HNI Corp (HNI) 2012 Q3 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the HNI Corporation third 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 third quarter 2012 results, which were announced yesterday after the market closed.

My name is Derek Schmidt, 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.

The 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 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 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 the call.

I now have the pleasure of turning the call over to Stan Askren.

Stan?

Thank you, Derek.

Good morning, everyone.

We'll share an assessment of the third quarter 2012 and then provide some thoughts on our outlook for fourth quarter 2012.

And then we'll share some thoughts regarding full year 2013, and then I'll open the call up for questions.

We are seeing a different economic environment than will be observed 3 to 6 months ago.

The momentum of the economy in the near term has slowed and is impacting the office furniture market.

Growth in our supplies business and contract office furniture business softened in the third quarter versus our expectations and first half results, as we think economic concerns appear to be constraining near-term purchasing decisions.

Topline growth in our office furniture [supply impairment] business was modest with organic growth of 1% as the market softened in response to broader economic concerns.

Our market leadership position is strong and we are well positioned to continue to grow profits.

Sales in our other office furniture businesses were also modest with organic growth of 1% against stronger prior year comparisons.

Federal government sales were weaker than we anticipated in all office furniture businesses, especially in the contract business.

Sales activity in our non-government contract business was solid.

Demand in our international business remains strong during the quarter.

Office Furniture profits were adversely impacted by lower than expected sales and operational inefficiencies caused by extreme summer heat during our peak demand season.

We understand the issues and are making operational improvements to ensure consistent flawless execution during future periods of peak production.

Our Hearth business continues to deliver excellent performance.

Sales in the new construction channel remained especially strong with 23% growth as housing starts and builder sentiment improved.

Remodel retrofit sales decreased 10% as lower fuel prices and warm weather adversely impacted demand for our alternative fuel products.

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

Kurt?

Thanks, Stan.

So for the third quarter of 2012, consolidated net sales increased 9.2% to $551 million, or 0.8% on an organic basis.

Sales for the Office Furniture segment increased 10.9% to $468 million, or 0.8% on an organic basis as well.

Net sales for the Hearth Products segment increased 0.9% to $83 million.

Consolidated gross margin decreased to 34.7% compared to 35.6% in the prior year quarter, due to unfavorable mix, seasonal ramp-up inefficiencies, and the impact of acquisitions, which were partially offset by better price realization at a lower material cost.

As a percentage of sales, selling and administrative expenses, including restructuring and impairment charges, were 30.2%, or 0.5% lower than prior year quarter.

Benefits from sales leverage were partially offset by investments in growth initiatives and acquisition-related transaction expenses.

We ended the quarter with $49 million of cash on the balance sheet.

Operating activities generated $81 million of cash in the first nine months of 2012, compared to $67 million in the same period last year.

Stan?

All right.

Thank you, Kurt.

We entered the fourth quarter focused on delivering profitable growth despite continued economic and market uncertainty.

For the full year we remain on target to deliver solid overall profit growth and are especially encouraged by the strong performance of our international business and Hearth new construction channel, which have delivered consistent double-digit growth in 2012.

We continue to invest for growth and I remain confident these investments will generate long-term shareholder value.

We anticipate current economic concerns and continued weakness in government sales to dampen near-term growth in our core Office Furniture businesses.

Sales growth in our supplies-driven business is projected to be flat against strong prior year comparisons.

Our Office Furniture contract brands continue to compete well in the markets.

Year over year growth rates within the contract channel are expected to modestly increase in the fourth quarter.

We expect continued strong performance in our international business, particularly in China, where we are well positioned to outperform the market.

We remain excited about the potential growth and value creation opportunities from our recent acquisition of BP ERGO, a market leader of office furniture in India.

BP ERGO's strong brand, significant customer base and solid manufacturing capabilities provide a strong platform for aggressive profitable growth in India, one of the largest and fastest growing office furniture markets in the world.

Our Hearth segment remains well-positioned for continued strong profitable growth.

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

Topline growth in the remodel retrofit channels are expected to be down modestly in comparison to the strong performance of our alternative fuel products last year.

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

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

Kurt will now provide the financial outlook for the fourth quarter and 2013.

So for the fourth quarter 2012, we anticipate overall sales to be up 2% to 6%.

Office Furniture sales are expected to be up 3% to 7%, including sales from acquisitions, or flat to up 4% on an organic basis.

Organic sales in the supplies-driven channel are expected to be down 2% to up 2%.

And organic sales in the rest of our Office Furniture segment are expected to be up 1% to 5%.

Hearth are expected to be flat to up 3%.

