HNI Corp (HNI) 2013 Q2 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the HNI Corporation second 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.

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 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.

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 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 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 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

Thank you, Derek.

Good morning, everyone.

We will share our usual assessment for the quarter, the second quarter of 2013 in this case, and then provide some thoughts on our outlook for third quarter and then full year 2013.

And then as usual, we will open the call up for questions at the end.

We executed well and delivered solid results for the second quarter.

Our growth investments drove solid sales improvements across both segments, strong market execution, good cost control, and investment returns contributed to improved margins.

We continue to deliver strong operating results while maintaining our investment spending for long-term profitable growth.

Our supplies business improved 2% against prior-year comparisons.

Small business confidence, a key market driver for us, remained soft.

We are executing well.

Our market leadership position is strong and growing, and our brands have good momentum in the markets.

Sales in our other office furniture businesses accelerated in the second quarter.

Strong organic sales growth of 9% was driven by robust project activity and increasing demand for our new products.

Top line strength was broad-based across all of our contract brands.

Our Hearth business continues to deliver outstanding performance.

Sales in the new construction channel remained especially strong with 31% growth driven by our leading market position and the housing market recovery.

Remodel retrofit sales also improved 10%, led by strong remodeling activity.

Overall, I feel good about our second quarter results which exceeded expectations and I feel good about our momentum heading into the second half of 2013.

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

Kurt?

Thank you, Stan.

So for the second quarter 2013 consolidated net sales increased 6.3% to $511 million, or 7.3% on an organic basis.

As reminder, the second quarter 2013 includes results which were related to the addition of BP Ergo and the disposition of several small businesses including dealer spinoffs.

Sales for the Office Furniture segment increased 4.2% to $436 million, or 5.4% on an organic basis.

Net sales for the Hearth Products segment increased 20.5% to $75 million.

Consolidated gross margins were 34.2%, compared to 34.4% in the prior year quarter, impacted by new product ramp-up and operations reconfigurations to meet the changing market demands partially offset by higher volume and increased price realization.

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 network distribution realignment savings and lower restructuring charges partially offset by investment in growth initiatives and the loss on the sale of a small non-core office furniture business.

We ended the quarter with $34 million of cash.

Operating activity used $12.5 million of cash in the first six months of 2013, compared to generating $6 million of cash in the same period last year.

This change is primarily due to working capital timing.

Stan?

Okay, thank you, Kurt.

I'm encouraged by the strong performance of our businesses and improved conditions in the core markets.

Our strategies are working and remain on track to deliver solid sales growth and double-digit profit improvement for the year.

Demand in our supplies business is expected to be relatively flat as market conditions remain choppy and weak in the near term, due to soft small business confidence.

Our brands are well positioned to continue to outperform the market.

We expect strong year-over-year growth rates in our other office furniture businesses as new business activity remains robust across our contract brands.

Our Hearth segment is expected to deliver continued strong profitable growth.

We anticipate continued double-digit growth in the new construction channel but at a moderating rate given strong year-over-year growth comparisons.

Growth in the remodel and retrofit businesses is projected to be solid, our remodeling activity improvement.

I remain excited about our ability to continue to outgrow the markets across both segments of our business.

Key to our success has been our ability to deliver consistent, flawless execution to our customers and provide relevant new product solutions in a very dynamic market.

In office furniture we are simultaneously ramping up several major new products and platforms.

At the same time, we are experiencing a significant acceleration in our core demand, especially from these new product categories.

In response to the stronger-than-expected growth, we are making additional investments in our operations to ramp up new product production.

We are also taking advantage of opportunities to reconfigure our operations to support new product ramp up in sales growth by driving improved operating efficiencies longer term.

We started these investments in the second quarter, and they will continue into the third quarter.

New product development has been an increasingly important role in our business, and we made a concerted effort in recent years to develop a stronger pipeline of new products in response to market and mix shifts.

Sales from new products have more than doubled in the past five years and now account for almost 30% of our office furniture sales.

Recent new product sales are on track to exceed those levels, and the strong top-line growth we are experiencing can be attributed to the success of our new product launches.

The near-term investments to speed up new product ramp up and operational reconfiguration are key enablers for our businesses to continue to outgrow the market and deliver strong, profitable growth for the long term.

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

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

Kurt will now provide the financial outlook for the third quarter in the full year 2013.

So for the third quarter 2013, we anticipate overall sales to be up 3% to 6%.

Office Furniture sales are expected to be up 4% to 7% organically, or up 1% to 4% including the impact of acquisitions and divestitures.

Organic sales in the supplies-driven channel are expected to be down 1% to up 2%.

