HNI Corp (HNI) 2014 Q4 法說會逐字稿

Good morning.

My name is Mike and I will be were conference operator today.

I would like to welcome everyone to the HNI Corporation fourth-quarter and full-year fiscal 2014 results conference call.

(Operator Instructions).

As a reminder, today's conference call is being recorded.

Thank you.

Mr. McGough, you may begin your conference.

Good morning.

I am Matthew McGough, Vice President Corporate Finance.

Thank you for joining us for the HNI Corporation conference call to discuss fourth-quarter and full-year 2014 results announced yesterday after market close.

Copies of our financial news release and earnings presentation including non-GAAP reconciliations have been posted to our website, www.HNIcorp.com.

Measures of non-GAAP financial performance for the fourth quarter and fiscal year 2014 discussed during this call other than organic growth, exclude restructuring, goodwill impairment, transition costs and gain on sale of vacated facilities.

Joining me today from HNI Corporation are Stan Askren, Chairman, President and CEO, and Kurt Tjaden, Vice President and CFO.

Statements made 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.

The earnings presentation posted on HNI website includes additional factors that could affect actual results.

The Corporation assumes no obligation to update any forward-looking statements made during the call.

I am pleased to turn the call over to Stan Askren.

Good morning, everyone.

As usual we will share a brief assessment of 2014, provide an update on our outlook for 2015 and then we will open the call up for questions.

We had a strong finish to a great year in 2014.

Our fourth-quarter is evidence of very strong momentum with consolidated sales up 15% on an organic basis and non-GAAP profit up 30%.

Office furniture organic sales were up approximately 13% with our supply driven sales up approximately 8%.

Hearth sales were up 23% on an organic basis.

For the year, we delivered strong sales in non-GAAP product improvement while continuing to make significant long-term investments.

Our results were broad-based across operating companies, brands, product categories and markets.

Our office furniture businesses had a strong year with accelerating momentum.

Full-year non-GAAP operating profit improved 21% on a 4% organic sales growth.

We are encouraged with North American contract organic sales growth of approximately 10% for the year.

We had another exceptional year in our hearth business which delivered record operating profits.

Sales were very strong across all channels.

Full-year operating profit improved 63% on 22% organic sales growth.

I am very pleased with our 2014 results and our momentum heading into 2015.

Kurt?

Thank you, Stan.

Additional financial highlights for the fourth quarter include non-GAAP consolidated gross margins were consistent with prior year at 35.7%, higher volume and better price realization were offset by unfavorable mix, and strategic investments in operations.

As a percent of sales, selling and administrative expenses decreased 50 basis points due to higher volume partially offset by increased incentive-based compensation, freight cost due to carrier capacity constraints, strategic investments and the impact of acquisition.

We recorded $24.5 million of restructuring and impairment charges and transition costs.

These charges included goodwill and intangible impairment charges of $20.5 million related to a small office furniture business and $4 million of restructuring and transition costs in connection with closures announced earlier this year with $2.7 million included in cost of sales.

We further strengthened our balance sheet ending the year at 1.2 times debt to EBITDA leverage and core working capital was again a source of cash.

Stan?

All right, thank you, Kurt.

So looking forward, we are driving towards strong sales growth and significant profit improvement again for 2015.

We expect double-digit profit improvement across our office furniture businesses driven by strong topline growth, strong operation performance and returns on strategic investments.

Our supplies driven business is expected to be up low to mid-single digits for the year.

Our other office furniture businesses are expected to be up mid to high single digits for 2015.

In our hearth business, we project strong growth in new construction sales.

Remodel retrofit sales will be lower due to a very strong year-over-year comparisons for biofuel product sales.

Our Vermont Castings integration is on track.

We continue to identify investment opportunities in virtually all aspects of the business which generate very attractive financial returns for our shareholders.

We have great momentum across our businesses.

We are well-positioned to continue to outperform the market.

So financial outlook for the first quarter and full-year 2015.

For the first quarter 2015, we anticipate overall sales growth to be 17% to 21% or 13% to 17% on an organic basis.

Office furniture sales are expected to be up 13% to 17% with similar growth in both the supplies driven and contract channels.

Hearth sales are expected to be up 31% to 35% or 10% to 14% organically.

Gross profit margin is expected to be slightly higher than the first quarter 2014 and SG&A as a percentage of sales excluding restructuring, transition charges and gain on sale of vacated facility is expected to be slightly lower than first-quarter 2014.

