HNI Corp (HNI) 2015 Q1 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the HNI Corporation's first-quarter fiscal 2015 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.

Thank you for joining us for the HNI Corporation conference call to discuss first-quarter and fiscal 2015 results announced yesterday after market close.

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

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, which are subject to known and unknown risk.

Actual results could differ materially from expected results.

The earnings presentation posted on the HNI Corporation website include additional factors that could affect actual results.

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

I'm pleased to turn the call over to Stan Askren.

Good morning, everyone.

We'll share an assessment of the first-quarter 2015; provide some thoughts on our outlook for second-quarter and full-year 2015 as well.

We will then open the call up for questions.

We had a great start to the year.

Consolidated sales were up 16%.

We delivered strong earnings results, as projected, while continuing significant investments for long-term, profitable growth.

Our office furniture business has outperformed the market, with double-digit top-line growth.

Our supply-driven business sales were up 15%.

Sales in our remaining office furniture businesses increased 13%, led by 15% growth in our North American contract business.

This is the third consecutive quarter our North American contract business has delivered double-digit sales growth.

Our hearth sales increased 24%, including the Vermont Castings Group acquisition, or 3% organically.

Strong growth continued in new construction sales with organic growth of 18%.

And as expected, organic remodel/retrofit sales were down, due to very challenging year-over-year biofuel product sales comparisons.

I'm very pleased with our first-quarter results and our momentum heading into the second quarter.

I will turn it over to Kurt Tjaden.

Thank you, Stan.

Additional financial highlights for the first quarter include consolidated gross margins increased 35.2% compared to 34.3% in the prior-year quarter due to volume, increased priced realization, and strong operational performance.

As a percent of net sales, total selling and administrative expenses, excluding restructuring charges and gain on prior-year sale of assets, increased 10 basis points.

The benefit of higher volume was more than offset by higher freight costs, investments in strategic initiatives, higher incentive-based compensation, and the impact of the acquisition.

We recognized $1.5 million of restructuring and transition costs in the quarter in connection with previously announced manufacturing facility closures.

In 2014 we recognized an $8.4 million gain on the sale of a vacated facility.

Stan?

Our outlook for the second quarter -- we expect to again deliver strong sales and earnings growth in the second quarter.

Our office furniture market momentum is strong and we project continued growth across all channels.

In the hearth business, we anticipate continued strong growth in new construction sales.

Remodel/retrofit sales will again be lower due to challenging year-over-year biofuel product sales comparisons.

I'll say it again: we have great momentum and are well-positioned to continue to deliver strong results.

Kurt?

So, financial outlook for the second quarter and the full year.

For the second quarter 2015, we anticipate overall sales growth to be 12% to 16%, or 8% to 12% organically.

Office furniture sales are expected to increase 8% to 12%.

Sales of the supplies-driven channel are forecasted to increase 5% to 9%.

And sales in the rest of our office furniture businesses are projected to increase 11% to 15%.

Hearth sales are expected to be up 35% to 39%, or up 8% to 12% on an organic basis.

Gross profit margin, excluding restructuring and transition costs, is forecasted to modestly improve versus second quarter 2014 when it was 36.3%.

Non-GAAP SG&A as a percentage of sales -- excluding restructuring, impairment and gain on sale of assets -- is expected to be similar to second quarter 2014 when it was 30.5%.

The effective tax rate is projected to be approximately 35% for the full year.

Capital expenditures for the full year are forecasted to be $110 million to $15 million.

And our estimated range for non-GAAP earnings per diluted share for the second quarter is $0.47 to $0.52.

For the full year, we are raising the low end of our estimated guidance $0.05.

Our new estimated range for non-GAAP earnings per diluted share is $2.50 to $2.65.

Stan?

Okay.

In conclusion, we enter the second quarter with continued strong momentum across our businesses, and we're well positioned to grow sales and significantly increase profits in 2015.

With those comments complete, Kurt and I will now open it up for questions.

(Operator Instructions).

Matt McCall, BB&T Capital Markets.

So, let's start with contract.

They outperformance there is noteworthy.

Can you point to anything, Stan, that you're having particular success at?

Is it a product category?

Is it a certain segment of the market?

How are you able to do so much better than the industry?

It's broad-based, Matt.

There's nothing particular to call out, except to say it's broad-based.

All right.

And is that broad-based product?

Is that broad-based customer?

Is that broad-based end market?

Project size?

Is it all of those?