Organic sales in the contract channel are expected to be up 10% to 14%.

Hearth sales are expected to be up 11% to 14%.

Non-GAAP gross profit margins expected to be slightly higher than third quarter 2012 when it was 34.8% excluding restructuring and transition charges.

Non-GAAP SG&A as a percentage of sales, excluding restructuring and transition charges, is expected to be slightly higher versus third quarter 2012 when it was 27%.

Net interest expense is projected to be $2.7 million, and the effective tax rate is projected to be approximately 34% for the full year.

For the year we are expecting capital expenditures to be $80 million to $85 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 third quarter is $0.55 to $0.60.

And for the full year, we are narrowing our estimate of non-GAAP earnings per diluted share to $1.30 to $1.40, which excludes restructuring charges, transition costs, and loss on sales of a business.

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

I'll now turn the call back to Stan.

Thank you, Kurt, and I'll close here by [commenting] I'm encouraged by the recent growth acceleration of our businesses and remain confident in our strategies to drive profit improvement while simultaneously investing for long-term profitable growth.

We enter the third quarter with good momentum across our Office Furniture and Hearth businesses, and we'll remain on track to grow sales and solidly increase profits in 2013.

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

(Operator Instructions)

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

Your line is now opened.

Thank you.

Good morning, everybody.

So I guess first, can you continue to talk about investment spending?

Can you -- in the past, we called that out and quantified what the incremental spend was on a year-over-year basis and the margin impact.

And did I hear a reference to additional investments?

I think Stan, to support some of the new products, I think, from the manufacturing perspective, so any -- maybe -- what's baked in to the margin outlook from an incremental spend perspective?

Yes, so I'll start this Matt, and we'll let Stan kick in.

So this is a new and incremental spending related to new product and client reconfiguration.

So a little different than some of the investments, perhaps, we talked in the past.

Accelerating on those, and we'd expect that number to be somewhere between $5 million and $6 million for the full year, started really in the second quarter and continuing on into the third quarter through the balance of the year.

So Kurt talks about this investment is new.

Often these investments are ongoing.

Simply what's happened is we are accelerating these I think is probably the best way to frame this.

So what's transpiring?

Well, A, the market is changing rapidly.

And I say that from the standpoint of new product category shifts, or excuse me, shifts in the product category, for instance, metal archival storage to laminate object sort of storage.

Or higher monolithic panel systems to lower open desking sort of systems.

And so, we are seeing significant shift in that area, I would say continues to accelerate.

Secondly, we are seeing, really, some very nice success on our ramped-up new product introductions.

Said another way, in the past we've talked on the front end about our investments, and a significant portion of that was to accelerate new product development.

And we are seeing really very nice take-up on those products, and that's required us to accelerate the ramp-up of those products.

And then the final portion of this is we are finding opportunities related to both of these to go into our plants and do some reconfigurations.

What that means is we are moving product lines.

We are moving things around to, A, accommodate the new product start up, B, to account for the mix categories shifts, and, C, to drive operating efficiencies so that we can continue this consistent flawless execution.

And so, these things come very fast.

We are very nimble and agile, so we respond to them.

It's consistent with kind of our rapid continuous improvement.

It's just right now, there is a significant ball going through the organization at this point in time.

So is the way to think about because you're starting to talk about plant reconfigurations.

You're not calling it restructuring, I understand why, but is the way to think about this is there a margin element from the reconfiguration, better productivity, better efficiency in the facilities that can help the margin beyond the normal incremental that we should expect?

The answer is partially yes on that.

Let me -- give me a second here to kind of re-stretch.

Interesting you say similar to restructure.

It is similar to restructure.

This is simply the positive restructuring due to growth in new product launch.

In the old days of a shrinking market, we'd call this out and everybody would be happy that the markets going down or restructuring.

This is a situation of joy for us as well.

We are growing faster than we anticipated.

The new products are taking on faster than we anticipated, and there is margin opportunity for us.

It's more than margin opportunity though, Matt.

Some of this is simply to meet demand, okay.

Secondly, some of this is to assure consistent flawless execution for our customers.

When we stumble on consistent flawless execution, it's a really bad event for customers' confidence in us, and it's a bad event for them and a bad event for us.

So it's those three things -- accommodating growth, margin opportunity, and really de-risk on consistent, flawless execution.

Okay, and then from a new product perspective, can you talk about some of the areas you mention, some of the transitions in the way the markets changing?

Is that what you're seeing success from a new market perspective as a metal going to laminate, top panel going to desking?

Or is there something else that's going on from a product perspective?

I'm specifically asking about furniture in this case.

I think you're on the core of it -- is really success with new product platforms.

