HNI Corp (HNI) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

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

I would like to welcome everyone to the HNI Corporation first-quarter fiscal 2015 results conference call.

(Operator Instructions).

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

Thank you.

Mr. McGough, you may begin your conference call.

Good morning.

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

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

Joining me today from HNI Corporation are Stan Askren, Chairman, President and CEO; and Kurt Tjaden, Senior 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 includes additional factors that could affect actual results.

The Corporation assumes no obligation 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 our thoughts regarding the second quarter of 2015, provide additional thoughts on our outlook for third quarter and for the full year 2015.

We'll then open (technical difficulty) up (technical difficulty).

In summary, it was another strong quarter.

We delivered 36% non-GAAP earnings improvement on 12% top-line growth while continuing to invest for the long term.

Our office furniture businesses performed well: 6% sales growth and significant profit improvement.

Sales in our supplies-driven business were up 2%.

Sales in the remaining office furniture businesses increased 11%, led by 13% growth in our North American contract business.

Our hearth business sales increased 8% on a organic basis, or 37% when we include the Vermont Castings acquisition.

Momentum continued in our new construction business, with organic sales up 9%.

Our remodel/retrofit business performed well, with organic sales growth of 6%.

Within that business, retail gas sales were up 15%, while biofuel product sales were down 8% due to lower oil prices.

Overall, I'm very pleased with our strong results in the second quarter.

I will now turn it over to Kurt.

Thank you, Stan.

Additional financial highlights for the second quarter include non-GAAP consolidated gross margin, excluding restructuring and transition costs, improved to 36.5% compared to 36.3% in the prior-year quarter.

Higher volume, increased price realization, and strong operational performance were partially offset by unfavorable product mix.

Non-GAAP SG&A as a percent of sales -- excluding restructuring, impairment, and gain on sale of assets -- decreased 110 basis points.

The benefit of higher sales volume was partially offset by strategic investments, higher incentive-based compensation, and the impact of the Vermont Castings acquisition.

We recognized $800,000 of restructuring and transition costs in the quarter in connection with previously announced closures, acquisition integration, and structural alignment.

Stan?

Okay.

Thank you, Kurt.

Let me recap the first half of 2015 and our outlook for the remainder of the year.

I feel very good about our first-half performance.

Non-GAAP earnings improved 45% on 14% sales growth.

Our outlook for the balance of the year remains positive.

We expect our earnings performance to be very strong as we see the benefits of our long-term strategic investments.

Our businesses are performing well, and we expect to continue to outperform the markets.

In the second half of 2015 we expect strong growth in our office furniture business, but at a lower rate than experienced in the first half of the year.

In our hearth business we anticipate second-half growth comparable to first-half growth rates.

In summary, we are well positioned across our markets to continue to deliver strong results for the remainder of 2015.

Kurt?

So, financial outlook for the third quarter and the full year 2015: for the third quarter of 2015 we anticipate overall sales growth to be 5% to 9%, or 1% to 5% on an organic basis.

Office furniture sales are expected to increase 1% to 5%.

Sales in the supplies-driven channel are forecasted to be flat to up 4%.

And sales and the rest of our office furniture businesses are projected to increase 4% to 8%.

Hearth sales are expected to be up 20% to 24%, or flat to up 4% on an organic basis.

Sales in the new construction channel are forecasted to be up 22% to 26%.

And within the remodel/retrofit channel, retail gas sales are projected to be up 8% to 12%, while biomass sales are expected to be down 28% to 32%.

Gross profit margin, excluding restructuring and transition cost, is forecasted to modestly import versus third quarter of 2014, when it was 36.4%.

Non-GAAP SG&A as a percent of sales, excluding restructuring charges, is expected to slightly increase from the third quarter of 2014, when it was 27%.

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 $115 million.

Our estimated range for non-GAAP earnings per diluted share for the third quarter is $0.84 to $0.89.

And for the full year, we are raising the low end of our guidance by $0.05.

Our new estimated range for non-GAAP earnings per diluted share is $2.55 to $2.65.

So, therefore, if you look at the fourth quarter, we're forecasting overall sales growth to be flat to up 4%, and an estimated range for non-GAAP earnings per diluted share to be $0.97 to $1.02.

You'll note that this is a shift versus our historical trend between third- and fourth-quarter profitability.

The change primarily is driven by the timing of strategic investments and returns, favorable business mix, and improved operational performance.

Stan?

Okay.

Thank you, Kurt.

I'll summarize here.

Office furniture and hearth businesses are performing well.

We remain on track to grow sales and significantly increase profits.

