HNI Corp (HNI) 2013 Q4 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the HNI Corporation fourth-quarter year-end 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. Matt McGough, you may begin your conference.

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss fourth-quarter and full-year 2013 results, which were announced yesterday after the market closed.

My name is Matthew McGough, 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; and 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 the call for questions.

Before we begin, please be advised that the statements made by the Corporation during this call that are not strictly historical facts are forward-looking statements.

Forward-looking statements are subject to known and unknown risks.

Actual results can 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.

Good morning everyone.

Kurt and I will share our assessment of the fourth quarter for 2013 and then provide some thoughts on our outlook for the first quarter and full year 2014.

We'll then open the call up for questions.

For the year, I'm pleased with our strong performance in 2013.

We delivered top-line growth, achieved strong profit improvement in outstanding cash generation, all while maintaining our investment strategies for long-term profit growth.

We increased net income 30% on a 2.8% field increase.

Organic growth in our Office Furniture businesses exceeded 1% despite a 27% decline in our federal government business.

Our Hearth business delivered outstanding sales and profit growth in both the new construction and remodel retrofit channels.

Operating profit improved 76% on 18% sales growth.

Sales in the new construction channel remained strong, with 26% growth driven by our leading market position and healthy market recovery.

Remodel retrofit sales increased 13%.

For the fourth quarter, we delivered top-line organic growth and strong profit improvement.

Organic growth in the Office Furniture business was approximately 1% despite a 40% decline in federal government business.

Our supply driven business organic growth exceeded 3%.

Our Hearth business continues to deliver excellent performance.

Our new construction business was up 21%.

Remodel/retrofit sales improved 17%.

I'll now turn the call over to Kurt to cover fourth-quarter 2013.

Thank you, Stan.

So for the fourth quarter of 2013, consolidated net sales increased 2.6% to $541 million, or 4.1% on an organic basis.

Sales for the Office Furniture segment decreased 1.3% to $417 million, or a 0.7% increase on an organic basis.

Net sales for the Hearth products segment increased 18.1% to $124 million.

Consolidated gross margins increased to 35.7%, compared to 35.2% in the prior-year quarter due to higher volume and better price realization, partially offset by the new product ramp up and operation reconfiguration costs.

As a percent of sales, selling and administrative expenses, including restructuring and impairment charges, were 28.7%, or 0.8 percentage points lower than prior-year quarter.

Benefits from sales leverage were partially offset by investments in growth initiatives and increased incentive-based compensations.

We ended the year with $65 million in cash; operating activities generated $165 million in cash during 2013 compared to $145 million last year.

Stan?

All right.

Thank you, Kurt.

We enter 2014 financially strong and competitively well-positioned to deliver continued sales growth and profit improvement.

Our outlook remains consistent with our October guidance.

We expect to deliver double-digit profit improvement for the year in a low-growth environment.

We anticipate business activity will improve during the year, and we anticipate sales growth to be low single digits for the full year.

We expect sales growth to be 1% to 5% in the first quarter, given modest economic growth and continued reduction in government spending.

Our supply channel is expected to be down low to mid-single digits.

The start of the year has been impacted by the slow economic growth and severe weather.

Our business is performing well versus the market due to our investments and branding, product development, and selling capabilities.

The contract channel is expected to be up mid-to-high single digits despite a decline in federal government spending.

Our Office Furniture and contract brands are competing well in the markets.

In the Hearth business, we anticipate sales growth to be in the mid-to-high teens for the first quarter.

We are well-positioned for strong, profitable growth with the industry's strongest brands, best products, and superior manufacturing and distribution capabilities.

Our strategies remain unchanged.

We're investing in our core North American businesses to capture key growth opportunities and aggressively pursue attractive prospects in key vertical and growing international markets.

We continue our new product investments to expand current product offerings and new platform initiatives to satisfy the changing needs of the marketplace.

We are investing in manufacturing capabilities to align with the changing needs of the marketplace, to competitively position ourselves in high-growth and profitable segments, and to deliver consistent, flawless execution for our customers.

We are expanding the (inaudible) unique and [split-focus] business model through investment in selling capabilities, branding, and customer loyalty initiatives.

And finally, we continue to make good progress on our business system transformation initiatives.

We're leveraging our RCI culture to champion significant process improvement throughout the Company as part of this effort.

I'll turn the call over to Kurt to provide the financial outlook for the first quarter and full year 2014.