So -- and I think you know this Matt because I think you understand our business.

We are a multi-faceted, multi-brand, multi-segment, multi-product category, multi-platform company, and so I'm going to give you some broadly.

We have invested significant dollars in virtually all of our categories, and so what we're -- and new product platforms as well.

So driving better platforms that we can differentiate, provide a broader set of solutions to customers, and pull it off more efficiently and more economically for our distribution partners as well as for our operations.

The categories of the platform range all the way from significant new seating platform launches, family launches, significant new systems platforms.

We showed at NeoCon some new launches and new platforms, all the way from what we call lighter scale, lower height, more open desking systems to more conventional, traditional value-priced systems platforms that compete more at the entry level, and everything in between.

We are significant investments in new platforms around the laminate storage, the laminate desking, the laminate case goods as well.

We're talking about our significant expansion here in Iowa in this new operation to really upgrade our laminate capability to better execute what we see as a growing category there.

So it's very broad-based.

It's multiple brands.

It's multiple product categories.

It's multiple process.

It's just all coming here in a big, big way.

As I say, it's a result of a lot of the work that we talk to you as we were coming out of the recession, and we said we are going to get on the gas on investment.

It's simply happening, and now we need to reconfigure and accommodate that growth more aggressively in our operations and quite frankly, we anticipate it.

Okay, thank you, Stan, and one more if I could.

To connect the dots here, the mid-point of the full-year range came down a little bit.

Is that, Kurt, related to the $5 million to $6 million of incremental spending.

And then looking at the quarter, the Q2 results specifically.

Did that incremental spending that maybe we didn't have baked in to the guidance, did that impact your margins in the quarter?

So part of our process, Matt, is to give our best current view of the business, and as we get better visibility through the year, is narrow that range.

I think it's a combination of better visibility as we look out, clearly some of those investments that Stan talked that we accelerated in the second quarter impacted that and continued through the third.

So those would have been a component as we looked at our total forecast that clearly played in.

Thank you guys.

Next question comes from Peter Lisnic of Robert W. Baird.

Your line is now open.

Hi this is Josh Chan filling in for Peter.

Good morning Stan, Kurt and Derek.

I guess my first question is to clarify the investments, the $5 million to $6 million.

Should we think of that as sort of a one-time, 2Q/3Q expense, or should we think of that category as something that is perhaps ongoing and last into 2014?

Yes, I think, Josh, the answer -- I'll narrow this answer down.

The broad answer is it depends on how the market develops, how we continue to -- the new products continue to develop, and what the opportunities we see to drive operating efficiencies and consistent, flawless execution.

That said, what we will anticipate, as we sit here today, is that it's going to be second quarter.

We signal it's going to be third quarter, that we will start feather down through the end of the year and into 2014.

But, I want to be clear with everybody on the call, we have always said, all else equal, we are in this for the long term.

We will forgo quarterly improvement for longer-term improvement and we will respond to the market.

So as we see -- the markets developing very, very fast and it's very, very dynamic, and you all know that.

So as we see opportunities that may change, but where we sit today, I would say second quarter, third quarter, start to feather through the end of the year, and then 2014, start to feather out.

Okay, great, and it's definitely encouraging that you're seeing the growth in the contract side and the acceleration there.

Could you comment on some of the underlying activity levels, visits, things of that nature, that you're seeing?

And maybe what that tells you about the trajectory of growth we could expect for the rest of the year and maybe even into 2014?

Well, we gave -- Kurt gave you some guidance on the organic for contract and third quarter, we're saying it's going to be up 10% to 14%.

And I think the activity level, we see a strong pipeline right now around the large project -- I'd say project, large is probably not fair.

It's really the medium to larger projects.

Again, it's relatively broad-based across our different companies and brands.

So that feels good to us.

We monitor that, obviously, weekly.

This economy is very dynamic, but I think we believe it's going to continue through the end of the year based on what we see today, Josh.

Okay, great.

And the last question is on -- to get to the midpoint of 2013 guidance, and it probably implies that office furniture are about flat compared to 2012, if I'm doing my math right.

And obviously you're investing to drive growth, but the question is as volume continues to grow, at what point might we possibly see kind of the stronger, more normal leverage that perhaps brings office furniture margins back to the historical levels.

Is there a point that you imagine that leverage could accelerate?

Yes, I mean it's a very fair, logical question.

And we've said -- we still believe in the leverage, all else equal.

We are in a significant transformation of the core.

The office furniture industry is going through coming out the recession, seeing significant change in how people office.

Everybody's responding to that, driving new product platforms, kind of dealing with the old, bringing in the new.

So we've got to get to that cycle.