With those comments complete, we'll now open it up to questions.

(Operator Instructions).

Josh Borstein, Longbow Research.

Congrats on a great quarter there.

Just a few questions.

Some of your peers over the past quarter -- Knoll, Steelcase, in particular -- mentioned in their last call a trend towards larger projects with extended shipping dates that they attributed to whole buildings and campus projects versus the smaller renovation projects that they were seeing previously.

Is that something you guys have seen in your contract business as well?

Josh, is the question about shipping for the project size?

It was the project size and extended shipping dates.

And they attributed that to just larger, whole-building projects, as opposed to just one-floor renovations that they had been seeing previously.

Yes, I think our mix of large, medium, and small is probably the same.

I don't think there's anything really to distinguish the difference.

We are seeing a bit of a slowdown just in the ability of the trades, the dealers, architects and designers -- the dealers that [center] to process this thing -- this stuff through.

I would say the channel, the network is plenty full right now, and so people are just really busy working that stuff through.

And that's leading to some delays and some extended push-outs, I guess.

It's not a big factor, but it is a factor.

Okay.

So the push-out is coming from the A&D community actually having too much work right now?

No, I don't want to narrow it down, that narrow.

I think it's a combination.

I think it's the A&D firms.

I think it's the construction firms.

And I think it's even the dealers that are having to plan and execute and get all that stuff.

So it's a combination of from A to Z, I think.

Okay, great.

And then in the contract side of the business, you guys put up a fourth straight quarter of double-digit growth.

And looking at the first half of the year, you guys are outpacing BIFMA by nearly double, outpacing your peers.

I know one quarter doesn't make a trend, but four quarters seem to.

So Stan, I know the past you said the gains had been broad-based, but if you had to put your finger on just one or two things that are really making a difference in the business right now, what do you think they would be?

Josh, I'm going to come back to that same sort of line.

It's broad-based.

It's product.

It's selling.

It's execution.

It's multiple companies within our contract, as well.

So you can't really nail it down to one thing.

It's just positive momentum, putting all the factors together to get it heading in the right direction.

We're feeling good.

We're proud about -- proud isn't the right word.

We're pleased with the performance we've seen last year in contract and this year in contract.

And I continue to be positive about the outlook.

Okay, great.

And just one more for me, and I'll hop back in the queue.

Stan, last quarter you mentioned you were more positive on the business than you were the three months prior.

Do you still feel that way here after 2Q?

Yes, I do, Josh.

If you look at the fundamentals across this, the macroeconomic factors are positive.

If you look at non-res construction spending, office spending -- I haven't looked at it real recently, but it's up over 25%.

If you look at the employment gain, it's up; CEO confidence and small business confidence are kind of bouncing around.

But I don't think there's enough to change the mind there.

What is interesting a little bit is this noise that we just talked about -- the first question you asked, around the ability for the channels to absorb it.

The net of all this is it is going to continue to be that term that we are getting tired of around here: choppy, lumpy, whatever.

But I still feel like the economy is solid.

We're well positioned.

I think the industry is on an uptick and it should continue.

Great.

Thanks for the color.

Good luck on the balance of the year.

Matt McCall, BB&T Capital Markets.

Kurt, back to the seasonality shift that you referenced earlier, just wanted to understand.

I think you mentioned timing of strategic investments, product mix; and I think I wrote improved operational performance.

Can you go -- give us a little more detail there?

Is the anticipated margin benefit, it's going to help Q4; going to come more gross margin, going to come SG&A?

Where are we going to see the big difference there?

Yes, so let me step back a bit here, Matt, and set the context.

So for the full year, as we said in opening comments, expecting -- we've improved our outlook, as Stan just talked; feels like we believe we're continuing to outperform in our markets.

Our profit margins for the full year significantly improving while we're investing.

Office furniture margins we'd expect to be up 150 to 200 basis points on the year.

Hearth margins total, including Vermont Castings, up 20 to 40 basis points.

So recall we are integrating, bringing that business into it.

What we're really talking is a third-quarter to fourth-quarter timing shift.

And the big piece of it, Matt, comes back to strategic investment timing; so, timing of when we're making those investments and when we see the returns of those investments.

Then think about the things that we've talked about on prior calls.

So, Vermont Castings -- we're coming up on a one-year anniversary of significant transformative benefits that we start to see in the fourth quarter; benefits of two office furniture facilities that we closed last year that we see the benefits of.

Stan talked about portfolio and what we're seeing in terms of product, and investments we've made in operations around capability and in different core processes, all of those things flowing into the fourth quarter.