Non-GAAP gross profit margin is expected to decrease modestly versus fourth-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 modestly lower than fourth quarter 2011 when it was 29.5%.

Net interest expense is predicted to be $2.6 million and the effective tax rate is projected to be approximately 37% during the fourth quarter.

For the full year, we are expecting capital expenditures to be $55 million to $60 million, and we project full-year 2012 depreciation and amortization to be modestly lower than 2011.

So for the full year 2012, we are revising non-GAAP earnings per diluted share to be projected in the range of $1.13 to $1.19.

So looking forward to 2013, our preliminary estimate of non-GAAP earnings per diluted share is in the range of $1.30 to $1.50.

Our philosophy is to provide our shareholders our best perspective on the business, and these estimates reflect our latest view of next year's market conditions.

So for the Office Furniture segment for 2013, we expect low single-digit organic growth.

We are projected solid margin improvement driven by continued reductions in our structural costs, operational execution improvements, and benefits from our 2012 investments.

Our Hearth business is expected to deliver strong profit improvement next year.

Mid-single-digit sales growth is projected in 2013, driven by continued strength of the new construction channel and modest growth in the remodel retrofit channel.

We'll plan to provide an updated view on our 2013 outlook during our future earnings conference calls.

That summarizes our outlook for the fourth quarter 2012 and full year 2013.

Turn it back to Stan for closing comments.

Despite near-term economic and political uncertainties, I remain positive about our markets and prospects for long-term profitable growth.

We remain confident in our strategies and will continue to closely monitor our markets, aggressively manage operating expenses, and invest in long-term growth.

Our businesses are strong, agile, and well-positioned for the future.

I'll now open the call up to questions.

(Operator Instructions) Budd Bugatch, Raymond James.

Good morning, Stan.

Good morning, Kurt.

My phone seems to want to ring all the time, too, as soon as that happens.

I guess the first question I have is just on the guidance for the fourth quarter.

I'm curious -- obviously, you have been hit with some uncertainties.

What could change good and what could change bad on that guidance?

And I'm going to kind of go to the same place for 2013 as well.

Okay.

So I guess the uncertainty around the economy; the uncertainty around the political situation and the budget, fiscal discussions which may impact small business and may further impact large businesses, is always a question.

I think, also, the sort of uncertainty around how will the federal government finish out the year would probably be the biggest sort of opportunities for up or for down, I think, as we think about it.

Everything else, yes, I guess to see it from a Hearth standpoint, the big question is going to be, how cold a winter, and then secondly, what happens to fuel prices.

Again, that could impact that plus and minus.

And then you follow housing starts closely, so you can probably answer those questions as well as anybody in the room.

Well, your remodel-retrofit was down.

I take it that was because we had lower oil prices earlier in the quarter, and now we are starting to see higher ones.

Is that right or wrong?

It probably has more to do with weather, and heat and cold, and the need for alternative heat.

And compared to last year's sort of interesting period, last year actually there was decent shipments to dealers in this, still, fourth-quarter.

And then it really began to decline in the first quarter as the inventory didn't sell through as aggressively.

So, timing of those starts of things as well as what happens to how cold a winter we have is really what's driving that more than fuel prices this season, I think.

Okay.

Just a couple of other questions.

Sagus in the fourth quarter is -- that's not a big quarter for them.

So you had $46 million, I think, in this quarter.

What does fourth-quarter guidance look like for Sagus?

Well, smaller quarter, and not a quarter that is profitable, as you think about that seasonality.

But not a big year on year impact.

And we anniversary Sagus in the first quarter or second quarter?

Fourth quarter -- midway through the fourth quarter of last year was the acquisition.

So we have six weeks of it in our fourth quarter.

I got you.

Okay.

And, for me, I guess the last question is, as I think about the Office Furniture business, your government business has historically been, if I remember right, about 15 percentage of sales in Office?

A little bit higher than that.

So peak total government would have been about 22%.

And as you think about it this year, clearly we are seeing that tick down somewhere in the 16% to 17% of our total Office Furniture business.

That's total government, not (multiple speakers)

And when do we start to anniversary the relatively non-peak comparisons?

You know, I think that's the question that Stan talked about, as we think about fourth-quarter is, we continue to see that on a downside risk and where that plays out.

So to be seen, I think is the question.

Okay.

All right.

Good luck on the balance of the year and for next year.

Thanks, Budd.

Matt McCall, BB&T Capital Markets.

Thank you.

Good morning, everybody.

Good morning, Matt.

So thanks for the outlook and especially for 2013.

And you mentioned, I think, Office Furniture up low single digits.

First part of the question, can you talk about the assumptions for contract versus supplies?

