HNI Corp (HNI) 2013 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 2013 results conference call.

(Operator Instructions) As a reminder, today's conference call is being recorded.

Thank you.

Mr. Schmidt, you may begin your conference.

Good morning.

Thank you for joining us today for the HNI Corporation conference call to discuss third-quarter 2013 results which were announced yesterday after the market closed.

My name is Derek Schmidt, Vice President, 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.

Sam 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 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.

I am pleased with our sales performance and profit growth over prior year.

We delivered top-line organic growth and solid profit improvement in both business segments.

Strong operational execution and investment returns drove third-quarter profit improvement while we continued to invest in new products and operational capabilities to meet the changing market demands.

We delivered solid sales and profit growth in our office furniture businesses despite a much greater than anticipated decline in federal government spending.

Organic growth in office furniture was 2%, including a 30% decline in our federal government business.

Organic growth in our supplies business was 1% as strength in our commercial business was offset by weakness in federal government sales.

Sales in our other office furniture businesses increased 5%, even with the government declines, as project activity and demand for new products remains solid.

Our hearth business continues to deliver outstanding performance.

Sales in the new construction channel remained especially strong with 30% growth driven by our leading market position and the housing market recovery.

Remodel retrofit sales were also strong; that improved 13% led by strong remodeling activity.

Overall, I feel good about our third-quarter results which exceeded expectations.

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

Kurt?

Thank you, Stan.

For the third quarter 2013 consolidated net sales increased 2.7% to $566 million, or 5% on an organic basis.

The third quarter 2013 includes results related to the addition of BP Ergo and the disposition of several small businesses, including dealer spinoffs.

Sales for the office furniture segment decreased 0.3% to $466 million, or increased 2.3% on an organic basis.

Net sales for the hearth products segment increased 19.8% to $99 million.

Consolidated gross margin was 35.3% compared to 34.7% in the prior year quarter due to higher volume and increased price realization, partially offset by new product ramp up and operations reconfigurations to meet the changing market demands.

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

We ended the quarter with $37 million of cash.

Operating activities generated $88 million of cash in the first nine months of 2013 compared to $81 million of cash in the same period last year.

Stan?

Thanks, Kurt.

I am encouraged by the continued strong performance of our businesses.

We will achieve our objectives of growing sales and solidly increasing profits in 2013.

We expect overall growth in the fourth quarter of 2013 to be modest as continued weakness in government sales and broader concerns related to the government and budget uncertainties are dampening near-term growth in our core office furniture businesses.

Demand in our supplies driven business is expected to be relatively flat as continued strength in our core commercial markets is projected to be offset by a steep decline in government business.

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

We expect solid year-over-year growth rates in our other office furniture businesses to continue as new business activity remains positive across our brands.

Our hearth segment is expected to deliver continued strong profit growth.

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

Growth in the remodel retrofit business is projected to be solid by remodeling activity improvement.

I remain excited about our ability to continue to outgrow the market through our core plus strategy.

We continue to invest in our core North American businesses to capture new growth opportunities.

While at the same time we are investing in our core, we are also aggressively pursuing attractive plus prospects in key vertical and fast-growing international markets.

We continue to invest in our international business, particularly in Asia where we are well positioned to outperform the market.

Overall, I feel very good about our relative performance and investments we are making to strengthen our market position and deliver long-term profitable growth for our shareholders.

Kurt will now provide the financial outlook for the fourth quarter and 2014.

So for the fourth quarter of 2013 we anticipate overall sales to be flat to up 3%, or up 2% to 5% on an organic basis.

Office furniture sales are expected to be flat to up 3% organically, or down 2% to up 1% including the impact of divestitures.

Organic sales in the supplies-driven channel are expected to be relatively flat and organic sales in the contract channel are expected to be up 1% to 4%.

Hearth sales are expected to be up 8% to 11%.

Non-GAAP gross profit margin is expected to be similar to the fourth quarter 2012 when it was 35.3% excluding restructuring and transition charges.

Non-GAAP SG&A as a percentage of sales, excluding restructuring and transition charges, is expected to be slightly lower versus fourth quarter 2012 when it was 29.3%.

Net interest expense is projected to be $2.5 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 and expect full-year 2013 depreciation and amortization to be $46 million to $48 million.

For the full-year 2013 we are projecting non-GAAP earnings per diluted share to be in the range of $1.35 to $1.40, so looking forward to 2014 our current estimate of non-GAAP earnings per diluted share is in the range of $1.55 to $1.80.

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

For 2014 we are projecting modest domestic economic growth and no significant economic change related to concerns regarding a US government debt default or another federal government shutdown.

For our office furniture segment we expect low single-digit organic growth next year.

We project solid margin improvements driven by continued operational execution improvements and benefits from our 2013 investments.