So that's the big mix part of it.

The second part is we've got some business mix that moves around between the quarters.

And a while it's a headwind in the second quarter, the third quarter, it actually is neutral in the fourth quarter.

That can be size of projects year-on-year.

That can be day-to-day versus project.

That can be within product.

But that flips between third and fourth quarter.

And then the last item, if you recall in the fourth quarter of last year, we had some significant challenges from a cost perspective around West Coast port disruption and carrier capacity.

And you'll recall that we had a significant volume lift in the fourth quarter that we struggled operationally to be able to service efficiently and effectively.

We have rolled through those, so that's not a repeat.

The big piece is the strategic investment piece of it.

That's probably more than half.

And the other is the other comments that I talked about.

Okay.

So if I think about it, maybe, and look at it from a full-year perspective and I think about the investments that you've made this year; I know Stan, those are going to be ongoing.

But is there any way -- I know that as you layered in Vermont Castings, that impacted your incremental margin.

As some of these things have impacted the results this year, as we start to think about how to model next year and in the context of what you just talked about, how much of the Q4 margin picture is going to -- how closely is the 2016 margin picture going to look like the Q4 margin picture?

Or are we going to get back to that full-year trend?

Is that the better guide?

I think, Matt, the answer is, I don't know.

Geez.

We haven't planned out next year yet.

But what we've said consistently is that we're expected to deliver this leverage, 25% to 30%.

So that's really what you ought to plan for, is top line with this 25% to 30% leverage, over a year.

We will move around by quarter, but I don't think you should jump all over the fourth quarter and just extrapolate that.

Because Kurt said there's a lot of noise in there that moves around.

And we have so many different moving pieces that I tend to take a longer-term view on this, rather than take one quarter and extrapolate it forward, if I was you.

Okay, okay.

And then maybe just to follow up on the contract space a little bit.

The second-half outlook is that growth is going to slow.

I just want to make sure I understood that that was basically just because of some of these delays, and the pipeline filling, and issues that come with that that you referenced when Josh asked the question.

Those are the issues.

It's not necessarily a cyclical slowdown?

Well, again, I'd go back and say, it's all pretty choppy.

Now, last year, third-quarter 2014 we were up 12%; fourth-quarter 2014, we were up 21%; first quarter we were up 15%; second quarter we were up 13%.

And that's going to -- when we start to lap those high growth rates.

And so, there's some of what Josh and I talked about.

But some of that is we're just running into some comparables that are getting -- that just are not sustainable, I don't think, as you start to anniversary those.

Okay, all right.

Thank you, guys.

Budd Bugatch, Raymond James.

I understand, Stan, that lumpy and bumpy can make you grumpy.

(laughter) That is a fact.

Just when I'm talking to the analysts, though, Budd.

I resemble that remark, for sure.

I know you do.

I know.

I am trying to understand, in office, your expectation when we had the first-quarter call was for office to be up 8% to 12% in the second quarter, and I think we were up 6.4% overall.

What changed?

What surprised you during the quarter?

Was it in supplies, or was it in contract, or was it in both?

It was more supplies, Budd, I would say.

So supplies were flat, you said, and that surprised you?

Well, supplies were not as strong, which was coming on.

Now, supplies -- we had some forward inventory build and deployment; some customers, our large customers take inventory and they place it.

And so it's a little bit more tricky to forecast what's sell-through, et cetera.

But I would say, small business confidence was down a little bit.

Transaction type of day-to-day went down a little bit.

And there's always noise there, so it was not as strong as we anticipated.

But I think, Budd, important for the full year, as you think about supplies, we've said since the beginning of the year we expect low-single-digit growth.

And that still holds true for the full year.

In supplies?

Even though there is some turmoil in that sector, right?

We do have some (multiple speakers) and changes afoot.

Right.

So, even with those changes, we're still expecting supplies channel to be up low-single-digits for the year.

We're back to that lumpy and grumpy again.

(laughter)

Well, that particular area should be less lumpy, and we should be less grumpy because of that, right?

That's a less bumpy area, less grumpy area.

Okay.

Tell me then, if you would, what the mix today between supplies and contract is?

It used to be 50-50.

Where does it run today?

I continue to use that number, but --.

If we grow the two segments at different rates, at some point in time that's got to change, Stan, doesn't it?

That is a mathematical fact.

Even at my age, I think I got that one right.

(laughter) Can you quantify for us the investment spending in the third quarter, then, Kurt?

What's the delta in spending, either in SG&A or efficiency that you are going to see in that quarter?

