HNI Corp (HNI) 2013 Q1 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the HNI Corporation first quarter fiscal 2013 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.

Derek 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 2013 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.

Presentation intended to accompany this call has also been posted to our website under the Investor Information section.

We encourage you to review this presentation as it contains details of our financial performance including the non-GAAP to GAAP 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 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 effect actual results can be found in the conference call presentation posted at 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.

We started the year with solid performance and profit growth over prior year.

I'm pleased with our strong operational execution, good cost control and investment returns, which drove first quarter profit improvement.

I'm also encouraged by our ability to simultaneously deliver strong operating results and maintain our investment spending for long-term profitable growth.

Overall sales were relatively flat, as increases in our hearth and supplies-driven businesses offset anticipated softness in our other office furniture businesses.

As we expected, office furniture sales declined due to softness related to the economic uncertainty in the fourth quarter of 2012 and continued reductions in federal government spending.

Our federal government sales were down 27% in the first quarter.

Excluding federal government, our office furniture sales would have been approximately flat.

Demand in our supplies-driven business improved 3%.

These are strong results, considering the federal government slowed down the large buy ahead at 2012 year end related to price increases.

We are executing well and our brands have significant momentum in their markets.

Sales in our contracted international businesses declined 9%, as anticipated, and were most severely impacted by the economic uncertainty in late 2012.

Sales activity is improving and we enter the second quarter well-positioned to deliver solid growth.

Our hearth business continues to deliver strong and improved performance.

Sales in the new construction channel increased 23% on the strength of our market position and the housing market recovery.

Remodel retrofit sales increased 9% as extended cold weather stimulated demand for our products.

Overall, I feel good about our first-quarter results, which exceeded expectations, and our accelerating momentum.

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

Kurt?

Thank you, Stan.

For the first quarter 2013 consolidated net sales decreased 0.7% to $442 million, or down 0.2% on an organic basis.

As a reminder, the first quarter 2013 includes results related to the addition of BP Ergo and the disposition of several small businesses including dealer spin-offs.

Sales for the office furniture segment decreased 3.4% to $366 million, or down 2.9% on an organic basis.

Net sales for the hearth products segment increased 14.8% to $77 million.

Consolidated gross margins increased 33.4% compared to 33% in the prior-year quarter due to higher volume in the hearth products segment and increased price realization, which were partially offset by lower volume and unfavorable mix in the office furniture segment.

As a percent of net sales, total selling and administrative expenses, including restructuring and impairment charges, increased 0.2 percentage points due to selling initiatives and higher incentive-based compensation partially offset by network realignment savings and lower restructuring cost.

We ended the quarter with $31 million of cash.

We used $30 million of cash in the quarter compared to $28 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, I'm encouraged by improved conditions in our core markets and the strong performance of our businesses.

Our strategies are working and we remain on track to deliver double-digit profit improvement for the year in a low growth environment.

We enter the second quarter with strong momentum and are well-positioned to deliver solid sales and profit growth for the year in both segments.

Strong growth in our supplies-driven business is expected to continue.

Year-over-year growth rates within our other office furniture businesses are expected to rebound in the second quarter.

In our hearth segment, strong growth in the new construction channel is expected to continue as the housing recovery remains intact.

Growth in the remodel retrofit business is projected to be down modestly as lower energy costs will adversely impact demand for alternative fuel products.

Overall, I feel good about performance, investments and market momentum in 2013 across our businesses.

We are executing our strategic objectives to grow faster than the market, deliver improved returns and invest for long-term profitable growth.

Our success remains rooted in the foundations which made HNI strong; our unique member-owner culture focused on rapid continuous improvement, our split and focus with leverage business model and our Core Plus philosophy.

The vast majority of our members are owners of HNI stock and share in HNI profits and they behave like owners by constantly driving out waste in their businesses and driving profitable growth.

Our split and focus model gives us the agility of a smaller company to quickly adapt to changes in our markets while simultaneously leveraging the scale of a larger company.

Our Core Plus philosophy drives profitable growth from multiple perspectives.

We are constantly transforming our core businesses to extract new growth opportunities while pursuing new [Core Plus] opportunities in attractive adjacent markets.

The foundation of HNI is strong and growing stronger and I'm optimistic about our ability to continue to deliver long-term shareholder value.