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

Low double-digit sales growth is projected in 2014 driven by continued strength in the new construction channel and modest growth in the remodel/retrofit channel.

We will plan to provide an updated view on our 2014 outlook during future earnings conference calls.

This summarizes our outlook for the fourth quarter 2013 and full year 2014.

I will now turn it back to Stan.

Thank you, Kurt.

I will provide some closing comments here and then we will open up to questions.

I remain confident in our strategy to drive profit improvement while simultaneously investing for long-term profit growth.

Our core plus strategy is working and we are making strong progress in our markets, competitive position, and of course, [quality] financial results.

Going forward, our strategy remains unchanged, but with a deeper understanding and implementation of specific elements required to adapt to a changing environment.

So with those comments complete, we will now open it up to questions.

(Operator Instructions) Peter Lisnic, Robert W. Baird.

Good morning, gentlemen.

First question, if I could, just on the hearth business; the strong incremental profitability.

Kurt, you talked about a good base for that to continue into 2014.

As we look at that business you are still pretty far away from a quote-unquote normalized housing environment.

Where can this business go?

We are pushing pretty good margins relative to historicals, but how much upside should we think about in terms of profitability in that business as we kind of move towards a more normal housing environment?

Good question, Pete.

We anticipate continued solid leverage on this business going forward.

I will remind you as we went through the downturn we, the team at hearth, really made some excellent moves around restructuring, reorganizing, simplifying product lines while at the same time investing in the future.

And we anticipate that the payoff on that is going to continue here, certainly through 2014.

Then as we look forward we expect that we are going to -- as we begin to see the more normalized housing market, we expect to have better margins than we had than when we went into the recession.

Okay.

As we think about the cost structure of that business, is it still a, let's call it, a 25% to 30% on a normalized basis incremental margin type of business?

That is a good place to be.

Okay, all right.

Then when you look at the top line there I am just wondering if there was any sort of impact that you may have seen, particularly on the remodel side I guess, with the movement in rates that we have been dealing with over the past couple of months.

It sounds like the homebuilders maybe saw a little bit in terms of their traffic numbers, but I am just wondering more on the remodel side if you saw any impact from rate moves.

Nothing worth calling out, Pete.

Certainly we are watching that closely, but nothing at this stage that would cause us to change our outlook.

Okay, all right.

Then last question; just wondering if you could maybe touch on a little bit the business optimization initiatives that you are putting through.

I'm just wondering if there's any sort of milestone that you can kind of lay in the ground for us to give us a sense as to how those are progressing.

Do you still feel confident with them and then just sort of any sort of benefits that could be accruing at this point?

Yes, I mean to summarize we feel good, continue to feel good about those investments.

They are on plan.

They are doing what we had hoped and thought they would do.

There is no significant change.

It is really more of what we have been talking about on the past.

Certainly you can see our positive leverage this quarter.

We expect to continue to invest and continue to still at the same time drive positive leverage.

As it relates to this business system transformation, it is again more of the same.

We continue to work our understand, simplify, standardize, and then connect and automate processes.

Significant work underway by the organization.

We are deep in really kind of the operational design phase and so we are heavier in the investment, not so much in the return phase of that project.

Okay, got it.

Then, Kurt, really quickly any sort of CapEx number that you can throw out for us for 2014?

I think you should look at a similar rate to this year, Pete, as we go forward.

Okay, perfect.

Thank you for the time and details and nice execution.

Thanks.

Budd Bugatch, Raymond James.

Good morning, Stan.

Good morning, Kurt.

Also my congratulations on your execution.

I guess let's talk a little bit about the government and what it looks like in the fourth quarter in terms of what do you think it will be for the office side.

I think, Budd, it is going to be similar to third quarter.

I think it is going to be down another 30% to 35%.

There is no positive sort of factor there.

As we indicated, Q3 was actually worse than we had anticipated.

We knew it was going to be bad.

We didn't quite really I guess do a good enough job of forecasting this whole wrangling in Washington and the impact there.

So what is it as a percentage of sales in the third quarter?

What was it a percentage of office or total sales; how would you --?

Federal government is typically running 5% and it is going to run similar to there.

We have come down; it was as much as 10% at 2011 and 12% something like that.

Now is 5% and it is going to continue to -- in 2014 it will be more like 4%.

There was no rush to budget.

[We came through] the end of the fiscal year and usually you get a bump at that last second.

No?

Unlike anything we've ever seen before.

It was dead.

Whoa, okay.

Thank you.

On the organic side or inorganic side, refresh me now how that is going to play out into the fourth quarter and into next year.

What do we have left in the divestitures to factor into our estimates for the base for next year?

State your question again here, Budd.

I'm not sure we have (multiple speakers).

We made some divestitures.

When do we anniversary them and what is the quarterly impact for the next couple of quarters?