And maybe we can quantify a little bit what the return comes in the fourth quarter.

How do we think about that?

Yes, so, I think in the third quarter, Budd, that investment spending between operations are often cost of goods and SG&A; it is probably $5 million to $10 million.

And it's blended between the two.

As you look about into the fourth quarter, that investment spend continues.

But if you try and normalize between fourth quarter, what you might have called and what we're seeing, I'd say half of that is really the returns that we start to see.

So if you wanted to say, hey, you're at $0.80 and we're at a $1 at the midpoint, $0.10 or -- you're talking $7 million to $8 million of type of return.

And again, recall, we had talked about those big structural cost transformations start to roll in and see full run rate.

And as Stan has talked on prior calls, great investment opportunities across the business, front-end and back-end, that we start to see the payoff of.

No, you guys do a fabulous job of running it.

So I'm trying to then -- trying to figure out that return.

How does that factor out between seg?

Is much of it because of the VC lapping and getting the benefit of some cost reductions or efficiencies that we have we been able to bring to that?

Or is it in domestic (multiple speakers)?

Yes, it's split between the two, Budd.

Sorry, go ahead.

Finish your question, Budd.

Say it again?

I missed it, Kurt.

No, I'm sorry.

I interrupted you midstream there, maybe.

It's split between the two segments.

Clearly, Vermont Castings provides a benefit on the hearth side.

I would tell you, they are also continuing to have strong core operational performance and execution with similar investment.

So, the way I'd think about it, come back to -- I talked about full-year profit improvement within the segments.

That should help you as you model that in for the balance of the year, to get to where that benefit flows through.

Okay.

And those benefits would continue to flow, at least some of them, through the first three quarters of next year.

Yes, but -- this is Stan.

So, this is the other -- you are absolutely correct.

And the other thing -- and you and I have had this conversation over the years -- we're never done.

We are working the next level of what those transformational cost opportunities are, and should be.

And I would tell you there's a nice lift that we're actively working and taking action on now.

So that's really what's driving this operational leverage that we talk about of 25% to 30%.

And the reason it's not exactly linear by quarter is because these big investments happened.

And it takes -- there's different timing for the returns, et cetera.

But as Kurt and I have said, we feel confident that we can drive this leverage not only this year, but we are confident we can drive it next year.

We should be able to drive it into the future, all else equal, unless the pricing environment goes to heck or raw materials go to heck in the short term.

But you're on it.

Okay.

And two other areas for me.

The biomass or the -- that area of fuel, we've expected that to be weaker because of the price of energy, and also because of the time of the year.

How are you thinking about that now, given that energy prices have had some stickiness down here?

And what are you thinking really longer-term?

Yes, we think longer-term it will normalize at a manageable, positive sort of mean.

Now, last year, we saw extraordinary growth.

So, we saw in third quarter and fourth quarter, in that category, 40% to 60% growth in that category.

This year, same third and fourth quarter, we see declines somewhere between 25% and 35%.

Still positive growth, if you cut the top off that and smooth that out.

We have a significant position in that.

There's still other compelling reasons as to why one would want to use a biomass appliance.

We continue to invest in that.

But it's really very volatile due to energy costs.

And the second thing would be just temperature; weather patterns.

A severe winter helps.

A warm winter doesn't help.

Okay.

And the final area for me is just corporate overhead.

Given the good results, are there any lumpiness coming in the corporate overhead, incentive accruals that might pop up to be heavier than normal?

What do we have in that area?

I think as you look at the back half of the year, Budd, I'd expect it to be relatively close to what we saw in the second half of 2014.

So you would model that as flat year-over-year?

No inflation growth, nothing in that?

You [do got] pluses and minuses in there, but nothing of significance.

All right.

Well, congratulations on just a good performance.

And thank you very much for taking my questions.

Kathryn Thompson, Thompson Research Group.

First I want to focus a bit on hearth.

Just with some of the primary research we do on the more residential products, we're finding that there is a difference in terms of demand momentum for higher-priced products versus lower price points.

So, pulling the string on your hearth business, are you seeing a greater volume increase for different priced products within what you are selling?

And how has that changed over the past 12 months?

That's a very good question, a complex question to answer.

So, we are working diligently to help the builders differentiate their product with hearth appliances.

Hearth appliance is in the top three for desired amenities.

If one is not careful -- if a builder doesn't really understand it, they will spec a low end, and that makes the homeowner unhappy.

So we're working hard, Kathryn, with the builders to show them how to give an upscale, up-priced product, but also help them engineer the total install so they actually have lower cost and more margin.

