HNI Corp (HNI) 2015 Q3 法說會逐字稿

(audio in progress) 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 call is being recorded.

Thank you.

Mr. McGough, you may begin your conference.

Good morning.

Thank you for joining us to discuss our third-quarter fiscal 2015 results.

Here with me are Stan Askren, Chairman, President and CEO; and Kurt Tjaden, Senior Vice President and CFO.

Copies of our financial news release, earnings presentation and non-GAAP reconciliations are posted on our website.

Statements made during this call that are not strictly historical facts are forward-looking statements which are subject to known and unknown risks.

Actual results could differ materially.

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

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

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

Good morning.

We delivered strong double-digit earnings growth in the third quarter despite modest declines in both office furniture and organic hearth sales in a slowing economic environment.

The markets where we compete were impacted by slower economic momentum in the third quarter.

We experienced softening orders in mid-August, which has since stabilized.

I'm pleased our office furniture business has delivered double-digit operating margins despite a 3% sales decline.

Our supply-driven business sales were down 4%, while sales in our other contract furniture businesses were flat.

We continue to believe our office furniture businesses are competing well in their respective markets.

We have a very strong and profitable hearth business.

Sales in our hearth business increased 11%, including Vermont Castings.

Organic sales increased 11% in the new construction channel, which makes up approximately 40% of the overall hearth business.

As expected, organic sales in our remodel/retrofit portion of the business decreased 13% driven by declining biomass -- specifically, pellet fuel -- stoves.

Overall, I'm pleased with our strong third-quarter profit performance and our ability to adjust to a slower economic environment.

Kurt?

Thank you, Stan.

For the third quarter 2015, specific financial highlights include consolidated net sales increased 0.2% to $616 million.

Net sales declined 2.8% on an organic basis.

Non-GAAP net income per diluted share, excluding restructuring and transition costs, improved 15% to $0.93 per share.

Non-GAAP consolidated gross margin improved to 38% compared to 36.4% in the prior year.

Strong operating performance, lower material costs and increased price realization were partially offset by lower volume and an unfavorable product mix.

Selling and administrative expenses as a percentage of sales increased 70 basis points due to higher freight costs, strategic investments and acquisition impact partially offset by strong cost management.

Stan?

Thank you, Kurt.

We entered the fourth quarter focused on delivering our profitability commitment despite a softening economy.

We are taking calculated actions to reset our cost structure for a range of slowing economic scenarios.

Our management team has been through these types of business cycles before with proven results.

For the full year 2015, we continue to project more than a 25% profit improvement on approximately 4% sales growth.

We remain committed to long-term.

We believe there continues to be significant investment opportunities for long-term value creation in our core businesses, both office furniture and hearth products.

We are using this opportunity to continue to tighten our business and product portfolios.

We are configuring our operations to support new products, build new capabilities and improve our operational efficiencies.

We remain focused as always on eliminating waste to improve profitability and better serve our customers.

As we look forward to 2016, we're preparing for multiple scenarios.

Our current best view projects overall sales to be up slightly to down slightly for 2016.

We expect our supplies-driven business to be flat to down modestly due to a muted small business spending environment.

We're projecting our North America office furniture contract business to be up slightly to flat compared to next year -- compared to last year, excuse me.

Overall, our international business is forecasted to be down modestly, led by the economic challenges in China.

And for our hearth business, we expect that to be up slightly.

We project continued growth in the new construction channel.

Remodel/retrofit channels sales are expected to be flat to down slightly, again, led by continued declines in the biomass portion of that business.

Overall, I remain confident in our investments and the capabilities we are building to strengthen our market positions and deliver long-term profitable growth.

We expect our increased profits in 2016 despite the overall challenging economic outlook.

Kurt?

Financial outlook for the fourth quarter 2015 -- we anticipate overall sales to be down 4% to 8%.

Office furniture sales are expected to be down 3% to 7%.

The supplies-driven office furniture sales are projected to be down 5% to 9%, while sales in our remaining office furniture businesses are forecasted to be down 2% to 6%.

Hearth sales are expected to be down 6% to 10%.

Sales in our new-construction channel are forecasted to be up 8% to 12%, and we expect the remodel/retrofit channel sales to be down 15% to 19%, again, led by biomass.

Non-GAAP gross profit margin is expected to be similar to the third-quarter 2015 results of 38%.

Non-GAAP SG&A as a percentage of sales is expected to be similar to the third-quarter 2015 results of 27.7%.

The effective tax rate is projected to be approximately 34% for the full year.

And for the full year 2015, we project non-GAAP earnings per diluted share to be in the range of $2.55 to $2.60.

The financial outlook for 2016 -- we believe we owe shareholders our best, current view of the business even in this uncertain economic environment.

We expect 2016 full-year consolidated sales to be in the range of up low single digits to down low single digits.

Our initial 2016 non-GAAP earnings per diluted share guidance range is $2.60 to $2.85 per share.

Stan?

All right.

Thank you, Kurt.

I'll wrap it up here.

Our businesses are strong and well-positioned for the future.