The full-year 2015 effective tax rate is projected to be approximately 35% and we expect capital expenditure levels to be similar to 2014.

Our estimate of non-GAAP earnings per diluted share is in the range of $0.18 to $0.23 for the first quarter and in the range of $2.45 to $2.65 for the full year.

Stan?

Okay.

Thank you, Kurt.

So I am going to wrap this up and we will open it up for questions.

Our businesses are strong and well positioned.

We entered the first quarter with very strong momentum.

I remain confident in our ability to significantly grow sales and profits in 2015.

Now we will open it up for questions.

(Operator Instructions).

Budd Bugatch, Raymond James.

Good morning, Stan.

Good morning, Kurt.

Good morning, Matt.

Congratulations on a very solid year and good outlook for 2015.

So can we drill down in a couple of areas?

First, let's drill down in supplies in office furniture and tell us what you see and how it maps with what we are seeing in the economy and maybe the outlook for not only the first quarter but the year itself?

I think we see supplies beginning to accelerate and if you look at the fourth quarter versus the year, it is a recent acceleration.

As we step back and look at activity levels and that comes in a variety of sort of measures depending on the business is our assessment of (technical difficulty) the momentum in the supplies channel is picking up.

I think small business is coming online, beginning to show signs of more confidence.

I think there is probably some pent-up demand there and then I think our supplies position and our supplies resellers or partners are taking more than their fair share of what is available there.

Nothing exactly specific but overall momentum is improving, accelerated the last part of the year and we are projecting that to continue into 2015.

Okay.

You are breaking up a little bit, I don't know if it is just my phone or not but the connection doesn't seem to be perfect or like it normally is.

I'll just mentioned that to you.

A couple of other questions on that supplies situation.

The recent announcement between Staples and Office Depot, I know that there is not a great deal of business done in the stores but there is through their business units.

What outlook does that give to you?

Does it present any challenges or opportunities or both?

What I would say to that, Budd, is you are correct.

They -- both groups are very important customers of ours.

We have significant position with both of them.

We value the relationships with both of them.

They play is not big time retail for us, it is really what they call the contracts side or the sales side, the feet on the street side and we are in a good position if it goes through to benefit I think.

If it doesn't go through, we plan to continue to work hard to earn their business and help them grow their business with us and that is probably the extent of what I can comment at this stage.

Okay.

And supplies contract percentages in office now, is it still around 50-50 or has it moved over time to something different than that?

It is just about 50-50, Budd, and it kind of moves around a little bit based on whatever is happening in the current sort of reporting period.

And my last area of inquiry is on hearth.

I would have expected given the price of energy for hearth to really be challenged on the biofuel side.

So maybe you can give us the linkage of why that may not be the case and there actually may still be growth in 2015 in that side of the business?

Yes, excellent opportunity to comment.

The biofuel is a significant opportunity for us, has been a significant growth area.

It is driven by a couple of factors.

It is driven by the cost of fuel, both fuel oil and LP, liquid propane, is the other big factor there.

It is primarily an alternative heat source versus an ascetic opportunity.

And so as fuel oil or alternative core energy prices -- fuel oil and LP go up, people seek alternatives to reduce their cost.

It is also often an alternative heat source for an alternative space.

In the event there is cold weather, people will seek out biofuel to place in a basement or in another room or whatever to provide heat sources.

The third thing is it often is a source of emergency heat.

So if there is a power outage, an ice storm, a big snowstorm and people are feeling threatened about their heat source, the power goes out, a lot of times that will drive an appliance sale as a backup for the family.

So what drives that is fuel prices and then cold weather and then natural sort of storms and disasters like that.

The final point is there is a longer tail on this because people do know that this stuff comes and goes and even though fuel prices may go down this year, they still remember last year and they are kind of in the mode of moving on and making an acquisition and they will go ahead and buy the appliance.

Or they remember last year when they were without heat and they look over at their family and they are shivering and they say never again.

So they will pursue that.

Then the final point, Budd, is there is a retail dealer involved in this that will buy inventory and move inventory through and so the flywheel sort of expands and contracts accordingly.

Okay.

Just remind me, I think again the split between these two subsegments and I hate to use the word subsegment but I'm not smart enough to figure out something else -- between these and hearth is also about 50-50, is it not or has that moved?