I believe as we get through that cycle which we're saying based on where we sit today, should be the middle to latter part of 2014 would be my best guess, if you really press me, that we should begin to see a return back to those historic profitability levels.

Now, we have to deal with the change of mix, and there's some short-term things as we ramp-up and some of those investments and sometimes that's inefficiencies, et cetera.

So as we talk about leverage, we feel the same way.

We are probably more inclined to get less excited about trying to dial that in by the quarter and more inclined to talk about it like next year sometime.

That will begin in 2015, that begins.

Again, because where we said our job is to respond to the market, and the market's very, very dynamic now.

Great, that make sense, appreciate all the color.

Thanks Josh.

Your next question comes from Budd Bugatch of Raymond James

Good morning, Stan.

Good morning, Kurt.

Good morning, Derek.

I guess, first question, just if the math holds on our mix basis and office, it looks like most of the divestitures, the supply side is 70% of the business, and the project side or the contract side is 30%?

Is that --?

I think we need to work on the math, but basically office furniture is split half-and-half still.

It's still, okay, but if you take those individual numbers you gave us, I guess what we don't know is the impact of the divestiture in each of the upcoming quarters would (inaudible - multiple speakers)

As you look out and you look at the third quarter guidance, you can see the organic, not significant, from a growth perspective.

We'll go take a look at those numbers and see if need to provide additional explanation, but where we sit, net of those divestitures, Office Furniture is still 50-50, and Hearth is, let's say, 18%,17%, and office furniture is the 82% or 83%.

Okay, I understand that.

Let's talk -- the additional expenses you mentioned look to me just like normal business expenses to take care of demand shifts.

It happens all the time in business, and I think you're as agile, as you said, as anybody I've seen to do that.

I'm trying to understand now the contribution margins and maybe where we are in terms of that of those kinds of metrics, so that we can model even going forward.

So is there a question there, Budd.

What are the contribution margins by segment?

We don't break those out specifically.

But basically what I would say regarding the investment, you are correct -- largely are for us.

I would say they are the heightened level right now due to this significantly changing mix in this ramp-up.

So the leverage that we would've typically given in office furniture organic, we basically have spent on this ramp-up through, A, new product ramp-up in through this operational reconfiguration and mix.

So when you net that all back, our contribution margin, leverage we talk about, and organic office furniture would be still that 25% to 30% roughly.

And we simply taken that and chosen to reinvest that to meet the market, to handle the mix, and to ramp-up these new products.

For essentially two quarters and then improving or moving beyond that unless a market again shifts.

Yes, exactly, unless there's something that comes on the horizon that says we would be wise to invest our shareholders money to meet that market in a different way.

But as we sit here today, yes, what you said is what I would anticipate.

Okay, and where do you see any significant change year-over-year on corporate overhead, what you see for third and fourth quarter?

I think the only one, Budd, is what we talked in the past, is around BST, and as a strategic investment as we ramp that up, but quarter-to-quarter, it'll be choppy but that's probably the one item of note.

Okay.

And so nothing in the way of bonuses or stuff like that that's going to be accrued that hasn't been done for the year?

Based on accrued to performance, as we see it.

Okay.

And on that question, Stan, as I'm struggling, are you -- do have enough capacity in Hearths for the growth?

And so I know we haven't asked that for a long time.

Yes, isn't that great?

The answer is yes, we do, but there will be additions and some reconfigurations of some equipment, et cetera.

Re-doing -- I'll give an example.

Laser technology has come a long ways since the beginning of the downturn.

So we may be replacing equipment to provide additional capacity, same footprint dollars, but, no, we feel good about the capacity we have in place and we've got more head room to grow.

Okay, all right, and then last question for me is just the status of the school market, the K through 12 market which you entered, I think, last year

Yes, I think it's kind of more of the same.

It's a short-term challenging market, but we continue to be optimistic about that business as an opportunity.

I think K through12 education as states still are sorting through their budgets is going to be relatively flat.

But the longer-term demographics along with the health of states is a good sort of indicator for the future in this market.

Our performance with Artco-Bell is basically on track.

As we said to you before, we are seeing profit improvement there, for the team, is executing the plan.

It's still a transformation to really get to the profitability that it needs to be at to be fully contributing.

So the experiment, the probe, the strategic initiative we endeavored a couple years ago is right on track, and I continue to feel positive about where that goes.

But if we haven't done the business right now for 2013, we are not going to get it.

That business has got to already be in the tank, right?

Yes.

I mean, this is the hot season, no pun intended in many ways, for orders and for production, et cetera, if it performs like it historically has, we should say.

Okay, and I'm going to also prevail with one more question.

