable growth.

Strong growth in our supply driven business is expected to continue to accelerate, driven by investments in selling, product development, and branding.

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

Year-over-year growth rates within the contract channel are expected to flatten against strong prior year comparisons in the second quarter.

Last year, we benefited from several large government projects during the second quarter.

We continue to expect solid growth in the contract business for the full year.

We expect continued strong performance in our international business, particularly in China.

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 improve.

Top line growth in the remodel and retrofit business is expected to remain modest, in comparison to the exceptionally strong performance of our alternative fuel products last year.

Overall, I feel great about our investments and market momentum in 2012 across all businesses.

Our new product and platform initiatives are innovative and highly relevant to the changing needs of our customers.

We are fully leveraged in our RCI culture and lean discipline, in pursuit of transformative initiatives to drive additional structural cost reduction and ongoing process improvement.

We are continuously building, and enhancing our selling programs and processes to make HNI the preferred choice the first time, every time, for our partners and customers.

We are investing in our core, aggressively pursuing new growth opportunities to extend our core, and building strong businesses to deliver long-term value to our shareholders.

Kurt will now provide the financial outlook for the second quarter, and full year 2012.

So for the second quarter 2012, we anticipate overall sales to be up 8% to 11%.

Office furniture sales are expected to be up 9% to 12%, including sales from acquisitions, or up 2% to 5%, organically.

Organic sales in the supplies driven channel are expected to be up 9% to 12%.

But sales in the rest of our office furniture businesses are expected to be flat to slightly down, as Stan talked due to strong prior year comparisons, and Hearth sales finally are expected to be up 3% to 7%.

Non-GAAP gross profit margin is expected to increase marginally, versus second quarter 2011, when it was 34.5%, excluding restructuring and transition charges.

Non-GAAP SG&A as a percentage of sales, excluding restructuring and transition charges, is expected to be similar to second quarter 2011, when it was 31.5%.

Net interest expense is projected to be $2.7 million, and the effective tax rate is projected to be approximately 36% during the second 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.

So our estimate for non-GAAP earnings per diluted share for the second quarter is $0.13 to $0.18 per share.

And for the full year 2012, we are narrowing our estimate of non-GAAP earnings per diluted share to $1.35 to $1.50 per share, which excludes restructuring charges and transition costs.

This summarizes our outlook for the second quarter and full year 2012, I'll now turn the call back to Stan for closing comments.

Thank you, Kurt.

I am encouraged by the continued improvement in the economy, and remain optimistic about our markets and prospects for growth.

I'm confident our investments are accelerating proper growth and delivering long-term shareholder value.

Our business is financially strong, and very well positioned for the future.

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

(Operator Instructions).

Your first question comes from the line of Budd Bugatch from Raymond James.

Good morning, Stan; good morning, Kurt; good morning, Derek.

Good morning, Budd.

I guess I have a few questions.

First question is did you give us, Kurt, the impact of Sagus on the operating results for the year other than -- I know gross margin and sales, but the EPS, was it accretive, dilutive in the quarter?

Guidance for the year, Budd, we said would be (multiple speakers)

No, no.

What was it in the first quarter?

First quarter it was $0.05 dilutive.

It was $0.05 diluted, and for the year what do you expect?

We would expect it to be nominally accretive for the year.

Nominally accretive, and second quarter?

And second quarter nominally accretive.

Recall Budd, highly seasonal business with a K through 12, and as we transform that, particularly in the first part of the year, you see a skew of profitability in that business towards the back half of the year.

Precisely where I was going, because I just -- that would have said to me I think in the second quarter you would have seen a little bit of a bump, because of it, no, and wouldn't that (multiple speakers)

Correct.

-- gross margin.

We would see a slight bump on the bottom line nominally accretive, not much on the gross margin line.

Okay.

And can you help me explain there why?

More from it as we think about production leveling in the first quarter and we're transforming that business, the impact is more material there than it is on the second quarter from a dollar and a percentage perspective.

Maybe a level above, Budd here as well is if you think about the K through 12 education business and the seasonality, it's highly seasonal, number one.

Number two, it's a tremendous asset brand market position for us, but as not unusual for HNI, we do buy businesses that need operational transformation.

And so what you are seeing, the financial impact, is us moving a business from a large batch, sort of inventory position to more of a lean flow produce to order.

