HNI Corp (HNI) 2012 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the HNI Corporation second 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).

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 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 intend he had 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 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 the 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 at 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 initiatives drove solid sales improvement across both segments.

Strong operational performance in market execution contributed to improved margins.

Performance in our office furniture supply driven business remained robust with organic growth of 12%.

Our market leadership position is strong and growing and we continue 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 comparisons in the second quarter.

Last year we benefited from several large government projects.

Demand in our International and non-government businesses remains strong in the quarter.

Our hearth business continued to deliver excellent performance . Sales and new construction channel remain especially strong with 20% growth as housing starts and building sentiment improved.

Remodel retrofit sales decreased 11% as declining fuel prices and warm weather adversely impacted demand for alternative fuel products.

I will turn the call over to Kurt and let him review some specific financial data for the second quarter.

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 costs.

These were partially offset by unfavorable mix and the impact of the acquisition of Sagus and higher restructuring and transition cost.

As a percentage of sales selling and administrative expenses including restructuring and impairment charges were 31.6% which was consistent with the prior year.

Benefits from volume 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 activity -- activities generated $6 million of cash in the first six months of 2012 compared to an $8 million use of cash in the same period last year.

Stan.

We entered the third quarter with strong mow 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 our office furniture supply driven business and our 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 continue to invest in product development, branding and fulfillment models to deliver continued proper 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 out perform the market.

Despite challenging market conditions for government sales we remain on target to deliver solid overall growth in both of our office furniture channels for the full year.

Our hearth segment remains well-positioned for continued strong profit growth.

Positive momentum in the new construction channel is expected to continue as single family housing starts to improve.

Top line growth in the remodel retrofit channel is expected to remain relatively flat in comparison to exceptionally strong performance of our alternative fuel products last year.

Our core plus strategy remains unchanged.

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

I remain excited about our new product initiatives this year.

The needs of the marketplace are constantly changing and our businesses is continually innovate to provide highly relevant solution for our customers.

HNI had another strong showing at Neocon this year, as our businesses won three best of Neocon product awards.

Allsteel also introduced our entry into the architectural wall segment at Neocon.

The response from the marketplace has been very positive and we're encourage about the long-term profit growth potential of this new business.

We are making good progress on our business systems transformation initiative which we communicated earlier in the year.

We are leveraging our (inaudible) culture, discipline and processes to champion old process improvement throughout the Company as part of this effort.

Overall, I feel confident about our investments and the capabilities we are building to strengthen our market position and to continue to deliver long-term profit growth.

The near term economic outlook remains uncertain but we are well-positioned to expand profits under multiple scenarios.

Kurt, you want to provide financial outlook for the third quarter and full year 2012?

So for the third quarter 2012 we anticipate overall sales to be up 11% to 14%.

Office Furniture sales are expected to be up 13% to 16% including sales from Sagus or up 3% to 6% organically.

Organic sales in each of our offers furniture channels are expected to be up 3% to 6%.

Hearth sales are expected to be up 3% to 7%.

Non- GAAP gross profit margin is expected to increase modestly versus the third quarter 2011 when it was 35.6% 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 third quarter 2011 when it was 27.5%.

Net interest expenses projected to be $2.6 million and the effective tax rate is projected to be approximately 36% for the third quarter.

For the year we're expecting capital expenditures to be in the range of $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 third quarter is $0.65 to $0.70.

And for the full year 2012 we are narrowing our estimate of non-GAAP earnings per diluted share to $1.35 to $1.45 which excludes restructuring charges and transition costs.

To summarize our outlook for the quarter and the full year 2012, I will now turn it back to Stan for closing comments.

Okay.

Thank you, Kurt.

I remain positive on our markets and our ability to grow sales, increase profit in 2012.

We continueto aggressively invest long tell profit growth and I remain confident our investments are delivering long-term share over value.

Our businesses are strong, competitive and well-positioned in our markets.

So with those comments we'll now open it up for questions.

(Operator Instructions).

Chad Bowen of Raymond James.

Your line is now open.

Good morning, Stan, Kurt and Derek.

Congratulations on a solid quarter.

Thank you.

I guess, Stan, in the continued strength in the supplies driven channel, I think has been a pleasant surprise for us given, you know, out of the macro data point have seemed to be softening in small business confidence hasn't -- been setting the world on fire.

Could you just give us a little bit of color as far as what you're seeing there in terms of drivers?

Is it finally some actual recovery and demand from small businesses, is it market share execution on your part playing a role?

Whatever color you can give us.

Yes I think it's a great -- question and I think certainly small business is not -- the confidence level has not popped up or shown any great movement.

Either down or up, I guess.

We see in the short-term it looks like it moved down a bit.

I'm not sure if that's significant enough to kind of change the overall macro-economic effect.

Good question.