Kurt will now provide the financial outlook for the second quarter and full year 2013.

For the second quarter 2013 we anticipate overall sales to be up 5% to 8%.

Office furniture sales are expected to be up 5% to 8% organically, or up 4% to 7% including the impact of acquisitions and divestitures.

Organic sales in both the supplies-driven and contract channels are expected to be up 5% to 8%.

Hearth sales are expected to be up 7% to 11%.

Non-GAAP gross profit margin is expected to be relatively similar to second quarter 2012 when it was 34.4%, excluding restructuring and transition charges.

Non-GAAP SG&A as a percentage of sales, excluding restructuring and transition charges, is expected to be lower versus second quarter 2012 when it was 31.4%.

Net interest expense is projected to be $2.6 million and the effective tax rate is projected to be approximately 35% for the full-year.

For the year, we are expecting capital expenditures to be $70 million to $75 million.

We expect full-year 2013 depreciation and amortization to be $46 million to $48 million.

Our estimate of non-GAAP earnings per diluted share for the second quarter is $0.22 to $0.27 and for the full year we are narrowing our estimate of non-GAAP earnings per diluted share to $1.30 to $1.45, which excludes restructuring charges and transition cost.

This summarizes our outlook for the second quarter and the full year 2013.

I will now turn the call back to Stan.

Thank you, Kurt.

I'll wrap it up here and just summarize, by saying I'm encouraged by the gradual improvement in our markets and remain confident in our strategies to drive profit improvement while simultaneously investing for long-term profitable growth.

We remain on track to grow sales and solidly increase profits in 2013.

With those comments from Kurt and myself complete, we will now open it up to questions.

(Operator Instructions)

Budd Bugatch, Raymond James.

Good morning, Stan.

Good morning, Kurt.

Congratulations on the quarter.

Talk a little bit if you would -- you talked about your investment spending delta and I just wanted to make sure I knew where we were in the program on that.

You had started, I think, a little bit earlier than some of your comparable companies.

Yes, I think -- but, if I understand your question, the delta year-over-year is basically flat.

So we have reached our run rate, so to speak, and we are not continuing to increase that delta.

We are also not shrinking that.

We are simply applying what we started in previous periods.

And that will continue for the foreseeable future?

Yes.

Okay.

Do you want to put any color as to where those dollars are going?

And what kind of return or how you are measuring there?

Yes, it's similar to what we've said in the past, Budd, which is this split and focus model means that we are applying it in multiple segments of the market, multiple companies, multiple brands.

It's investments around selling capabilities, selling resources.

It's investment around new product development.

It's investment in eBusiness content and syndication and delivery.

Its investment in some new business areas, such as -- we've talked about the architectural wall segment, the K through 12, our expansion in India, and there is lots of other little things around that.

Our returns on that vary.

We most of the time expect to see a return somewhere in the 18- to 24-month time period.

Again, depending on what the investment is and what happens in the market in the meantime.

Okay.

Second question is just to make sure I understand, government spending in office was down, did you say 27%?

Our business and federal government was down 27%, that's correct.

That's primarily in office, right?

That is all in office I would think.

It is all office, Budd.

Where do you see that going for the balance of the year?

How do you see that trending?

It's a pretty big unknown.

It's one of the bigger unknowns, but I think we are believing the year is going to run somewhere between 15% and 20% down.

But I would probably put an asterisk on that, say that's one of the bigger unknowns as we look forward

Can you put some numbers to that or dollars?

What was it last year in the quarter, what was it this year, what was the year?

Give us a second here, Budd, and see if we can pull that up.

Derek, do you have that?

What I can frame up for you, Budd, is this quarter fed government was roughly 6% of our sales.

For the full year we'd expect it to be 6% to 7% of our office furniture sales, if that's helpful.

When you say 6%, Derek, is that 6% of total sales including hearth or is that total --

Total office furniture sales.

Total office furniture sales.

Okay.

My last question, I guess, has to do with the CapEx over D&A.

Did you say $70 million to $75 million CapEx versus a $46 million to $48 million D&A?

We did, Budd.

Kurt, where's that money getting spent?

Is it primarily in some of these investments [spending] areas?