And that creates some really interesting distortions in the short term, around margins and absorption, but also inventory.

So what you are seeing is highly seasonal, going through significant transformation, which is consistent with what HNI does with these acquisitions.

So nominally accretive in the second quarter, you are going to get it nominally accretive for the year, which tells me the third and fourth quarter, you will see some accretion that's more than nominal?

Is that correct?

To offset a $0.05 dilution in the first quarter.

That's correct, Budd.

Okay, because we are trying to figure out -- you know, obviously it's our error, and I think the street's error.

We were looking at the second quarter guidance coming well back below what we were guiding for, and I think we were, actually, lower than the consensus.

So we are trying to understand what's causing that differential.

In the last quarter call, you also said you were going to be spending some more money on SG&A projects.

I think some systems projects and some other things, and I wondered if you could quantify what that impact might have been on the second quarter, and on the first quarter, and maybe again for the year?

Yes, so for the first quarter, Budd, a couple million dollars of investment.

And we would expect that to ramp through the year, somewhere in the $10 million to $15 million incremental spend.

And I will remind you, again, that's across selling, that's across new product introductions, and then, as you refer to, that business system transformation.

So on a quarterly basis it's $2 million in the first quarter, and the run rate at the end of the year is about $4 million a quarter.

Is that right?

I'd say reasonable assumption.

Okay.

All right.

I've got a bunch of other questions, but I will let others ask their own.

Thank you.

Your next question comes from the line of Matt McCall, from BB&T Capital Markets.

Your line is open.

Thanks, good morning, everybody.

Hello, Matt.

Let's see, so Kurt you ran through that guidance.

—I just wanted to make sure -- I missed what was Q1, and what was the full year?

So did I understand you to say that the full year you expect the furniture business, outside of supplies, to be flat to down, or was that for Q2.

That was Q2.

Alright, and what's the expectation for the full year?

Inconsistent with as we have said in the past, Matt.

Low to mid single digits for the full year (multiple speakers)

And that's -- that's contract and international.

That would be correct.

Okay.

And maybe, Stan, this might be for you, is that consistent with your expectation for the industry?

I guess I'm asking this because it looks like based on the -- what you just reported that maybe supplies did a little bit better in Q1 than you had guided and that contract and international maybe did a little bit -- and is modest but a little bit less than you had expected.

So, is there anything that's changing in the environment that would cause those deltas to show up.

Yes, Matt.

First -- don't slice our guidance too closely on contract and international.

Just to kind of reset everybody, we look at the year and there's a lot of moving pieces in a business like ours, including government moving around, large projects, corporate, contract, international, China, supplies etc.

So sometimes I feel like you all grab some of these individual prices and overanalyze it.

And I understand what you are trying to do, so to answer your question specifically, we are very excited about the strength in supplies.

It's been a long time since supplies has been this strong.

And it is coming on, and we are seeing continued strength going forward based on the indicators that we look at, which is really kind of broad market momentum.

So the answer is yes, I think supplies is stronger than we thought.

I don't feel like contract and international has really changed significantly, in my mind, anyway, of exactly how we lay that out, and -- for you all, I'd have to go look at.

But no, I don't think I have changed my view on that.

But I have become more excited about what is going on in supply land.

And one of the -- you mentioned indicators, one indicator we watch, obviously, I think you do too, is the Small Business Optimism metric, and it did tick lower last month for the first time in six months.

It sounds like you're referencing more company specific drivers, what's happening in the channel, obviously that's more important.

Are you seeing any signs that would be consistent -- doesn't sound like it -- but any signs it would be consistent with what the Small Business Optimism indicator is telling us?

Not -- no, the answer is no, Matt.

And again, we do look at small business confidence.

It took a minor tick down.

It is a pretty -- over time, I think it's a pretty good indicator.

We don't get too excited on a monthly basis.

If it's (multiple speakers).

There's a lot of noise.

If you even look at the sample size of the companies in that small business index, we don't overprocess that too much.

It is kind of a good early indicator for us.

And over time, I think there's good correlation, but month to month changes, I don't get too excited about.

Overall we are seeing very healthy activity in the market for us.

For us, we feel like we are -- the market is improving and we feel like we are performing well in that market.

In supplies, so jumping back to contract a little bit, Kurt's expectation for low to mid single digit growth.