We're looking at it hard.

I do this I that we are performing well, executing well in that segment.

I think you're seeing clearly the benefit, the payoff of investments that we've made in prior years around brand, product, selling models, fulfillment model.

It's broad based.

You know, recovery multiple sort of different industry segments within the small business and also different geography as well.

So it -- we are pleased with that -- those results as well and, you know, I think it's an indicator of -- the return of the investments we've made in the past.

Okay.

And if we look at the contract side of the business, it looks like you're guiding for a little bit of a reacceleration in 3Q versus what we saw this quarter.

Can you quantify or share with us any -- of the leading indicators for project activity in terms of visits and things like that?

What are you seeing there?

Have you seen any change in -- customer behavior, attitudes with movement in the economy?

You know, understand again the pipeline looks good.

The activity levels which we -- don't really, you know, look at visits and that sort of thing.

We look at sort of bid activity and just sort of the overall sentiment with our channel partners and our different companies and their sales forces, etcetera.

The activity level is good.

We have not seen any significant decline or change in activity level.

I would be lying to you if I didn't tell you we're looking hard at sort of this uncertainty in the economy making sure we're not missing anything, but it feels good to us going forward.

Especially when you sort of net out the federal government sort of downdraft overall it feels very, very solid and, you know, activity levels at all of the brand, all of the companies is very good.

Okay.

Last question for me.

I mean if we think a little bit beyond 2012 as we get past the addition of Sagus and the ramped up spending on some growth investments that you have done this year, I mean should we be thinking about 2013 as getting back to something more normative in terms of contribution margin or do you think you'll have continued investments, whatever color you can give us.

So, David, we plan to update our outlook for 2013 next quarter.

It's something we did last year.

We'll continue to evaluate it if that makes sense.

I think certainly given the uncertainty with the economy and the political environment that is probably more challenging this year than last year, but to your question the investments we're making we would expect to continue to see returns and progress on -- delivering profitable growth going into 2013 but no specific targets at this time.

Got you.

Well, thanks guys for taking the questions.

Good luck to you.

Thank you.

Your next question comes from David MacGregor of Longbow Research.

Your line is now open.

Hi.

This is Josh in for David MacGregor.

Thanks for taking my questions.

In K -12 given the stronger back half seasonality of the business.

What does state and local spending look like coming up here compared to this time last year?

I'm sorry.

State that question again.

We missed the last part of it.

You broke up on us.

Sure.

No problem.

Just looking at K-12 and that vertical and given the stronger back half seasonality in that business What does state and local spending look like coming up to compared what it was this time last year?

It's relatively flat.

It's been relatively flat and that's our view of it going forward.

Also, within that those state and local budgets education continues to be a priority for virtually all of the states around sort of, state competitiveness and kind of making sure that the populations are getting what they feel like they need from the state.

So flat spending and with education K-12 education getting probably more than their fair share of focus and finances.

We feel good.

We feel good about I say I Guess.

We feel good about the K-12 segment of the market.

Great.

Thanks for that color.

And then you mentioned lower input costs in the quarter.

I think you had said last quarter commodity inflation for Q 2 through 4Q would be modest to flat.

Has you outlook changed at all?

Can we expect lower than anticipated material inflation in the back half of the year?

No.

Not significant changes in the outlook.

You know, it's moderated but not materially different than what we said last quarter.

Okay.

Great.

And then just one last one for me.

The second quarter Chinese GDP slowed down a little bit.

The slowest rate since 2009.

Your business there, however, still seams pretty resilient.

You know, is that still the case there?

Have you seen any signs that things may be slowing down?

Yes.

Certainly we have seen it slow compared to the toroid pace it's been on the last couple of years.

It's still very, very strong and we're Still achieving high double-digit growth percentages there.

Less than it was -- it's been the last couple years but very, very healthy and very solid performance by that group in that part of the world as well.

Great.

Thanks and good luck.

Thank you.

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

Your line is now open.

Thank you, good.

morning, everybody.

Hi Matt.

Okay.

So the -- just looking at the full year guidance it looks like you maybe took down the full year by a couple pennies relative to consensus Q3 number looks pretty good.

So what it about Q4 I don't hear a lot of doubt in your voices so what is it that's expected to apparently be a little bit slower in Q4 or am I looking at it wrong.

So let me start, Matt, and I will let Stan kick in here.

So what we did is narrow our range on guidance and for up to $1.35 to $1.45 when before -- The range is $1.35 to $1.45.

Previous the range was $1.50to $1.35.

Correct.

So, It was brought down Matt, by a nickel.

Why?

Well, two reasons.

One, we're just a quarter deeper into the year.

Yes.

(inaudible )So has gone down.

The second, the economic uncertainty we're just kind of making sure we're not sort of too optimistic based on the uncertainty.