Yes, sir.

Okay.

That's fair.

Kurt, your incremental margin in hearth, I know it's being impacted by Vermont Castings.

But can you talk about what it was on an organic basis?

How we should look at it, both on an organic basis and with Vermont, for the rest of the year?

Yes, so, our outlook for that, Matt, is basically unchanged.

You ought to expect core hearth leverage for the year to be well north of that 35% number that we've talked in the past.

And if you put Vermont Castings in there, all-in, it ends up being kind of mid-teens.

And that outlook is consistent with what we had talked on prior calls.

You talked about that 30% to 35%; you are saying well in excess of 35%.

Is that --?

No, I'd say 35% is still the right number.

Could be, but I'd still -- 35% is the right place.

Okay.

I thought I heard a well in excess in there.

Maybe not.

So, you talked about a couple things that impacted margins: freight, investments in initiatives, and then incentives.

Can you talk about each one of those buckets, and then how we should look at those items through the remainder of this year?

Sure.

So, I will take a cut at them, Matt.

Higher freight costs; clearly carrier capacity; West Coast port disruption plays an impact.

We'd expect to see that continue.

Investments in strategic initiatives; we've talked about that.

We have attractive investment opportunities that have great payback.

Those I would expect to see continue.

Higher incentive-based comp is the combination of, as our earnings increase we pay out more profit sharing to our members.

And the other impact in the quarter is fair market value on deferred stock.

So as our stock price goes up, that has an impact.

An acquisition will roll off in the fourth quarter.

So I would say relatively balanced for the quarter between them.

But those -- particularly on the investments and strategic initiatives -- those are the things that are driving the top line, and we'd expect to see drive the kind of incremental margin and leverage that we've talked about for the year.

And when you say balanced across those, is that on a dollar basis?

And if so, what was the total dollar impact of those items in the quarter?

Yes, I'd say dollar basis, relatively balanced.

You are kind of $2 million to $3 million-plus per, on each of them for the quarter.

Okay.

And then final one I have is really on price/cost.

Can you remind us of the price benefit you had on a year-over-year basis?

And how much of that was offset or helped by inflation or deflation?

Yes, that's a -- so, pricing has been positive.

We've put pricing across all of our businesses.

Thus far this year, it's average, call it, 3% type pricing.

And commodity inflation, modest -- again, as we talked, kind of 2% to 3% inflation.

Not a lot of that in the first quarter, but would expect that relationship to be positive for the full-year outlook.

Okay.

So for the quarter, you had a net benefit?

Yes.

But I will remind you, Matt, we have people costs going up.

We have freight costs going up, et cetera.

So Kurt's answer to your question is correct.

Price to materials is an advantage, but if you look at overall, it's not an advantage.

So they basically net each other out?

Close enough.

Okay, close enough.

All right.

Thank you, guys.

Budd Bugatch, Raymond James.

A couple of questions, or help maybe educate me.

What was different -- what surprised you in the quarter?

What came in differently than what you might have expected when you gave guidance, or going into the quarter?

Was there anything that surprised you, or thought that you would like to help us understand?

Yes, but first off, we came in as we projected.

So we came in the midpoint of our guidance -- the overall glidepath for us was right on.

So, A, we weren't surprised at the overall results, just to be clear.

Now, what was different than we thought on the downside was biomass was softer than we thought.

We had it down; we didn't have it down as much as it ended up down.

That's a function of weather.

Last year, as you recall, we had a huge biomass bump because it was very, very cold.

Seems like it was cold this year, but not as cold as last year.

And so the biomass would have been the softer than anticipated.

Okay.

And profitability, Kurt, I was trying to get to your mid-teens, excluding Vermont Castings, and make sure we're calculating the contribution margin properly.

We get, just on the raw numbers, a 4% contribution margin year-over-year.

And then if I try to do it sequentially, I think I get to a 30%-plus.

Is that the more relevant, sequentially, since Vermont Castings was in the fourth quarter?

Are you talking for the second quarter, Budd, or for the full year (multiple speakers)?

I'm talking for the first quarter, looking at the contribution margin.

Year-over-year in hearth, I get to like 3.7%, looking at that just on the raw numbers.

But that doesn't include Vermont Castings in the base.

So I'm trying to understand.

You said mid-teens without Vermont Castings.

Yes, that would be a full year number, Budd, when I talked mid-teens.

But for first quarter, your numbers would be about in the ballpark.