How much -- is that your expectation for the market, overall?

What -- I know you have done a lot of things to try to improve your share, but what's the expectation for the market this year?

And then what are some of the things that drive that optimism?

We always expect to do better than the market.

I mean that's the job [they] give the operating companies.

Right.

And again, we feel good about our progress.

You have lots of moving parts.

So you have a government spend that's changing going down.

We feel good about the large corporate accounts, and we feel good about the small to medium size projects.

You net all the that out, we think there's very solid, sustainable, positive growth going forward in that -- as Kurt says, in that low to mid single digit level.

The comparables last year are incredible, as well, especially around these large government projects that are in the works, etc.

A lot of that is going away, and Matt, as you know, our feel is based on market activity, and it is hard to get really dialed in specifically on is it -- how much better we are going to do than the overall market going forward.

Okay, and then finally, on the hearth side, you broke out the new construction activity, up 16%.

I mean -- I guess you could use multiple metrics here, but -- the -- I know you have cited in the past your strengths at the large builders, is there anything you can point to that says hey, the large builders are growing at X, and we are growing and we're taking more share there?

Again, it is kind of that market versus company dynamic that I am trying to get to?

Yes, I don't have anything specific for you, Matt.

I will tell you again, if you look at the dramatic downturn that housing went through, and our corresponding moves to address that.

The restructured costs, at the same time we invested in new products, branding, selling, distribution, closer alignment with large builders.

We think that's going to pay off, nicely.

Our best look at this thing going forward in Q2, is new construction is going be up somewhere between 8% and 11%.

And I would say, again, we are pretty careful to claim share gains in short term horizons, because there's so much noise.

But I think we're going to compete very, very well in those markets as that recovers.

Okay.

Okay.

Thank you, all.

Thank you, Matt.

And your next question comes from the line of Peter Lisnic from Robert W.

Baird.

Good morning, gentlemen.

Hello, Pete.

I guess the first question on the investment cost, Kurt, I think you were -- you mentioned $2 million in the first quarter.

As I kind of look at the model, I'm just wondering, do we see a significant ramp in the second quarter and then that cost tailing off?

Or are we just ramping steadily toward that $10 million to $15 million through the year?

I think you got it at the latter comment.

It ramps gradually through the year, Pete.

Okay.

All right.

And then the thing that I'm still trying to explore a bit, is particularly on the business system optimization process, just how we think about that spending going forward outside of 2012, and then when -- and to what degree, or what magnitude, do the benefits start to roll in?

Is there some cost savings that we see accrue in the back half of the year from that investment?

Or is it really more of a 2013 kind of accretion on that front?

And then to what degree might we see that both in the back half of '12, and '13, is really what I'm after.

I understand your question.

These business system transformation investments sort of return questions are complex.

I think the answer to your question specifically, you should think about the benefits accruing latter in sort of the period of '13, and '14.

The investments are highly dependent on a lot of work around -- it's not just an ERP implementation for us.

It is a lot of rethinking our business processes and consistent with our lean sort of understand, simplify, stabilize and then connect lean processes.

So the cost savings come in a lot of different ways.

From -- all the way from efficiency savings to actually rolls to supplies, as how we project, it rolls to forecasting production.

It rolls to our in-house SG&A spend, allowing us to do things more efficiently, and there's a huge aspect here, being more effective with our customers.

And then finally, the impact when we do this is we are driving sort of more better faster with less for our customers.

We are optimizing our costs and, we're also optimizing our working capital.

So to lay those specific benefits out and when they roll through, we're not going to share those -- certainly we'll work those internal -- we're not going to share those externally at this point.

But be assured that we are looking, talking, working this thing, very aggressively, at my level on down to make sure we generate a very healthy return for shareholders.

Okay.

That is helpful.

The one follow up on that one, I just wanted to ask, was on the cash side of the process, you alluded to -- I think you alluded to better cash conversion, if that's the right way of thinking about it, is that correct?

And you've historically been a very strong free cash flow generator, is there a way that you could maybe give us a guide post for the improvement in cash conversion that we might see as a result of this process?

I will take it, Pete.

I think on the one hand there's absolutely a cash component of this project, as Stan talked about.

Particularly on the working capital piece, whether that's inventory, it is back to these business processes around how we collect, and how we manage payables.