Yes, some of that's in the thing Stan talked about two big ones, one is some laminate capacity and capability that I think we've talked about in the past that's coming online here in Muscatine.

The other place is, as we've talk in the past, is our business system transformation.

Those are probably the two big incrementals year-on-year.

Yes, I thought the business system transformation was actually in that additional spending and was going into expense directly.

But it is also going into capital, is that correct?

Yes, the bigger portion of it, Budd, is actually capital.

There is an expense element but is predominately capital.

All right.

Thank you very -- oh, I lied.

My last question, did you quantify the restructuring and transition costs for the quarter and the year?

Minimal, Budd.

Thank you.

Good luck for the balance of the quarter and the year.

Appreciate it

Matt McCall, BB&T.

Thank you.

Good morning, everybody.

I will follow-up on the government question.

You're talking about 5% to 8% growth and maybe a little bit more modest or moderate decline as you progress through the year versus the 27% but what's the government assumption in the Q2 guidance?

So for Q2 specifically, Matt, fed government outlook is modestly down.

And the difference between Q1 and Q2, we have a very large project, GSA project, hitting in Q2 that shifted between quarters.

But beyond Q2, as Stan suggested, we really -- we're looking at down 15% to 20% for the back half of the year and the full year.

And the bulk of our sales -- 60% of our fed government sales come in the back half.

Okay.

Then maybe more broadly on the commercial side, you gave the outlook of what you expect the government segment to look like.

Stan, what do you think the full-year is going to look like on the commercial side, given what the ABI is telling us, given what some of your leading indicators may be telling you?

Yes, Matt, our estimate that we've given is 5% to 8% growth on the rest of the business, so the non-government business.

I thought that was a Q2 number.

I was more talking about the balance of the year given your comment about what you expect for the government for 2013, what you expect for the commercial side?

Yes, for Q2, Matt, as I suggested, Q2 specifically for fed government is going to be modestly down.

So low single digits.

The commercial business in total is very similar to the overall projection for office.

I think for the remainder of the year we'd say commercial business is in the range of mid-single-digit growth, maybe low-high-single-digit growth.

Okay.

All right.

Kurt, this might be for you.

Any commentary on price cost?

Anything going on, on the discounting front?

The inflation front?

Anything, any color you can add there?

Go ahead.

On the price side, ability to take pricing across 80% of our businesses in this year.

Announced already, material inflation nominal.

You want to talk discounting --

Discounting environment is steady.

No significant change.

So I would say our spread is consistent, hasn't really changed, kind of a non-factor.

Okay.

And then the final one I had was on the hearth incremental.

I don't think there's as much spending going on in that segment, correct me if I'm wrong, but the incremental margin, I think, is 25%.

Clearly respectable and on a tough comp a year ago.

And it was a good margin number, I'm just trying to get a handle on how to look at that contribution opportunity on growth as we move forward.

Is 25% impact the right number or is it something different than that?

So to correct you, Matt, there is spending going on in hearth as well.

They're investing in the front-end brands, selling capability and product.

So it is not just a cost reduction leverage play.

They are on thinking about longer-term investments and profitable growth there as well.

And the leverage you should expect is that 25% to 30% for the foreseeable future, we believe.

And then maybe what would be -- can you break out the spending when you talk about this level of spending that you are -- that you've maybe targeted in the past and targeting in the future, how much of it has been aimed at the hearth side?

I'm not going to -- I'm going to decline to break that out, Matt, just because we are into some granularity that I'd just as soon avoid.

The 25% to 30% is a safe number is your point?

Yes, I think so, Matt.

All right, thank you.

Thank you, Matt.

(Operator Instructions)

Peter Lisnic, Robert W. Baird.

Good morning, gentlemen.

First question, I think I heard -- I missed the first part of the call, sorry about that.

But I think I heard conversation on network realignment savings.

Can you give us a feel for maybe, A, how much that helped in the quarter, but more importantly just kind of how that might layer on as we look through the rest of 2013 and then into 2014 and beyond?

Yes, what we are specifically referring to are some things in the office furniture piece last year, Pete, that we closed a regional distribution center and consolidated in.

It was about $3 million of savings in the quarter.

That will start to anniversary as we get later in the year here.

But run rate, we think about that pretty material savings.

Okay.