And second part, can you talk about kind of the assumptions you are baking in for some of the key underlying drivers for those two businesses?

The assumption around contract and supplies, Matt, is basically they are the same.

We are projecting no significant difference between those two parts of the business.

I think your question, then, is what is going to drive, then, the bottom line growth improvement.

And I think there are some multiple perspectives or some multiple inputs into that.

One, is that we believe that the materials commodity environment should be relatively stable.

Two is we plan to reap the benefits of investments that we made in prior years.

Third is we plan to skip or avoid some of these operational execution issues.

We are taking aggressive actions and making investments to make sure that doesn't happen again.

And I think that captures the essence of what's going to drive that profit improvement.

So a couple of follow-ups on that.

Reap the benefits of the investments -- so what's the underlying market growth that you are assuming there?

It sounds like you are going to assume a little bit of growth above that?

It's largely -- and this is always the question at this point.

So it's pretty -- we are looking pretty far out on the horizon and lots of potential movement in this.

But for the most part, we are planning and assuming that the market is going to be flat to relatively small single-digit growth, Matt.

Okay.

And then the operational issues, I recall in conversations around the preannouncement with Derek, that you did break out or at least directionally talk about some of the -- or quantify some of the operational issues.

Are you just referring to the weather-related issues this summer or were there other things that I'm forgetting?

And then maybe lump them all together, and what could be the net help for next year that is not a hurt from this year?

Yes.

Your assumption or your comment sort of reminds me that it's around the weather-related.

The heat related is largely correct.

That impact was somewhere around $3 million to $4 million.

So we hope to avoid that direct cost, and my objective always is to drive us for even more.

But you should think about a $3 million to $5 million cost avoidance or impact avoidance next year.

Got it.

Okay.

And any other margin enhancement initiatives that we can quantify at this point?

I mean, I know you said you would drive more, but anything that you have already done that you'll maybe get the benefit of next year?

No, Matt, I don't think there's anything specific to call out.

We are operational grinders, so we will grind through lots and lots of little items that really drive the profitability to where we've laid out in guidance.

Okay.

All right.

And then, finally, just to understand the sudden -- the suddenness of the slowdown, can you talk about just the health of the pipeline?

Client visits, RFQs, RFPs, mockups -- whatever metric you want to use, but just what is the environment like?

And is it folks are sitting on their hands now and waiting, waiting for something in November, waiting for a fiscal cliff to pass?

What are you hearing from your customers?

Well, it's a broad picture whatever you talk to us because, as you know, we deal with multi-segment, multi-price point, multi-channel, multi-customer types, multi-end users, Matt.

What I would say is we saw an appreciable slowdown sort of mid-third quarter and, really, start of August we begin to see some slowdown.

And it's broad based.

If you look at our numbers, you'll see it impacted contract and it impacted the small business.

And so I think some of that has to do with just the economic uncertainty.

It has to do with some of the global environment.

I think everybody tapped on the brake a bit here, and so I can't call out anything specifically other than broad-based contract and supplies.

But when you look at some of those metrics, I mean, does your sales force still talk about a healthy pipeline?

Are you still seeing the mockup requests?

I mean, anything you can talk about, the pipeline that says all right, the projects are still there, yet they are just not being released and maybe it's because people tapped on the brakes?

Yes, I think -- yes, thanks for the follow-up, Matt.

The answer is yes, the pipeline activity does continue to look relatively good, relatively solid.

We are hearing -- and a lot of this stuff is anecdotal, as you can imagine, Matt, that some of the customers, primarily in the contract channel, are delaying or hanging on before they make their final decision.

And so it's during these periods that the pipeline becomes a little bit less predictable regarding what's going to come out the other end.

The activity is still solid.

It's not a slam on the brakes perspective, but it appears that people are backing off the accelerator a bit and maybe tapping the brake in some situations.

And as we've talked in the past, the small business customer turns on and off very, very quickly.

So that comes and goes in small pieces.

It's a significant size business but comes in small pieces.

And it will come on and it will come off relatively quickly.

Okay.

Thank you, Stan.

You bet.

Peter Lisnic, Robert W. Baird.

Hi, this is Josh Chan filling in for Pete.

Hi, Stan, Kurt, and Derek.

Good morning, Josh.

Good morning.

The margin of the Hearth business is starting to reach points that we haven't seen in quite a number of years.

Could you sort of talk about the sustainability of that and whether you continue to expect that to expand as volume potentially grows?

Yes.

It's a great observation, Josh.

The margin leverage has been tremendous in that business.

That business was severely impacted during the housing meltdown and recession.

The team, the Corporation, I think, made some really good moves to reset structural cost, and also at the same time invest for the future.