So there is a benefit, but again, similar difficult to quantify, and not at that point, yet.

Yes (multiple speakers)

Okay.

I'll state this, we are early in a -- what's going to be a longer term project, as well, so you ask very good questions.

I think we should plan -- we'll be talking about this for a couple of years, here as we go through.

Because it is a very comprehensive implementation, design implementation, and the benefits and the investment will take years to invest, and years to generate that benefit.

And so as we go, we'll try and share that which we can, but I think a lot of this is going to be a general conversation like this in the future.

Okay.

All right, got it, and then one, perhaps painful and granular question on Hearth.

I understand the new construction side of it.

I'm wondering if you can give us a feel or flavor for what you are seeing on the remodel side, and if there's a way of stripping out just the fuel cost related demand element of Hearth remodel.

In other words, are you seeing stronger remodel demand from customers X, the kind of the swings in fuel prices?

I am going to give this to you -- this is more anecdotal rather than detailed analysis.

My feeling is that we are seeing -- if you strip out the alternative fuels and this unreasonably warm weather that we have seen here, that the core remodel retrofit is largely flat, maybe slightly up at this point.

And this is kind of a -- this is not a great season for us right now, as the weather gets warm, and you know -- looking out and the trees are green, etc..

We do see a bit of a downtick, and we don't quite see as much activity.

Partly because dealers have some inventory they may be selling through as well.

So, it's a little bit harder for us to tell, exactly, what the core market is doing.

That's actually very helpful, I was just after the confidence aspect of it.

So, thank you for your time.

That was all very helpful.

Thanks, Pete.

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

Your line is open.

This is Josh Borstein, in for Leah.

Thanks for taking my questions.

You had mentioned that gross margin was impacted by unfavorable mix.

Could you discuss the drivers behind that, and how you think about that going forward?

Sure.

So Josh, mix is a complex issue for us as you think about the breadth of our business.

That could be everything mix from a customer, a channel, a product, project versus day-to-day, a combination of those items.

So really in that comment, it's not one particular item there.

Stan talked about government, channel verses others.

All those things come to impact that.

But it is really a combination of those factors, as opposed to any individual one we would call out.

Okay, thanks.

And then we had heard of a 3% to 5% price increase in Allsteel products scheduled for April.

Now, was that the case, and if so, did you see any pull forward in demand ahead of that increase?

We did announce that price increase, and implemented it on contract.

You typically -- you see it from an order perspective, Josh, you don't see it from a shipment perspective.

Because it is built to order, so that no impact on the quarter from a shipment perspective.

Okay.

Thanks.

And then just lastly, can you give any end market color regarding the contract business, specifically, what you are seeing in government and education?

Sure.

Josh, government is slowing down, as we expected.

Federal government and state and local.

This is not really a great education season quite yet.

That's yet to come.

But our feeling is is government is hanging in there, pretty well, I think we are competing well there.

The segments, in particular the K through 12 segment is actually doing what we had hoped plus a little bit.

I think they are performing well.

That acquisition integration is going well.

Great, thank you.

Thank you.

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

Your line is open.

Good morning.

Could you quantify the ending backlog for furniture?

We don't break those numbers out, Todd.

Okay, just thought I would give it a shot.

On the Sagus deal, it seems that --- tell me if this is correct, it seems that Sagus alone was responsible pretty much for the 100 basis point margin degradation.

Is that accurate?

That is accurate.

So in other words, price and volume have pretty much fully offset the other factors cited?

The mix and input cost issues.

Correct.

What is the outlook for raw materials as -- what's the trend we should think about, from where you sit now, for the remaining three quarters?

Modest to flat.

Okay.

You had previously, for the first quarter guidance, you had stated you expected slightly lower than the prior year's 33.4% SG&A to sales.

It came in about 110 basis points below that.

Just curious, was that 32.3% actual number -- was that about in line with you were thinking when you guided to slightly below?

I think, Todd, we did a little better than we expected.

As we -- and that may be some timing, it may be some cost savings.

It is a combination of things.

But generally in line with what we expected.

Not significant.

All right, thanks a lot.

All right, Todd, thanks.

And there are no further questions in queue.

All right, well, thank you very much for your interest in HNI.

We appreciate your time.

We look forward to talking to you in the future.

Have a great day.

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