It will start to be less of an impact as we roll forward, Budd, and you will see it really roll off in the second half of 2014.

But it gets to become much less of an impact as we go forward quarter to quarter.

But it was 12.5% in the third quarter, right, Kurt?

The net of impact, is that?

That is correct, but it is a couple of million dollars a quarter for the next couple of quarters going forward.

Okay, all right.

Last question for me I guess is D&A for next year.

You gave us the CapEx run rate.

I guess with that moving up D&A will move up as well.

I would say that is a fair assumption.

And so 46 to 48 this year.

What do you think it is next year, 50 to 52?

I think that is probably a reasonable assumption as well, Budd.

Thank you very much.

Congratulations.

Josh Borstein, Longbow Research.

Thanks for taking my questions here.

Just a follow-up on one of Budd's questions on GSA; when you said it is 5% that was in 3Q and was that for -- as a percentage of your total sales?

It was for the full-year, Josh, and it is a percentage of our total office furniture sales.

Office furniture, okay.

Have you seen any GSA projects been delayed or actually canceled here?

Is that part of the reason why maybe GSA came in worse than you had anticipated?

We have not -- I am not aware of any significant projects that have been canceled, Josh.

Certainly there has been delay, and a lot of what you have seen is even we call it the day-to-day transaction stuff has been on hold very tight as well.

So the question is what happens as people come back.

Does some of that pick up or is that perpetual?

Certainly we don't anticipate a significant increase as we go forward.

I think we have taken a more conservative view on this.

Okay.

It sounds like now for the full year it will be down something greater than the 15% to 20% you had?

Yes, I think the full year is going to be more like 20% to 25% down.

Okay.

That is helpful.

Thank you.

On the 2014 outlook, could you just talk a little bit more about the office furniture component, what the expectations are, what you are kind of seeing maybe in some of the greater verticals for you?

I think overall, Josh, it is a lot more of what we have seen this year.

I think it is steady, somewhat choppy growth.

The core feels very strong to us, and then we pick up some drag from the federal government still.

I think international has come down, is much more muted than it was last year, and I think international will start to come on a little bit more.

But we are not anticipating big blowout sort of growth there as well.

So more of the same.

Federal government drag, international picking up modestly.

And all told, you were talking about low single-digits organic growth in office furniture for 2014?

Yes.

Okay.

So more or less in line with BIFMA projections?

Yes.

And then just last on the international business, you touched on that a little bit.

What have you seen this quarter and your expectations for next quarter in that piece of the business?

The international business was impacted by a slowdown in China and has been over the year.

Certainly the Mideast upheaval has slowed things down, and then everybody else is associated with that.

And so we did see a relatively -- well, a muted sort of performance or muted growth here this year.

We expect this next quarter is going to pick up.

We are seeing increased activity in Asia.

I think the rest is starting to improve and then, as I say, 2014 I think will be more conservative but I think solid there.

Great.

Thank you and good luck to you.

Thanks, Josh.

Josh (sic) Schwartzman, Sidoti & Company.

Hi, gentlemen; it's Todd Schwartzman.

Just a couple of items.

Not to beat a dead horse on the GSA, but what was the sales delta for Q3?

Versus what, Todd?

To make sure we understand your question.

Year over year, sorry.

Something like $10 million, $8 million to $10 million, Todd.

And that was down 25%-ish?

More like 30%.

Okay.

So the comment on another potentially 30% to 35% down, does that refer to 4Q on a year-over-year basis?

Correct.

Okay.

In general how is the pipeline of large projects shaping up now versus three months back?

Pipeline is solid, is good, similar to what it was three months back.

The question really has to do with sort of does it flow through the pipeline at the same rate given the uncertainty.

Still feel good about that, but it is something we are watching closely.

And in terms of verticals, any pockets of strength or weakness that you would want to highlight?

Nothing that is significant to point out to you.

What about discounting?

You know, I think it is more of the same.

I think it is stable.

Got it.

That initial take you gave on 2014, thank you, that is helpful.

But looking at that $1.55 to $1.80.

Does that assume OpEx in that 29% to 30% of sales range?

Yes, I think 25%-plus, Todd, you are probably good.

25% plus.

Let's think of it in terms of operating leverage, so you can back in between margin and SG&A to get at OpEx.

But you have got to take what we have given for the top line and just think about the earnings; it goes through to about a 25% operating leverage.

Okay.

So the contribution margin?

Exactly.

Okay, great.

What are you seeing as far as commodity pricing; what is your outlook for next year?

Modest inflation.

Okay, thanks a lot.

There are no further questions at this time.

I turn the call back over to Mr. Askren for closing comments.

We appreciate your interest in HNI and look forward to speaking to you in the near future.

Take care.

Ladies and gentlemen, thank you for joining.

This concludes today's conference call.

You may now disconnect.