So we're seeing nice unit dollar average growth in a same-for-same type of situation.

What makes it hard for us to track is just, as you know, is the mix of housing.

Because entry-level housing versus custom housing, we'll see different movement there.

But working hard to move people up is probably the operative term here.

Okay.

Maybe another way to think about that question is how much did price versus volume contribute to overall results, at least in the quarter for hearth?

We don't break that out.

Okay.

Understood.

On the office side, understanding that construction cycle right now, we're only starting to see some real volume growth in earlier cycle building materials.

For instance, aggregates and steel studs, you're seeing high-single-digit volume growth in the current market.

Based on your experience in prior cycles, what has been the timing lag between increased demand for these earlier type of basic building products versus demand for your office products, and should really be more on the contract side?

And what is -- other than some of the bottlenecks that we're seeing with labor and backlogs there -- what is, tagging along with that, is there anything in the current cycle that would change that timing?

Thank you.

Again, great questions, Kathryn.

Certainly new construction, non-res, new construction office is a very positive factor for us.

It's hard for us to track that timing because it depends on a lot of factors: is it sold new construction, or is it going to be leased?

And then there's a whole domino effect that happens, as well.

So, new construction is built for somebody, or somebody's going to occupy it.

When they leave their old space, that becomes available; somebody moves there; which then somebody moves there, which somebody moves there.

And so, if you think about office furniture events, is how we think about it, they come from lots of different things.

They come from real estate strategies, come from facilities management strategies, come from business drivers.

And often -- and most of office furniture is for existing workers.

About 10% is for new workers.

So there's so many different dynamics, Kathryn, we have not been able to track the timing exactly.

There's a good correlation here.

But lagging it and leading it, we have not been able to sort through.

I like it a lot when the economy is building new office buildings.

And I like it a lot when the economy is adding jobs, because those are the most positive furniture events that the industry can have.

Okay, great.

And then my final question is just a cleanup question regarding your guidance.

And this may be because I'm a little bit newer with coverage, but I know that you talked about investments that are going to be hitting in Q3.

And you touched on them, too, in the Q&A.

But could you maybe just give a little bit more clarity, and a little bit more, at least, confidence for me as newer coverage in better understanding that why doesn't -- what gives you confidence those investments made in Q3 will yield -- what types of investments in Q3 will yield results once you get into Q4 and beyond?

If you go back, we've been talking about these types of moves and these investments for years.

So what gives us confidence is past performance, is results.

And we are -- because we're a split in focus company, we're a company that plays in many different segments with many different brands, it's a very broad-based picture.

We invest -- we're investing in product.

We're investing in distribution.

We're investing in sales capacity.

We're investing in manufacturing capacity.

We're investing in people.

We're investing in IT platforms.

And so we are focused on volume growth.

We're also very -- we're a company that's very tuned in to cost efficiencies.

And so we invest a lot to drive cost efficiencies as well.

And they go all the way from large facility transformations to a couple of more feet on the street to sell education product.

It goes from large brands like HON Company to smaller brands like Maxon.

And we run it kind of as a portfolio strategy.

So big stuff, little stuff.

And so as we look at it, we just kind of lay it in and see what it's going to come as we plan it with the operating companies.

Now, I'll be honest with you, Kathryn, not all of our investments generate a return.

But we have a pretty good track record of making good investments that generate nice returns.

That goes back to this leverage that Kurt and I talk about.

We feel like we're outperforming the market on the top line.

That's the volume growth, both hearth and in office furniture.

Second, we've said over time we should be driving 25% to 30% operating leverage on incremental dollars.

And so, we're driving volume growth and we're also expanding margins, and then we're driving capital efficiency.

And the reason why we think it's going to happen is because that's what we've been doing, and that's what we plan to continue to do.

All right.

Thanks for taking my questions today.

Josh Borstein, Longbow Research.

Just one more for me, Kurt.

It looks like you guys paid down some debt on the quarter.

Just wanted to know if you can update us on the balance sheet.

No paydown on debt in the quarter, Josh.

If you see a movement between short-term and long-term, it all has to do with maturity on our long-term private placement debt, which comes up in early next year.

And we just have a reclass between the two, between short-term and long-term.

So, accounting.

Yes, it's purely the accounting of it; nothing from a debt perspective.

Okay, great.

Thanks for the clarification.

We have no further questions in the queue.

All right.

Well, thank you very much for the excellent questions.

Thank you for your interest in HNI.

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

Have a great day.

This concludes today's conference call.

You may now disconnect.