Thank you, Stan.

So for the first quarter 2014, we anticipate overall sales growth to be 1% to 5%, or 3% to 7% on an organic basis.

Office Furniture sales are expected to be flat to up 4% organically, or down 2% to up 2% including the impact of divestitures.

Organic sales for the supplies-driven channel are expected to be down 2% to 6%.

Organic sales for the rest of our Office Furniture businesses are expected to be up 5% to 9%.

And finally, Hearth sales are expected to be up 15% to 19%.

Gross profit margin is expected to be similar to the first quarter 2013, when it was 33.4%.

And SG&A as a percentage of sales, excluding restructuring and transition charges, is expected to be slightly lower in the first quarter 2013, when it was 32.7%.

Net interest expense is projected to be $2.2 million, and the effective tax rate for the full year is projected to be approximately 35%.

For the year, we are expecting capital expenditures to be $90 million to $95 million, and we project full-year 2014 depreciation and amortization to be $50 million to $52 million.

Our estimate of non-GAAP earnings per diluted share for the first quarter is in the range of $0.07 to $0.12 a share.

And for the full year 2014, we are updating our estimate of non-GAAP earnings per diluted share to be in the range of $1.60 to $1.80.

Stan?

All right.

Thank you, Kurt.

So I'll close here.

I remain positive about our momentum and our ability to continue to grow sales and increase profits in 2014.

We continue to invest for long-term profit growth and remain confident that our investments are delivering shareholder value.

Our strategies remain unchanged.

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

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

(Operator Instructions) Bud Bugatch, Raymond James.

Good morning, Stan.

Good morning, Kurt.

Good morning, Matt.

I guess a terrific performance in certainly in Hearth for the fourth quarter at, I think, 18.5%.

Can you talk a little bit about how that looks going forward?

How should we expect the operating margin to continue?

But you should expect, as we expect, that it will continue to expand.

We've said for some time here that we expect to continue to drive positive leverage on our growth in these businesses.

So if you go back, this [car] story is a great story, and it goes back 20-some years that we really started on this journey of really building a very strong enterprise in the industry.

So we put this business together; we made a lot of acquisitions, a lot of investments.

We hit the recession.

We, I think, made a lot of the right moves there that the leadership team there, all the members, did a great job of responding and resetting cost structure, maintaining the critical capacity, and also investing in the right things through that downturn.

And so now as it comes back up, we are in great shape to continue to sort of reap the benefits of that pain and all that great work done by the team.

And so we have, I think, sufficient capacity.

We have, I think, the right sort of management processes that we should continue to see those margins expand.

And, as we've said for some time, should generate much better profit on lower sales on the way up than we have when we started the recession.

So long answer to an important question.

So to make sure I understand it.

Expand it from the 18.5%, Stan, or expand from where it was year-over-year?

Expand well.

Year over year certainly, Budd, is what we're talking about.

We get some funny variation based on mix and volume and events.

So the quarter can jump around.

But certainly year over year, we should continue to see that expand.

Okay, that makes sense.

All right.

Second question is, I think I heard a change in direction on the office side in terms of expectations for the quarter.

You said that the specified side was going to be up in the first quarter and the supplies-driven channel will be down mostly because of weather.

Could you maybe go back over that?

Yes.

We sent you a signal it's -- on a quarterly basis, it's really been probably down to supply channel has been more impacted, we think, by weather.

We think the overall climate is -- climate, no pun intended -- the overall business environment is sort of core is the same, but due to weather and kind of the transaction nature of that business, it's down more than probably we told you last time.

Still think for the year it's going to be where we told you before.

Now, the contract side is more lumpy due to large wins, federal government projects, et cetera.

So we do see that up more first quarter, I think, than we told you last quarter.

Interestingly enough, actually government is going to be up a little bit on that side because we got some large project shipments through.

So for the quarter, going to move around a little bit; for the year, basically the same as we told you last time we talked to you.

Okay.

And then finally for me, can you go over what the divestiture impact is quarter by quarter?

When do we anniversary that, Kurt?

How much is it in the first, second, and third quarters?

Pretty minor as we look out, Budd.

So we'll start again to anniversary that in the back half of the year.

Almost all of that is in the first half of the year, and about $18 million as you think about for the first six months of 2014.

So basically $9 million in the first quarter and $9 million in the second, or how do we split it?

Pretty close (inaudible).