Any pricing changes you have made?

I think, Budd, we said we took pricing across all of our businesses this year at varying points on an average of 2% to 3%, but --

And they are already implemented and are you -- what's the realization?

I think realization is that positive and all have been implemented or announced.

There's one small one yet that comes into effect here shortly but feel good about where that is.

With the take-up on the price has been consistent with what we've done historic

Which is about a third right

Which is actually more like a half, more than that

Okay, but it takes you -- because of some of your markets, it takes about six months usually to get them implemented?

Yes once we announce it, correct but once it's in it comes.

So what you're referring to is just the whole -- some of our supply businesses is a catalog-driven business, and it takes longer to get it through the different channel partners to get it logged in.

Okay

The contract is a relatively quickly with the exception, maybe of, some longer-term customers that may have contracts, et cetera.

Thank you very much.

Thanks Budd

Your next question comes from Todd Schwartzman of Sidoti Company.

Your line is now open

Hi, good morning, guys.

What is the current competitive pricing environment of the contract furniture?

I think it's very consistent to what it's been, Todd, which is it's always competitive, it's always project-for-project.

You have to be very, very sharp, but no change as to what it's been.

It's not -- the pricing environment isn't getting worse.

It's not getting particularly better.

It's more reached a point of equilibrium I think.

Okay, and just to reiterate the lower midpoint of the EPS [cottage] for the year, that's purely the cost issue and does not speak at all to any change in demand, correct?

That's really correct.

It's just, as Kurt indicated, Todd.

It's typically what we do, is we start with a broader range and as we get quarters behind us and the year becomes more certain, then we frequently do narrow that.

So I think it indicates, A, we've got another quarter behind us, so the opportunity in front of us is less or more certain, and, B, it indicates this additional investment that we spent some time elaborating.

Okay, that makes sense.

Last quarter, I think it was Derek, if I'm not mistaken, who referenced a very large GSA project that was expected to ship in Q2.

Did that occur?

It did, Todd.

Okay, and for the quarter what was the sales delta for the federal business?

So FedGov was basically flat for the second quarter.

Okay, so that's a sharp improvement.

As we expected due to timing but I would tell you our outlook for the full year, as we said last time, was down 15 to 20 and that's what we continue to project for the year.

Okay.

Is that really an issue of last year's comps, or is it just choppy at this point where you might expect some sequential weakening in the year-over-year delta?

I think it's just timing, Todd.

It's kind of -- it's always choppy, A. B, it was largely driven by these large projects as you just hinted at, and so where last year came in and where this year comes in, it moves around.

So as Kurt said, we think for the year it somewhere minus 15 to 20.

Okay, it looks like you're taking up your CapEx expectation about $10 million or so.

Is that all of the furniture side?

Predominately related, Todd, to the things Stan talked about to support that new product ramp-up and specifically as we talked about our oak-laminate expansion, accelerating that to meet the market.

Okay.

Does that -- will that affect your pricing power on metals going forward?

I don't think you should assume any change in sort of pricing power direction as you think about us going forward.

Okay.

What was the small non-core office furniture business that was sold during the Q2?

Part of the acquisition of Sagus, which was Artco-Bell was a small, non-strategic -- they're a custom laminate case producer for a market that wasn't associated.

So when acquired that business, we anticipated we would be spinning that off.

It's a $20 million-type of business, not really contributing to the EBIT, the bottom line so to speak.

$20 million annual top line?

Yes.

On Hearth, could you give any color on unit versus price growth?

I know you mentioned you took about a couple points of pricing across the board.

Was that the case, as well, in the quarter for the Hearth business?

Yes, I think we don't really break that out, Todd, but to provide some directional color, it's mostly unit growth.

The pricing environment is still very challenging there.

The builders are feeling lots of cost pressure and so they're negotiating fiercely on this.

So we are seeing most of the benefit come through volume, not very much at all through price.

The housing rebound of late at least has been primarily in the west, but I think to a lesser extent in the south.

Is that consistent with what you've been hearing from your builder channel customers?

We are broadly diversified, the most broadly diversified, and play in all of the markets, so, yes, that would be consistent.

Now there is some differences at times based on the price point of the house and the heating index or is it south of the Mason-Dixon line, north of the Mason-Dixon line, but we are expensing the same growth patterns as the overall building sort of industry.

Including by price point?

Including by price point.

Great, thank you very much

Thanks Todd

I have no further questions at this time.

I will turn this call back over to the presenters.

Okay, thank you so much for joining the call.

We look forward to sharing with you more about HNI in the future, and have a great day.

Take care.

This concludes today's conference call.

You may now disconnect.