It is still 40-60, 40% new construction, 60% remodel/retrofit of which biofuel is a component of remodel/retrofit.

Budd, I will add.

Biofuel, we talked in the October call that we expected that category to be challenged given the significant growth that Stan referred to.

That is part of the outlook, strong on new construction and solid on the retail gas side.

So that mix across those three businesses gives us that positive outlook on the hearth business for 2015.

And total as you parse that 31% to 35% for the first quarter or 10% to 14% organic or however you want to say it, how do we look at the pieces of that for growth?

What would be the --

I think directionally consistent with what I said, I think we would expect to see new construction up, retail solid and alternative fuel or biofuel kind of flattish to down slightly.

Okay, could be down.

That's what I was trying to get to.

Okay.

Thank you very much, guys.

Great quarter.

Good luck on this one.

Appreciate it.

Matt McCall, BB&T Capital Markets.

Thank you.

Good morning everybody.

So let me fill in a couple of blanks here.

Budd got a few of them.

But what was, so you said supply, Kurt, was up 8% in the quarter.

What was contract up -- it would have to be high teens?

North of 20% North American contracts, overall, yes, up north of 20%, Matt.

And you are assuming mid to high single digits there for the year, right, upcoming?

For the contract side?

Yes, sir.

Yes, for the full-year, that is correct.

And then what was the projection for hearth for 2015?

I didn't get that.

I think we said mid-teen-ish organic base, low to mid teens.

Organic.

Yes, organic single digits for the year, Matt, was between quarters.

The mid single-digit for the year for hearth, midteens for the quarter.

So if I look at hearth incrementals obviously it looks like Vermont had an impact there, your incremental was a little bit lower than it has been.

How should we think about the incremental margin as we look at 2015?

Are we going to see three more quarters as Vermont Castings gets included until we anniversary it or what is the assumption for the full year?

You should expect core hearth business to continue to lever in that mid-30s plus as it has, Matt.

But as you look at the impact of Vermont Castings, we said that was $0.05 to $0.10 a share so that ends up being significantly less than kind of our core leverage.

And until we get to the end of the fourth quarter we would expect to see lower overall leverage on the hearth business for 2015.

Overall, okay.

So when I look at the hearth business, we looked back the last four years, the results have actually exceeded the guidance in seven of eight quarters and you were in line in that eighth quarter.

Can you explain the visibility and kind of your ability to forecast there, what you are using and how comfortable are you that the mid single-digit for next year is kind of going to continue this trend of outperforming?

You know, Matt, this is Stan.

To be candid with you, on a quarterly basis how good is our visibility on that?

It moves around a lot.

My gosh it depends on oil prices, it depends on new construction, it depends on the weather, etc.

So sometimes we get it right, sometimes we don't.

And I think in general we should get it right but we don't live and die based on these quarterly projections.

We have been very clear to our shareholders that we are running this business for the long-term.

We owe shareholders the best view of what we know with a little bit of a conservative bent to it is what I would say.

So if anybody would have told me that biofuel was going to be up 40%, 50% this year, I would have said I don't think so.

It is up.

Why is it up?

Because of oil and weather, etc.

So it is a volatile economy, volatile industry, etc.

I quite frankly don't get too excited if we miss it on a quarter and then hit it above the next quarter or whatever.

It is all about the long-term for us.

So how do I feel about next year?

Based on what I am looking at, we have given you our best shot.

For the year based on what I'm looking at today I know, we've given you our best shot for the quarter.

It is likely we are going to over time come in about where we sit but sometimes it is over, sometimes it is under.

And it is not a quarterly comment.

I was really trying to understand what goes into your forecast because it has been so good/conservative.

But maybe I (inaudible) some of the components -- new -- what are your single-family start assumptions?

Can you talk about the growth rate there or some of the components that go into your outlook?

We look at all of this stuff, Matt.

We go through and look at economics and we do what you do.

We kind of do a roll up.

We look at all the different people who are forecasting single-family starts and who are forecasting remodel retrofit and forecasting bet oil prices and fuel oil prices and LP prices and we factor that back and all of that stuff and we roll that out.

So we don't break out what we think single-family starts are.

I think Kurt said we think hearth is going to be led by new construction which is driven by single-family starts and take what you are looking at from all the different sources out on the market.

We kind of pick a midpoint based on how we are going to do relative to the market.

We take a look at remodel retrofit at the midpoint, we make a projection of over think that is going to be vis-a-vis the market and that is how we roll it out.