Okay, so maybe help us -- help educate us as to how that plays out over the year.

Because that's a fairly wide standard deviation or variance from the average of the year.

Or is there any way to do it, or just --?

Yes, the way I'd think about it, Budd, is as with any acquisitions, as we integrate, as we come up on the lean that we'll bring to bear, you will see that acceleration on leverage on Vermont Castings through the year.

The other piece, recall, as you come into the back half of the year, you've got a higher volume than you do in the first half, so the benefit will be greater.

But it's really just growing into that acquisition as we come up on that one-year anniversary and realize the benefits of the investments we're making to transform that business.

Okay.

Is it on track as you wanted it to be?

Yes, it is (multiple speakers).

Go ahead.

It was operating fairly well when you bought it, as I recall.

The leadership there had done a pretty good job.

Well, yes, the leaders had done a nice job.

But I think we were clear: it is a transformation opportunity.

The value creation opportunity is to bring that business up to par with the rest of our hearth businesses, both front end, back end, sales growth, and costs.

And so, I don't recall the margins exactly on that, but they were a -- maybe one-third of what our core business is.

And so the opportunity for us, as Kurt is saying, is to apply our resources, know-how, lean thinking, manufacturing, front-end capability, alongside that management team and bring them up to where the rest of our business is at.

Okay.

All right.

Just a couple of other ones, if I could.

Thank you for that.

The freight costs -- that's primarily due to the shortage of drivers?

Or you said something about I think the West Coast port disruption.

How did that impact you?

Yes, Kurt -- the answer to your question is yes.

It is primarily carrier capacity, which is being driven by driver capacity.

So that's the real takeaway.

Kurt mentioned port slowdown.

That had a modest effect in the first quarter.

We're not going to lay anything off on that.

We felt it more keenly in the fourth quarter of last year.

We worked it through.

We get paid to sort all that out.

So it had an impact, but I wouldn't dial in on that.

And whatever residual effect is still there, we have worked through, I would say.

Okay.

And did you quantify the freight increment that you saw?

Yes, I think Kurt took a shot at that, of $2 million to $3 million, something like that, Budd.

And that continues each quarter for the next -- until we -- when do we anniversary that?

Well, I think it continues.

And I think the whole freight thing, as you know, is very dynamic.

I think supply and demand have to reach an equilibrium.

And it's not clear to me that the driver situation has been resolved, and it's got to be resolved.

So, will it continue?

I think it will in the foreseeable future.

When does it plateau?

I don't know.

Okay.

And my last question relates to corporate overhead.

It is equivalent, I think, in this quarter to what it was in first quarter, or very similar.

Is the right way to think about that now flat?

Is there something in there that needs to be accounted for?

Yes.

As I talked for the quarter, Budd, you had a couple of things that play through there.

One, on the strategic investment front, we continued to have -- we are at full run rate on our BST, business system transformation, initiative.

So there's some incremental on that.

And the second part is that fair market value on stock and incentive-based comp.

So I would expect a kind of a 10%, 12% increase on corporate overhead for the full year.

And quarter by quarter, just that way, Kurt?

Yes, hard to lay it in.

But -- particularly with the stock price -- but I think flowing pretty evenly through the year.

All right, thanks much.

Congratulations on a good quarter, and good luck for the rest of the year.

Thanks, Budd.

Josh Borstein, Longbow Research.

Just on the last question that Budd asked on corporate expense, just to make sure I understand.

You said to anticipate 10% to 12% higher versus what corporate expenses were last year?

Correct.

Okay.

Through the full year, Josh.

Got it.

Okay, thanks.

And then just on the guidance, you brought up the low end by $0.05.

Where do you see revenues for the full year?

Are you still anticipating mid-single-digits in office and mid single-digits in hearth?

Correct, Josh.

We do.

Okay.

And the 2Q guide maybe came in a little bit lower where the Street was.

Could you help us understand maybe the flow of the year, where the Street maybe got it wrong a little bit?

Do you see the year a little more back-half-weighted in terms of earnings?

First off, we're never clear of what the Street comes up with, Josh.

I'm glad you laughed at that.

I don't really know.

We quite frankly -- I'll make my speech here and then I'll try to answer your question.

We're not terribly concerned about quarter by quarter, to be honest with you.

The Street really focuses on quarter.

We take a longer view.

We give, we try to help the Street by giving quarterly guidance.

But we're not anticipating this quarter and the next quarter and trying to steer that.