I think your $9 million is probably a pretty reasonable place.

Okay.

Thank you very much.

Good luck on the year.

Thanks, Budd.

Matt McCall, BB&T Capital Markets.

So it sounds like the expectation for Q1 gross margin, Kurt, was for no change year-over-year, yet you're forecasting a little bit of organic growth.

Can you talk about what's limiting any gross margin expansion, given that you are talking about some growth?

Yes, I think it's kind of noise in the numbers, Matt.

It's pretty similar from maybe a little better on the margin side.

But, as Stan talked lumpiness on projects, he talked about that (inaudible) being up; which, you know from a profitability perspective, it can be a negative impact.

So I think those are probably the things that move it around, but I'd call it noise as opposed to large movements as you look out particularly for the balance of the year.

Okay.

And then I noticed, and forgive me if I missed it before, but your CapEx outlook $90 million to $95 million.

I've got some good history in my model.

I don't see anything that high.

Can you remind us where that's being aimed?

And then you talked in the past about some of that growth investment and how it's maybe put a little bit of a drag on margins.

Clearly didn't show up last year, but what's the expectation for OpEx investment in addition to the CapEx investment?

All right.

So you have two questions here, Matt.

And I'll take a shot at it and let Kurt jump in.

Your first question was CapEx and had we raised it, and I'll paraphrase.

The answer is we are seeing more CapEx spending next year.

We see tremendous opportunities to invest shareholders' money to get some really great returns around new product, around productivity efficiency.

And so we're going to continue to invest that money, and we think that is really the sort of the gasoline that keeps the journey going in out years, number one.

Number two, you asked about op expense investment.

So we continue to invest incremental dollars around sort of expanding the business -- new branding, selling models products.

We are investing some money in these plus initiatives around K through 12, around international, and then walls.

And we are investing money in business system transformation.

So we see that kind of running similar to last year again.

We believe that's the energy that's going to continue to carry us on our journey for long-term profitable growth, and I don't think you should expect anything -- any major departure over what we've already told you.

I don't know Kurt, if you want --

Well, I think the only add-on on CapEx, I'll remind Matt, we're in the midst of business system transformation.

And as we come into that next important phase into 2015, that is clearly having an impact on 2014 capital expenditures.

Okay and -- thank you both.

Last question I had, Stan, you talked about expectations for business activity to improve as the year progressed.

Can you just talk about some of the items, whether it be order trends or just macro trends in general?

Are some of the things that are behind that confidence that the year is going to show improvement?

Yes, I guess, Matt, what we're seeing on our activities we [talked] to the different segments is underlying everything, there is, I think, more confidence in from corporations.

We believe small business confidence is improving, albeit slowly.

And I think just the avoidance of some of the stuff we had last year around sequestered budgets, payroll tax improvement -- or increases, et cetera, just bodes for a better economy.

We think, I think, the economy is seeing a bit of a head fake around this weather.

We believe that is dampening a lot of the activity in office furniture here just around people purchasing and buying and [getting] after projects.

And we think as that goes away, we're going to continue to see good growth.

Our pipeline activity, regardless of the Company or where it's at, appears to be healthy.

We are hearing from our customers -- our resellers are selling (inaudible) similar sort of story.

So I don't see a dramatic acceleration, but I think we're going to have 2013 plus a bump -- a bit of a tailwind in Office Furniture.

And then as you talk about Hearth, I think that story continues to be positive.

Again, I think there's some tent stakes in the economic indicators these days around starts and permits and all that stuff.

But we think it's big-time weather-related.

We think affordability, household formations that consumer confidence it is there, and we'll continue.

And I think there's a lot of runway yet to go on the housing recovery.

Very helpful.

Thank you, Stan.

Peter Lisnic, Robert W. Baird.

Stan, I just want to go back to the Hearth margin question.

If we look at the incremental that you've been putting up in that business and where we're at just from an absolute margin perspective, about 18.5% that you booked in the quarter.

How should we think about incremental as we go forward?

I know you mentioned expanding margins year-over-year, but we are at record highs.

Do we think about at some point we might need capacity or some other costs in there that maybe depress incrementals somewhat from the 40% that you booked in 2013?

Just a little bit more color on where the profitability of that business can really go.

Great question, Pete.

The answer is you should think about 30% to 35% leverage, I think, for some period.

I quite frankly am not sure of the capacity.

We have ample capacity in that business to continue to grow.