Okay.

So you took the outlook up about a nickel and was that more -- is that improved optimism or increased optimism around the top line or was there some margin delta that actually helped you become more confident in where earnings could be this year?

It is both, Matt.

We are a quarter in, very strong results fourth quarter.

I think we are [jibing] or communicating very strong results for the first quarter of 2015 and so we are just adding that to the number and again we are looking at the long term.

So let's begin to move this up.

In other words, I think we owe shareholders the best view of what we know and I would say I am more positive today about 2015 than I was the last time I communicated with shareholders.

Okay, that is good.

Finally, the CapEx outlook.

I think Kurt, you said flat year-over-year.

I had a little bit of a step down.

It might have been an error in my model but is there something that has changed there or if there is nothing that has changed, where is the spending aimed?

Can you remind us of --?

Matt, if you have a step down then we may be mis-communicated because I believe we said that we expect this CapEx to kind of run at a similar rate for the next couple of years at least.

So the great news for shareholders is we are identifying some super return projects and investment opportunities in the core business and it is focused on a few areas, primarily we are finding lots of productivity opportunities in the core business of transforming our core processes, investing in equipment and process improvements there to drive costs.

That is what is going to drive our this leverage thing in the long term.

We are identifying some great opportunities to invest in front end tools and selling tools for the salesforce around IT sort of systems.

And then we have talked to you a lot about our great opportunity to retool our business systems here and that is a significant investment in capital as well.

So I am very excited that we have all of these great sort of high return relatively low risk opportunities that take CapEx in front of us versus just sending shareholders back money without driving a big return on it.

This is great news for us.

Okay.

Perfect.

Thank you, Stan.

Todd Schwartzman, Sidoti & Company.

Good morning, guys.

Wanted to ask about the guidance for furniture for the quarter at 13%, 17% is nice growth although that is stacked against two years of first-quarter declines but still some solid expectations there.

Wonder if you could talk about the comparisons with prior year maybe by vertical and kind of remind us whether there is anything particularly tough or easy from a year ago in terms of furniture deliveries?

I would go back to Kurt's comment.

It is broad-based, it is across our businesses, it is across our operating companies, across our brands, across our product categories.

And so I don't think we have anything specific to call out.

I think we said it is going to be both contract and supplies driven.

So good news.

So a year ago in Q1 there was no vertical that saw an inordinately large one-off order or two or conversely a decline based on perhaps a prior-year bump up?

Nothing that I would call out specifically, Todd, no.

And you are not disclosing the year-end furniture backlog, correct?

We don't disclose backlog.

No sir.

Okay.

On the gross margin for Q4, I just wanted to get a sense of what the factors there were on the mix front maybe ex-VCG.

So I will take that, Todd.

I would say nothing different than the past.

It continues.

It is a complex thing.

It ends up being typically around product mix flowing through there.

But Vermont Castings was modestly accretive in the fourth quarter but other than that from a mix perspective, nothing of significant note.

Do you guys think in terms of whether it is in units or dollars, the mix within your furniture business of the so-called collaborative type products versus some of the more legacy?

Are you asking if there is any significant change in those ratios, Todd, is that the question?

I don't suppose there is an abrupt change from quarter to quarter but is there a slow-moving trend that has been underway that maybe we should watch and think about for modeling on a long-term basis?

Nothing that we haven't discussed in the past.

Certainly this move from archival storage that we have gone through over the years has been significant but regarding the changing workplace and all that, we are not looking at anything that I think shareholders should be aware of that is going to change how they think about the business.

Got it.

On hearth, I know that you have both and had relationships with a sizable number of the builders.

But the growth there, the organic rose 23% in Q4 alone for example.

Whether it is alternative fuel products or traditional ones, have you taken on any new customers that is helping to fuel that organic growth as well as the products themselves?

So the organic new construction business was up very nicely for the year and also very nicely in the fourth quarter and that is really coming from our core customer.

So the answer to your question specifically, we are out competing job per job, install per install and I think we are competing well.

Has there been any big change in our customer base?

The answer is no.

So if you looked at your top 10 customers on the hearth side in 2014 versus 2009, would it look pretty similar?

Yes.

Okay, great.

Thanks, guys.

Josh Borstein, Longbow Research.

Hi, Stan, Kurt and Matt.

Congrats on a nice year.

A few questions for you.