That's just a waste of our time and it leads to bad investment decisions, from where we sit.

So, it does move around.

We get you guys get paid to figure that out.

So, where do I think the Street missed it?

My guess is we are probably more back-end-loaded than the Street have.

I don't know, Kurt, what's your view of that?

I think it's normal fluctuation, and there's nothing of significance from a shift, first half to the second.

I just --.

Josh, to be honest with you, I haven't changed my view of this business.

In fact, if anything, I'm more positive than the last time we talked.

The Street gives some funny -- takes on some funny signals on this.

We delivered right at the midpoint of our guidance.

We hit what we thought we were going to do.

Feel really good about that.

Still feel great about the year; big-time increase for the year; strong top line in office furniture, really strong new construction in hearth.

If single-family starts are up 4.5%, and we're up 18% on our new construction business, we're doing really well there.

I think that's going to continue.

And so the rest comes down to -- it's choppy, from where we sit.

We don't worry too much about that.

And I think maybe the Street thought it was going to be smoother.

I don't know.

Yes, no, I hear you, and I agree with everything you're saying.

From everything I'm hearing, you feel every bit as good about the business as you did last time.

So, all the indicators certainly seem positive from what I'm hearing.

Right on.

And you guys mentioned you've been taking share.

And clearly the last three quarters in contract have been very strong for you guys.

Do you have any idea who you are taking share from?

And do you think it's the big national players, maybe the smaller regional players?

Josh, we're smiling here.

We are very careful to claim when we're taking share, because that's kind of a wicked game.

If we don't take it in the quarter, then I got to come tell you that.

I think we're performing very well, is where I'm at.

And so, where is that -- I think we're outperforming the market.

Where is that coming from?

Well, typically in this business, taking share in the short term is really kind of challenging.

So I think we're outperforming because, A, the market is performing well; B, I think we're in the right spots with the right customers and the right models.

Third, I think it's coming from a bunch of things -- front-end investments, back-end investments, middle investments.

I just think all of our companies are performing well.

They are all working the levers, and it seems to be happening.

And I think if you say, who are we outperforming, to start to get close to your question, I'd say it's probably coming a little bit from a lot.

But we don't -- because we're so broadly diversified, it's really even hard for us to tell, Josh.

It just kind of comes.

And when it comes, it feels great.

And when it doesn't, we go work all the levers to turn that around.

And just speaking to that diversification that you guys have, have there been any shifts with any of the lines -- say, more HON, more Allsteel?

Anything that gives you any indication of maybe some changes?

Well, the answer is, they are all -- our big horses are all pulling nicely together, and there haven't been big shifts.

The thing I would say is the supply side of the business is coming back online in a big way.

The numbers we gave you was the supplies-driven business sales were up 15%.

And I think Kurt gave you that they are going to be up 5% to 9% in the second quarter.

That's a nice improvement over where we've been, post-recession.

As you recall, small business, which tends to be -- small business [commons] tends to be the bigger driver on this; has been slow to come back online.

And we're starting to see, then, this portion of the business come back online.

And that's really a great economic engine for the Corporation.

So I think that's the good news.

And that's also why I feel -- continue to feel good about the outlook for the business.

Is it your sense that the small business owner is just has greater confidence in the economy and maybe is going forward with some projects that they were hesitant on before?

Yes, that's our sense.

And I would say it's been creeping back.

It's been much slower than I think any of us thought it would come back.

But, yes -- it feels like slowly the confidence is coming back.

They are stepping forward.

Some of the uncertainty is diminishing.

And it's not just projects; it's also the day-to-day replacement sort of thing as well.

And just one last one for me.

The operational performance you guys saw in office this quarter -- a nice performance, up 300 basis points, the EBIT margins; contribution margin approaching 30%.

Was that better than your internal expectations?

And what could we expect, going forward, in that segment?

Yes, I think the answer to your question is it's what we expected.

And what you should expect going forward is the same.

We have said that we should deliver for the year 25% to 30% organic -- leverage on the organic portion of the business.

And so, we're really programming that in, and driving -- leaning into that number.

And that's what we're expecting, Josh.

Great.

Thanks for taking my questions.

Todd Schwartzman, Sidoti & Company.

Just wanted to follow up on Josh's question.

The op margin, 5% for furniture for the quarter.

What is the ceiling on that for the foreseeable future?

Yes, that's a great question, Todd.

I don't know.

We said 25% to 30% margin this year, and quite frankly we are investing in core operational improvements.