So no real change in our view of sort of tone and -- in the market but just further along saying the upside is less probably than we would have -- than we sort of had factored into that range last quarter.

The previous quarter and we're just kind ever sort of dialing in a little bit tighter.

Okay.

Alright.

So but, your language is very consistent with the last couple quarters when we spoke with you so it's not really anything that you're seeing, just more let's be a little bit more cautious an you have an extra quarter of data?

Yes.

Exactly.

Our language is consist -- we have one less quarter and there's a little bit more uncertainty.

We're not feeling it yet, but as we look on the horizon saying wow, maybe we should make sure we've got just a little bit more caution.

Haven't seen it, haven't felt it yet but having that $1.50 out there is not probably reasonable, I believe at this point.

We probably need to bring it --

Yes.

Okay.

That's fair.

Alright.

And then I think there was a question earlier kind of about the incremental margin, but if you talk about some of these items and I think, Kurt, you talked about incentive comp this quarter.

You talked about growth spending for a number of quarters.

How should we look at these items that have been affecting your incremental margin in recent quarters as we move forward and I guess I'll just end there and then I will follow up with another one.

Yes.

So I think we, again, Matt, remain consistent with our outlook.

Leverage is a full year look.

It's going to be choppy quarter to quarter.

That 30 percent objective remains where -- we're targeting for.

You know, core leverage if you take out acquisitions, the impact of that has been the 20% range for the year if you kind of take the mid-point of guidance and if you think about -- Stan talked about BST and our Walls investment as a couple examples that are longer-term, more strategic payback that we're not seeing return on, that core leverage still is 30% or north of it so.

Let me amplify that a little bit, Matt.

The way we think about this is our job is to take the core and make sure we're maximizing the fervency and maximizing our costs and doing what we do very well, which is grind it out in the core.

That comes out typically around about 30%.

As Kurt says, we don't really care whether that comes outright on a quarterly basis.

Makes no difference because it's just not how we run the business; okay?

Then we think about what -- so that's core.

Then we think about what are the plus opportunities, what are these opportunities in the market with businesses, with customers, with business models that we should be grabbing and bringing in house and then doing what we do well to create long-term value.

One of those for instance, is Sagus.

So Sagus, K-12 industry leader comes for sale, it is not leveraged at 30% but it's a great brand, great people, great distribution, grated product.

that needs our operational sort of execution so we grab that, pull that in and then go through our transformation process, which sometimes takes two to three years.

In the mean time, that's not going to leverage at that same 30%.

And so.

Right.

That's part of that plus.

Another example would be sort of investment, internal investment opportunity.

If you -- well, we showed you at Neocon we showed you this architectural wall segment.

New segment.

Right.

New segment you know, $0.50 million to several $700 million segment, fast growing, looks like it fits our business model well, it's related to kind of how the contract business goes to market.

We understand the product, we understand the application, we understand the selling model and so there we're doing a greenfield startup starting with, you know, an alignment with -- with a product creator and we're investing to develop that business.

Same thing.

That has no sales when we start off.

It has multiple millions of dollars of investment which we believe as we kind of come online two to three years from now that will be a -- you know, three to five years that's a significant sized business generating at Lee the same levels of the profitability as our core and so we're going to continue to find these as they come forward and grab them and pull them in because when we -- you know is drive long-term profitable growth.

Don't become too sort of captive on, are we leveraging at a certain percentage.

Likewise, you want us, shareholders us want us to be efficient with the resources we're given so we have to come back on that core and make sure we're drying it out.

So that continues to be kind of just core thus mentality and how that impacts the leverage, I think.

And so, I don't have perfect adding here.

So if exclude Sagus and if you exclude the internal investments you mentioned Wall specifically and some of the gross spending then that core incremental margins is where you want it I guess is the way to look at it.

Absolutely correct.

Okay.

Alright.

Go ahead.

No.

Go ahead, Kurt.

I'm sorry.

We are leveraging that in the core for the year we will leverage at that 30% plus.

Perfect.

Perfect.

Okay.

And then in response to an earlier question you said that you seen the benefits of some of your investments in the past paying off and I know that we've talked about those being a lot of little things and you talked about branding, you talked about distribution.

If you had to pick one that would -- that has paid off the most, what do you think that would be or could you pick one?

I don't think I could pick one.

I wish business was that easy, Matt.

If it was, I would be a hero.

It has to do with, all of it has to hang together.

You've got to have the brand, the selling, the distribution, the product development, the internal efficient operations, the fulfillment models and when you have all of that, you get really great growth.

If you're missing one piece, it's a little bit like an engine.

It just doesn't run right.

Now, you still have momentum but it's not tuned and tailored and it's not hitting on all cylinders.