That does not include, when you talk about those realignment savings, that doesn't include things that you might be getting from the business optimization initiatives, correct?

Correct.

Is there a way to maybe give us a little bit of an update on how that optimization process is working?

What sort of benefits, if any, are coming down to the bottom-line, to the cash flow statement?

Pete, we've been consistent on this which is this investment in BST is a significant investment but it's a longer-term investment.

You're really talking about looking at enterprise-wide business processes, going through and understand, simplify, standardize.

For instance we just ran our core financials on this Oracle system.

It went smoothly.

The benefits of that are pervasive and very difficult to measure in the short term.

So we have opted not to do that.

It really has to do -- the payoff on this really has to do with when the enterprise is fully up, integrated and running a couple years out.

I'm confident we are seeing savings, as we always do, through our business simplification.

But as far as identifying those and measuring those and calling those out here it is a little bit of an ambiguous sort of target and I think it would be misleading.

Okay.

That's consistent with what you've said in the past so I appreciate that.

Then if we could just switch back to the question on price, should we assume it's been pretty consistent with what you've realized historically?

You mentioned 80% of the business getting some level of price realization.

I would assume it's in that two-point range.

Is that the right assumption to make?

That would be good.

All right.

And then with the increase in CapEx and these investments I guess that you are making, at what point do we see the D&A piece kick up on the income statement?

Are we seeing some of that now or should we see a more significant ramp as we look to 2014 or 2015 on the D&A side?

I think it's really 2014 and 2015, more towards 2015 when you start to see it, Pete.

Okay.

Is there any -- I hate to ask about 2015 in first quarter of 2013, but can you give us a feel for how significant the ramp in D&A might be at that point?

No.

I think we will decline on that one.

I tried.

All right, I appreciate the help.

All right, Pete.

Todd Schwartzman, Sidoti & Company.

Good morning.

I missed some of the opening remarks.

Did you speak to order rates in commercial contracts at all?

I'm sorry, Todd, you broke up here.

Say that again please?

Yes, order rates in commercial side of things, contract business, did you throw any numbers out?

If not, could you do that?

We did, I think the best thing would be go back and look at the transcript there rather us reading through all that.

Of course I wouldn't normally talk about order rates.

We talk about increased momentum, I don't know, Kurt, are you --?

I think it's activity and momentum were positive were the comments.

But no numbers, Todd.

No numbers.

Okay.

Could you speak maybe qualitatively to some of the verticals if there's anything that you think should be called out?

There's nothing that we would call out specifically, Todd.

So nothing has weakened terribly from Q4?

We talked about fed government continuing to be soft and down.

We said our federal government sales were down 27% in the first quarter.

Derek answered several questions on that and went into detail as to what the second quarter and the rest of the year would be.

And I think that will show up in the transcript.

Right.

On the commercial side, nothing to speak of really?

Nothing to speak of, Todd.

Okay.

With supplies-driven, maybe could you spend a little time talking about what's going right for you lately?

It seems that in light of somewhat choppy small business comp optimism you guys are performing pretty well there.

Has there been any changes in your distribution or do you suspect market share?

That's a good question, Todd.

I think how we would characterize it is just overall strength for us in our channels with our customers.

I think it is a product of focus investment on branding, selling product distribution, eBusiness content.

It is a lot of factors that are coming together to give us very positive momentum in a relatively challenging environment.

Were there any newly, relatively newly introduced products that are fueling any of that?

No.

There's lots of new product in that channel, but again, it is a very broadly diversified channel so one product isn't going to really move the needle in a big way.

It is a culmination of all those factors I discussed, moving the needle.

Okay.

Onto hearth for a second.

Just looking at the gross margin opportunity you have going forward, will that be all volume-driven or is there any lingering benefits remaining from prior restructuring activities that might give you a little lift there?

Yes, the leverage is going to come from volume and the cost reset that we've implemented through that very challenging period there.

That business, that team of members and management, is a very capable group that is constantly focused on eliminating non-value added waste through our long-standing RCI, rapid continuous improvement process.

Plus any time an industry goes down as much I think these guys and gals have done a very nice job of resetting costs and they are going to feel the volume leverage on the way back up just due to capacity being consumed.

Okay.