And we've got more of that on the board, planned, and are executing.

So I don't know what the ceiling is yet.

Our objective is to continue to drive that up.

And are there product categories that might be particularly helpful on that front?

I guess this dovetails with the market share question.

Where are you making the most inroads in the past 12 months?

Well, we're working all the product categories, Todd.

And again, we're very broadly diversified in market segments and product categories, et cetera.

And our objective is to be working all of those.

And so I would say we're seeing progress in all of those categories as well.

Got it.

You may have mentioned -- I didn't hear the beginning of the prepared remarks -- but the biomass sales, what was that as a percentage of total hearth sales for the quarter?

I think -- is your question what percentage is biomass of the total hearth business?

Correct.

It's like one-third, Todd.

Okay.

You've mentioned the strategic initiatives.

I wonder if you can just give some more color on that, and also speak to whether there's been any changes as far as your outlook for uses of cash.

So a comment on the strategic initiatives and we'll talk about the cash second.

So again, I sound like I'm beating the same drum: broad-based.

Strategic initiatives around the front end; strategic initiatives around the back end, manufacturing, logistics, distribution; and then the middle, which is a big one.

We're working on it right now -- our business system transformation.

And so we're working all of these.

And then each of the op companies, each of our brands, each of our business models are working this as well.

And it is really more -- it's more of what we've been doing, is what we see going forward as well.

Uses of cash?

Same sort of priorities.

A, we're going to pay -- well, A, we're going to invest in the business in projects that we think can generate a strong return for shareholders.

Second, we're going to pay a strong and growing dividend.

Third, we're going to -- when we see an acquisition that makes sense that we can create value, that creates economic profit, we're going to do it.

And then, finally, we're going to buy stock back, at least to offset dilution.

And there may be opportunities that we buy a little bit more.

Same sort of priorities as we've been working, and I see that same sort of priorities as we go forward.

Excellent.

Thank you very much.

Matt McCall, BB&T Capital Markets.

One more from me.

Kurt, I think you said -- or maybe it was you, Stan -- mid-single-digit growth is still the way to look at the full year.

And I'm specifically referencing furniture here.

You did 14% in Q1.

You are guiding to 10% in Q2.

To get to mid-single-digits -- and I don't know if maybe that was an industry comment -- but that would imply a pretty substantial slowdown.

Did I misunderstand it, or is there something more we should be thinking about?

Well, first off, Matt, you've got to take in the year-over-year comparisons.

So when you say slowed down, I don't know what that means.

Do we think the market is slowing down?

No.

Do I think there may be year-over-year comparison differences?

Yes.

So don't take my comments as anything other than -- as I said, I think Josh asked a good question, and I talked about where the momentum is.

Our view is the momentum as a market will continue, and actually will improve over where we're at.

The year-over-year comparison?

I don't know.

Kurt and Matt can help you walk that through, but I don't see a slowdown.

Kurt, do you have a comment on that?

No, I think you got it.

Okay.

Okay, perfect.

Thank you, Stan.

Josh Borstein, Longbow Research.

Just a follow-up on the biomass hearth business; just trying to get a better sense for where it may be going.

It was down this quarter, but you had mentioned last year you were up against a very difficult comp from weather that helped demand.

And last quarter when you talked about it, you had also talked about this business having a long tail, where people remember what energy prices were like before they went down.

And it's slow to maybe decelerate.

So going forward, do you see a bounce-back in biomass?

Or at least not declines that weren't as -- the magnitude not as great as this quarter?

The answer is, it tends over a couple years to level out.

And so last year -- I'm looking at my team here -- biomass was up 40 --.

45.

45%, same period.

So it bounced high.

This quarter, it is now something like 30%.

And so, where is it going to end up, Josh?

It's going to end up somewhere in the middle there.

And it's a tricky business to forecast because it's a seasonal product; it's a dealer retail product; and it's driven by the cost of energy, namely fuel oil and LP; and it's driven by weather.

And so we have -- and we are the predominant player in that category.

We have a very large share there.

The answer to your question, again, is it's going to be somewhere between that 45% to minus 30% level.

Thanks for the help.

There are no further questions at this time.

Mr. Askren, I will turn the call back over to you.

Thank you.

Well, we appreciate everybody's interest in HNI.

And we look forward to talking with you in the future.

We hope you all have a good day.

Thank you.

This concludes today's conference call.

You may now disconnect.