We -- as we came through the recession, we were very strategic about what capacity we retained and what capacity we took off line.

So we prepared, I think, for this scenario.

So we have another 40% to 50% capacity, I think, available.

Now, there will be some capacity constraints in specific lines, et cetera, but we're not talking about major new investments.

that's going to need to happen to bring that online.

And so it's a very competitive business.

We're going to continue to have to meet the competition.

There is ample opportunity for front-end investment to make sure we are delivering better value to our end customers and to our distribution.

And so a lot of that is what we get paid to do day in and day out.

So that's when I cycle back to I'd use 30% to 35% as a good benchmark year for the foreseeable future.

Okay, perfect.

And then as you look at the growth in that business, can you give us a number for the first quarter?

I'm just wondering can you give us a little color on what the growth might look like by remodel versus new construction for all of 2014?

I'm just wondering if there are any initiatives or any trends there that might make you post some stronger growth comps in remodel versus new or vice versa?

Let me take a shot at that.

We continue to believe that new starts -- new construction -- single-family starts, and multi-family starts are going to continue to grow at healthy rates lower than 2013 but still excellent rates.

So that should be a real nice tailwind for us.

Remodel/retrofit really breaks down into two categories for us.

So there's a remodel retrofit around I'm going to finish off my basement, or I'm going to add a room, or I'm going to redo a room is one category.

I think if you look at the numbers, the industry -- again, as people become more confident about home prices and as they begin to feel better about the economy, I think you're going to see remodel/retrofit accelerate.

I think that's kind of a mid to high single-digit sort of number.

We are well-positioned there.

And then the other side of this that we are feeling positive benefit right now as we speak is really around this hearth heating stove.

This utility appliance that is to provide heat to a room more than just ambience.

So there is an inverse relationship -- or there is a positive relationship, is probably a better way of saying that -- between as fuel oil goes up or LP prices go up, our sales of those alternative heat appliances goes up as well.

And you're watching the news and watching these prices as well.

So we're getting a nice bump from people that are trying to offset the negative impact of rising LP and scarcity.

But fuel also will bring people to these appliances.

And so I think what we are likely to see because of this cold winter and those situations, we're likely to see the remainder of 2014 -- or the beginning of the next heating season, likely to see a positive impact there.

Now, how much will depend on where those fuel prices settle out.

And so that's the rest of the story, I guess, that we'll have to wait and see.

Okay, all right.

That makes sense.

And then just a quick one, Kurt.

We've basically got all the components for the cash flow outlook for 2014 except for maybe working capital.

Should we expect any sort of change in working capital efficiency plus or minus in 2014 as we think about cash flow?

And then if you want to kind of get into uses of cash, given where the balance sheet is at and just update us there, that would be great.

Yes, so I think our working capital story continues, Pete.

If you go back over the last three years, we have generated over $50 million of cash and working capital on $300 million of incremental sales.

It's a great story.

So we're never done, as you know, with lean but so at a minimum it's -- we target it to be working-capital neutral as we look out.

From a use-of-cash perspective, the second one, I think, is unchanged.

And it goes back to the things Stan talked about.

It's continue to invest in our business, maintain modestly, increase our dividend, look for value-enhancing acquisitions; and then for share repurchases, it's simply the continued offset dilution.

So I think that constancy remains on capital priorities.

Did I get all your questions in there?

Yes, you did.

That was very helpful.

I appreciate the time and help, and nice job on the execution.

Josh Borstein, Longbow Research.

Congratulations on the quarter.

Just a few quick questions on GSA.

You said it was down 40%, I think, in Q4.

You said it's going to be up some in Q1.

It's a huge swing on a sequential basis.

What are you seeing right now in that part of the business?

So the question is regarding fed gov, Josh, to make sure, and kind of the trend from fourth quarter into first quarter and our outlook for 2014?

Yes, exactly.

It's really timing of large projects, Josh, is the bottom line.

We still believe government is going to be down 10% to 20% for the year.

For the year 2014, you're saying?

Yes, federal government is going to be down 10% to 14% for the 2014.

Okay, okay.

And what percentage of the business is GSA right now, the federal piece?

Federal is 4% to 5%.

And that's of consolidated business, or is that just Office Furniture?

Office Furniture, Josh.

Okay, thanks for that.

And then you talked about some weather issues.