Stan, I think first in some of your remarks you made one comment about organic sales growth of 10% I think in maybe it was office.

Was there a comment like that?

You are talking about which context, Josh, sorry?

I don't know.

I just know it was in the opening remarks where you made expectations for organic growth of I think you said 10% in one of the (technical difficulty).

Yes, Josh, I believe I mentioned that for the year 2014, North American contract organic sales grew 10% for the year which is significant growth given I think what was going on in the industry.

I see.

Okay, for 2014.

Got it.

Just in the press release you mentioned office furniture sales, a lot of momentum, some acceleration in 4Q with increases in both supplies and contract channels.

What exactly are you seeing that has changed?

Could you put some more color to the increased momentum you are seeing?

Is it share gains, the industry in general, if it is coming from any particular end market?

Yes, as you know, Josh, we are always reluctant to jump on the share gain thing in the short term just because it is -- it moves around.

We are seeing broad-based strength is how we would say that.

Project activity is good.

Day to day activity is good in both contract and in supplies.

We are seeing strength across most all of our businesses, segments, price points, categories, channels, etc.

So I think from where we sit, from where I sit I would say the economy is improving.

We are getting the benefit of that and then I think we are executing well and the investments that we made front-end, back-end product across the board are bearing fruit.

But would you characterize the momentum you have seen as a step change from recent trends as the industry takes another leg up do you think?

Certainly we saw the latter half even fourth quarter and first quarter take a step function improvement in our business for the year.

You'd have to look at the BIFMA stuff although it lags, to see kind the best indicator albeit not precise is what is going on in the overall industry.

The BIFMA data, if you average the last few months kind of suggests that maybe what was a low to mid single-digit environment is turning into more like a mid to high single-digit environment.

Is that kind of a feeling you are getting as well?

Yes, that is consistent with what I think and have seen and feel.

Just the way that the quarter played out on the office furniture side, was there any acceleration or deceleration intra-quarter?

I would say the latter part of the quarter was accelerating.

Okay.

On the revenue guidance for 1Q, much higher than consensus expectations.

Is it just the sell side, is it us that got it wrong or is it more a function of just this acceleration that you are seeing?

I would never say the sell side gets anything wrong so I would just say it is the acceleration that we are seeing, Josh.

All right.

Fair enough.

Thank you for that.

In the hearth segment, the increased material costs that you referenced in the press release, what is that exactly?

We are looking at each other, Josh, which means it is general stuff.

There is nothing there.

We are seeing freight and distribution -- it is not material but freight and distribution as a cost went up, the industry is struggling with carry capacity right now.

Fuel oil is a positive but the carrier capacity is an issue.

And I don't think there is anything else really specific on the material side.

We would say materials are rather muted right now.

There are some specific categories driven around supply and demand more than input costs are going up.

Okay, so the fluctuations in steel and all that all in the basket of commodities is looking pretty flattish for the year?

A couple of points, pretty good sort of stuff again.

It is more driven by supply and demand, just capacity that was adjusted during the recession.

Glass is a good example.

We use a lot of glass in hearth products as well as in office furniture and that capacity has changed.

The carton world has changed a bit.

So I would say there is maybe a couple of points but it is rather muted as we sit here today.

You know this better than anybody, it can change dramatically based on sort of what is going on with the global economy.

Sure.

And just a question on FX, I think you guys don't have too much overseas exposure, I think it was around 10%.

But if you can just remind us on the exposure that you have and what you anticipate for any FX headwinds?

Office furniture less than 8% of our sales overseas, Josh.

And foreign exchange for us is really a non-event.

So would not expect to talk it at all.

Can you give us an update on what you are seeing in those businesses overseas right now in India and in China?

Yes, I would say India and China are relatively muted, still sorting through kind of their economic macroeconomic sort of stories there.

We are seeing China is improving some.

We are feeling better about China as we go forward.

Our India business is I would say, India is more flattish with some growth there.

We are still working on the transformation of that business.

So the international businesses are relative to the North America businesses are not as strong but I think there is still some growth to be had there.

Got it.

Thanks again for taking my questions, congrats and good luck on the year.

Thanks, Josh.

That was our last question.

I will turn the call back over to the presenters.

Thank you so much for your interest in HNI and we appreciate your commitment to the Company and we look forward to talking with you all in the future.

Have a good day.

This concludes today's conference call.

You may now disconnect.