So for us this is the challenge and the opportunity to come back and make sure we're working all of these different pieces simultaneously so they come together in an integrated way and they create, you know, this long-term sustainable competitive advantage to give customers what they want when they want it how they want it and do that every day better, more, better, faster for less is what we say and so, you know, I can't point to one thing.

It's many things.

One thing I can point to we've got a great team of members.

A great team of employees working on this.

Okay.

That grind this out every day.

Thank you, Stan.

Alright.

Thank you.

Your next question comes from Peter Lisnic, Robert W. Baird.

Your line is now open.

Good morning, gentlemen.

Peter.

First question just on the -- taking the $1.50 down a nickel to $1.45 is that just more caution on volume or is there any incremental expense that you're building in there as well?

I think what we have, the explanation we just took Matt through, I just amplify that again.

Peter, I -- we haven't really changed our guidance per say.

We just narrowed the range?

Why?

Because we're a quarter deeper.

B because I think there's less upside due to the uncertain economy.

Okay.

That's fine.

And then if we could switch over to hearth just for a second.

You mind running through and reviewing maybe the profitability mix there between new and remodel?

Just trying to see what the growth trends there being somewhat divergent how that factors into the profitability mix as we look forward.

So, Pete, profitability between remodel and retrofit and new construction is about the same.

So no difference between the segments.

As Stan talked the growth story year-to-date as we look for the balance of the year really is new construction and you think about the correlation with single family starts.

We're up high, teens through the first half the year, see that moderating a bit in the second half but that and that is a business we have a very strong position in the market so we get any lift in single family starts that's an area we benefit disproportionately.

Okay.

Got that.

The challenge.

You alluded to it a little bit in the last comments, but on Sagus the profitability may be not leveraging quite where the core is.

Can you give us a sense as to where the profitability trends are in that business an how it's progressing in terms of integration?

Yes.

So I will talk profitability.

You know, we expect that business to be nominally profitable for the full year.

Highly seasonal, you know, heavily back end loaded with the education side but as we transform that business expect it to be nominally profitable and cash positive for the year on track with our expectations as we came into this acquisition.

I will let Stan talk transformation.

Yes still Early Stages of transformation, Pete.

The other thing I would say is very strong cash flow in that business as well.

So our transformation efforts tend from a standpoint take at that a little bit longer.

The cash flow though tends to come much faster.

They're right on track I think doing a great job and we expect them to be at that same level of profitability here as we go forward.

Okay.

Perfect.

And then just last question on that one.

If I look at the implied sequential revenue ramp in that business from second quarter to third quarter, it's a pretty substantial increase.

I'm guessing a lot of that is seasonality but I'm wondering if there's any sort of competitive gain that you're realizing there now that it's under the HNI umbrella.

We would love to think so, Pete.

I think it's too early to be claiming or beating our chest too early on competitive gains.

It is highly seasonal, though, to your points there.

Just how schools buy and how they build and how they remodel and then they're all ramping up getting ready for the new school season.

So it is a challenging business from that standpoint?

Alright.

Well, I appreciate all the color.

Thanks and good job.

Thanks, Pete.

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

Your line is now open.

Hi.

Good morning, guys.

Hey Todd.

On the recent May number for small business optimism do you think that's a blip?

Is it a seasonal thing ultimately?

Do you think that will be proven to be the case or just something else more secular going on there?

I don't think we know, Todd.

Okay.

Most of my questions have pretty much been addressed thus far, but if you could -- did you give the organic growth rate for supply driven sales for Q2?

For Q2?

Yes.

Yes.

I think we had organic at -- Derek, 9% to 12% for Q2?

9% to 12% was your guidance.

I just want to see what it came in at.

Yes.

We were about right on it.

Okay.

For -- at the high end of the range so yes, I think we're a little -- just a little north of 12%.

Okay.

And on the hearth side sales came in pretty close to the low end of your guides of as up 3% to 7%.

I wonder if you could walk s through some of the dynamics there.

I realize that it's a tough comp was a big part of that and that in turn was due to the alternant fuel products, but, you know, did you kind of under estimate just how great a quarter that piece of the business was a year ago?

No.

I think it's hot weather and fuel prices.

Dealers are -- consumers aren't in pulling remodel retrofit alternative fuel appliances Todd, so it's hotter than hell out there and people aren't buying hearth appliances when it's hot.

And what was the mix of new construction remodel for the quarter.

It runs roughly one-third, two-thirds, Todd.

A few point but not significant.

Okay.

So that probably stays the same or goes north of that skewing towards the builders going forward?

Yes.

A little more.

Slight skew.

Okay.

Thank you very much.

You bet, Todd.

Thanks.

There are no further questions queued up at this time.

I turn the call back over to Mr. Schmidt.

Okay.

Thank you so much for your interest in HNI and we look forward to talk to you in the future.

Have a great day.

This concludes today's conference call.

You may now disconnect.