I was just wondering if with Christmas and New Year's both falling midweek this year, did that disrupt the number of available order entry days or shipments in any significant way that might be lingering here in Q1?

I don't think so, Josh.

It's an interesting point.

Not that we (inaudible) -- and I have to be honest with you, we don't get that sort of response that finitely.

So our general sense is it's just kind of the overall cold weather, snow -- every morning I look, there's, like, 24 states that are impacted by this weather.

Well, pretty broad spread and pretty longer-lasting than, I think, the normal.

Okay, great.

Thanks.

And then just with the investments you touched upon, maybe making some investments in architectural walls.

I know that's a relatively new opportunity for office furniture companies.

Could you talk a little bit about how significant a category that might be, if you have any metrics on the relative size that's out there?

Yes.

We think it's significant category.

I would estimate that the walls category is north of $500 million and growing faster than virtually any other category in office furniture.

And so for us, it's an important growth objective.

We started this probably 24 months ago.

We think we've got a nice start.

We think we have the right product, we have the right intellectual property, we've executed a version of our split focus to have a team assigned to that, and we're seeing nice progress there.

It has a long way to go to get to where it needs to be, but we believe it will be an important part of our growth portfolio in the out years.

Great.

Thanks for that.

And then just one final one for me.

On the international business, could you just discuss a little bit what you saw on the quarter and maybe your outlook for the next quarter here?

Yes, I mean, certainly we've experienced the same as many in the market.

International slowed, and we expect that it's going to continue to be challenging.

Certainly mainland China has been challenged, Hong Kong, which are important markets for us, along with India has slowed somewhat.

So we've had some great growth performance in past years.

We've always thought this was going to be somewhat volatile just based on how the global economics work.

So this is a bit of a more of a flattish period.

I expect next year's going to continue to be somewhat challenged, though better than it was in 2013, and then expect we're going to get back to some really great growth years as we go.

We don't get too excited when it's fantastic, and we don't get too concerned when it's not as fantastic.

It's still, we think, an important part of our, again, portfolio as we go forward.

Great.

Thanks for that, and good luck.

Todd Schwartzman, Sidoti & Company.

Good morning, folks.

Question on the -- ex the government business.

If you were to strip out GSA with respect to contract business, was that a high single-digit, like towards the top end of the total segment delta that you spoke to?

Is that a high single-digit improvement for the quarter?

We don't split out at that level, Todd.

But I think, as Stan talked in his comments, overall, Office Furniture up low single-digits when you take out that government business.

Okay.

And on the guidance for furniture sales.

I think you -- I want to make sure I got the numbers right.

I think you said you're looking at supplies down 2% to 6% with contract up 5% to 9%.

Is that accurate?

That's accurate.

Okay.

And that's on an adjusted or reported basis?

Are you talking organic?

Yes.

Those are both organic reported.

2% to 6% [of] supplies, 5% to 9% on the rest of the business.

And on an as-reported basis, I think you gave those numbers as well.

I just -- I didn't get them in time.

We said overall up 1% to 5%, or 3% to 7% on an organic.

Okay, great.

Thanks.

Regarding the -- on the Hearth side, looking at the benefit in material costs that you had in Q4, to what extent is that ongoing in first quarter thus far?

You say benefits in material costs; we didn't really call that out, Todd.

We're really -- the benefit -- the margin expansion is really around sort of the cost structure leverage.

So we expect that to continue.

Okay.

So it's is not an absolute number, then?

No.

No.

Okay.

And on the international side, emerging markets, really nothing of consequence, correct?

Correct.

Okay.

One housekeeping question.

Just looking at the CapEx that you reported for full year, about [$79 million].

Looks like the September, the nine months year to date, was around $47 million.

I'm just having some trouble reconciling that full-year number if, in fact, you spent $19 million in the fourth quarter.

Well, we would have ramped through the year, Todd, as Stan talked about.

Whether that's the business system transformation initiative, as we had several large projects around our laminate reconfiguration, our facility down here.

So just a function of timing as it fell in during the year.

So the full-year number, the [$79 million], is correct?

It is correct.

Okay, great.

Okay.

That's all I've got for now.

I may just get back in the queue.

Thanks a lot.

We have no further questions at this time.

Okay.

Thank you very much for joining us.

We appreciate your interest in HNI, and we look forward to talking to in the future.

Good day.

Ladies and gentlemen, thank you for your participation.

This concludes today's conference call, and you may now disconnect.