We still have good room for additional margin leverage.

As you can imagine, it's going to -- the margin leverage will not be as strong in the future as it has been in the past, just because the leverage has been incredible.

But we think there will continue to be above average margin leverage opportunity as we look at 2013, and even into 2014, Josh.

Right.

Great.

And then switching back to Office Furniture, you talk about the uncertainty in demand and people sort of taking a pause.

Is there some sense that maybe after we work through the elections or the fiscal cliff issues that there may be improved or pent up demand that may be released at some point in the middle of next year that could benefit you?

That's a great question, and we sit around speculating on that a lot.

It's a big uncertainty, isn't it, for everybody.

That's my personal hope.

Again, we are planning in this scenario for moderate, single digit growth in Office Furniture.

And anything beyond that would be a bonus.

Great.

And then last question for Kurt.

When we think about free cash flow for 2013, assuming the earnings growth that you are forecasting, is there anything unusual that would impact free cash flow on a year-over-year basis in 2013?

No.

I think you'd see very similar CapEx, a similar level working capital performance, similar -- so, really, no, Josh.

We should see that flow through.

Okay.

Great.

Thank you for your time.

You bet, Josh.

Todd Schwartzman, Sidoti & Co.

Good morning, Stan, Kurt, Derek.

Just a couple of quick ones for you.

What was the quarter end backlog for furniture?

Todd, we don't -- we've never disclosed backlog.

Our backlog is relatively small.

We are a short cycle business and we don't really find it meaningful.

Okay.

On the contract side, there's nothing really worth calling out there?

No.

No.

Okay.

You began making your latest round or two maybe of stepped-up investments in, I guess, just about a year ago now.

With that in mind and based on your product development efforts, do you expect the payoff in 2013?

I appreciate the guidance, by the way.

Just in general, do you expect to grow faster than BIFMA next year based on some of your efforts over the past 12 months, we'll call it?

Yes, I think as I commented earlier, we do expect to see the payoff of those investments and the flow through.

And a lot of that comes through in the way of profit.

We have a strong, healthy pipeline of new products.

It's a very competitive environment, but my hope would be, in fact, we would outperform the market.

Tell me about the new products that you haven't discussed as of yet.

Well, it's a significant pipeline, Todd, and it covers -- as you know, we are a multi-brand, multi-segment Company.

We are working that in all those different segments and all of those different brands.

And so there's nothing really specific that I'm prepared to call out for you.

Great.

Thanks, guys.

Thank you, Todd.

David MacGregor, Longbow Research.

Hi, guys.

This is Josh Borstein in for David.

Thanks for taking my questions.

In your revised outlook back in mid-September, you mentioned the downshift in order activity was particularly acute the past 30 days; that conversion orders had slowed.

Have you seen periods like this where things have happened so quickly, either up or down, for you?

Or is this something unusual?

It's a great question, Josh, and I think in recent years and following the Great Recession or the global recession or the big downturn, it has become more volatile.

Our economy -- and you know this stuff, so I'll just share my perspective, is, the economy and our industry in particular, has become much more closely linked -- tighter linked.

And so things do come on and come off much faster.

Businesses are more lean, more nimble, more agile.

There is more data flow, more information flow.

And managers have been trained to get on the accelerator and get off the accelerator, to get on the brake and get off the brake faster than certainly periods before the recession.

And so I don't think it's unusual if we are recent sort of path, and I don't think there's any sort of overlying crisis this year.

I just think it's kind of how our economy is working in this new environment.

Okay.

Thank you.

And then just turning to Hearth sales, they were up [a percent] in the quarter compared to previous guidance, which was 3% to 7%.

My impression regarding that mid-September revision statement was that the slowdown is occurring mainly in Office Furniture.

Could you just walk us through some of the dynamics in the Hearth business and what you saw?

Was it less new construction or less remodel, or did something not square with what you had previously thought?

Yes.

And I'm not -- I'd have to go back and look at what you're referring to.

What I will explain to you is some of the dynamics in that business.

As you recall, new construction is about one-third of our business, and this retail biomass is about two-thirds.

So I think we have indicated here that new construction has been very strong, up really nicely, but the biomass, the retail side, has been muted, primarily around heating and weather.

And so I think you are seeing the mix of those dynamics there.

Okay.

Great.

I appreciate it.

Thanks and good luck.

All right, Josh.

Thanks.

There are no further questions at this time.

I turn the call back over to Mr. Askren.

All right.

Thank you very much.

We appreciate your time and your interest in HNI and we look forward to talking with you in the future.

Have a great day.

This concludes today's conference call.

You may now disconnect.