You gave the delta for both the builder, the new construction and the remodel retrofit.

But what was the mix of each channel as a percentage of total -- of hearth sales for the quarter and what was it a year ago?

Yes, it is shifting obviously.

It's -- right now it's about 60% remodel retrofit, or 55% remodel retrofit, 45% new construction.

It's shifting significantly towards the new construction.

Last year was probably 65%, 35%.

Okay.

Thanks.

That helps.

Last question.

I think as far -- as part of the prepared comments you said that you are on track I think for solid sales for the year for both segments.

With regard to office furniture, would you characterize 3% to 4% growth as solid for this year?

Yes, in this environment we would say that would be solid, Todd.

Okay.

Great.

That's all I've got.

Thanks, guys.

Thank you.

(Operator Instructions)

Josh Borstein, Longbow Research.

Thanks for taking my questions here.

You had brought up the lower end of your guidance.

What's changed since the fourth quarter to give you some more confidence in your outlook?

We have one quarter behind us.

Okay.

I know the tone in 4Q was a little more sober, much more upbeat this quarter.

Again, what's changed, what's different?

What's different now than before?

Clearly you think about fourth quarter we were in the -- last year when we talked to you we were in this budget sequestration thing and there was lots of uncertainty.

Since then, as we prepare our thoughts and our best estimate as to what's going to transpire going forward, we've seen business activity come up.

So when I say activity, I mean as we talk to our sales force, as we talk to our dealers, our channel partners, our resellers, as we look at our bid activity, virtually all of our businesses are seeing increased activity.

So as we sort of apply our best judgment as to what's going on, we see more positive momentum.

Some of that is pent-up demand from fourth quarter, but it also feels like the economy and the market is wanting to move forward in I would say a slow but steady fashion.

Certainly we are always subject to some sort of external shock or impact, but to us it feels like we are making solid, steady movement forward in this -- in our markets.

Okay.

That's helpful.

On the decline that you saw in the international business, can you discuss what you saw on the quarter, what your outlook is for the next quarter with that piece of the business?

Yes, and keep in mind our primary exposure in international these days is in Asia.

So we sought China, certainly our markets in China, Hong Kong and mainland China fourth-quarter went through a slowdown and then you factor in a different Chinese New Year -- the time of the Chinese New Year, it was earlier.

We saw a deceleration there.

Again, as we apply our judgment based on discussions with the people leading these companies, what they would say is the pipeline is firming up in Asia.

And we believe going forward we are going to see a stabilization and growth there for the year.

Now, same thing, [paps] that some external shock like avian flu or something like that.

Okay.

And on the hearth side you said you had realized some price increases.

I know last quarter you had mentioned that even though you are the market share leader it's still very difficult to push through pricing in hearth.

Can you just discuss some of the dynamics that you are seeing in that business right now that enabled you to realize some pricing?

It's very modest pricing, Josh, so we are talking about 2%.

So a lot of that is pricing around the edges, I would say, around the hearth business, the stove business.

New construction business is very challenging.

Some of that comes through features and pricing options, et cetera.

So I would say the pricing environment is still relatively challenging there and 2% isn't exactly pegging the needle, from my perspective.

Okay.

Is it more price increases centered around innovation?

Is that where you tend to realize most of your price increase?

That's a big part of it, Josh.

Okay.

Just a last one on the federal government, and not to beat a dead horse here, but can you talk about what you're hearing from your federal government clients?

Are they telling you that it's -- the declines are attributable to budget cuts?

Are they telling you the money is there, but they are just being told not to spend it right now?

What we are being told is there's huge uncertainty, is probably the best way of describing it, as to what the money's going to be and where it is going to come from.

Clearly they're in a mode of reduction and pulling their wings in a bit.

So I think it is more about the money's not there, rather than money is there and we can't spend it at this point.

But that's a very general statement because it ranges across the board depending on which segment of even the federal government we are talking about.

Okay.

Got it.

Great, I appreciate it.

Thanks and good luck.

Thank you.

Appreciate it, Josh.

There are no further questions at this time.

I turn the call back over to the presenters.

Thank you very much for taking the time to tune in.

We appreciate your interest in HNI.

We look forward to talking with you in the future.

Have a good day.

This concludes today's conference call.

You may now disconnect.