Our brands are competing well in their markets.

I remain confident in our strategies and investments for long-term profitable growth.

We'll continue to aggressively manage structural costs, and we expect to increase profits in 2016.

So with those comments complete by Kurt and myself, we'll now open it up to questions.

(Operator Instructions) Matt McCall, BB&T Capital Markets.

Where to start -- so I guess first you said -- I understand the softer economic environment comment, I guess.

But you said orders stabilized since the weak August.

I'm just talking out -- I think that was in furniture in general.

So what is it that you are seeing specifically that's causing this much, I guess, adjustment to the outlook?

Or is it just an adjustment to the outlook, that we just have it wrong?

Well, (inaudible).

Several questions in there, Matt.

So let me see if I can weigh in here and help you sort it out because I think that's all good stuff for us to thrash around here a bit.

Certainly, the year started off very strong.

And our activities were very strong, orders were strong -- continued through.

We saw a significant step-down down in orders in early August.

So I want to say we saw it across the board, Matt.

So I'll remind you, as you know, we play all the way from the very top to the very quick-to-buy value segment of the market.

And we saw that sort of deceleration across the board -- I mean, completely across the board.

So you say, okay, so is that you or is that the market is the question that you will probably ask.

And we believe it's the market.

If you look at what's happened in the economy, we believe that the economy step-down is due to the global economic uncertainty and that everybody began to put the brakes on.

The challenge here is there's been mixed signals, though.

Because as we talk to our resellers, our dealers, they say they are busier than ever.

If you look at our activity pipeline, it looked good.

But, simply, what was not happening is it was not converting to orders.

So that led to loss of mixed signals.

So we went back and asked the question, I think, pretty rigorously across the board, is it us or the market?

We believe it's the market.

We believe that the overall economy has stepped down, and office furniture is a non-revenue-producing asset that the brakes just put on.

The other thing I'll remind you is we're the shortest-cycle player in the industry.

In other words, we tend to deal with smaller products who have a smaller business, and that historically is the stuff that puts the brakes on first.

We saw that in the longer-cycle businesses where there is a project underway.

There's a hole in the ground, there's a new building coming up or there's a merger and there's consolidation.

It takes longer for that stuff to sort of come off, but also it takes longer for it to come on.

So we've even seen that sort of come down.

So we still have the long-cycle projects going on.

But we simply are saying based on the uncertainty of this environment, based on what we've seen across the board with all of our businesses, we believe office furniture is stepping down.

Now, we're also prepared for multiple scenarios.

As you recall, Matt, we've done this a few times.

And so we're prepared -- if it's better than that, we know how to ramp up.

And we're also prepared that if it's worse, on how to get after structural costs along with day-to-day costs and just good old-fashioned bringing it out.

So that's a long response to a general question.

I'll let you probe wherever you'd like here.

Yes.

So going back to the comment about stabilization -- it sounds like in August you saw things slow, you saw good pipeline activity, a lot going on.

It just wasn't translating into orders.

But you said since August you have seen a stabilization.

Does that mean you have seen some of that activity turning into more orders?

It seems like you are dragging the trend in August out into next year and not necessarily the more recent trend.

Or did I misunderstand?

You misunderstood.

It is stabilized at a lower level.

We, in fact, are projecting -- as Kurt gave you the guidance there -- potentially slightly up to slightly down for 2016.

And actually, he gave you more specific guidance for the remainder of 2015.

So, yes, stabilized lower level, projecting that forward unless we see some catalysts that would change that.

And I don't know -- you are a smart guy that pays attention to the economy -- we're not seeing anything really that says it is going to get worse or it's going to get better.

Now, we're standing daily, weekly looking for that.

And if that happens, as I said, we're prepared for whatever scenario comes our way.

Okay.

And there was -- the top-line guidance for next year is basically flat as you take (inaudible), and you're talking about flat to up maybe $0.15, so I'll take the high end of the 2015 guidance.

You are talking about flat to up top line on EPS.

So you referenced some cost take-out in the release, and you talked about focusing on efficiencies.

Can you give more detail into what it is that you are doing?

Are you pulling back on any investments, or is it just an efficiency improvement effort?

Matt, you've followed us for lots of years, and so you know how I'm going to answer this, I think.

Which is one of the things we're really good at that we always are working, good times and bad times, is structural cost.

So what does that mean?

It means we're always thinking about how do we realign our manufacturing, logistics, physical distribution network?

As product categories shift, as we launch new products, we're always thinking about where do we invest to drive factory productivity?

We're always thinking about where do we invest around information systems and productivity there.

We consistently move, redeploy people around on the front end to kind of skate where the market is hot and where it's not.

And so it's just a lot of that.

As you recall, we have some 10 and some businesses -- 16 plus, a dozen and a half, operating facilities.

And we have dozens and dozens of manufacturing lines, and we have millions and millions of products.

And so it's just part of our HNI member-owner culture to get after that all at the same time.

And so it's that sort of thing that we're talking about.

We are not talking about backing off long-term value creation investments.

I think it's just that through the last global recession that we know how to sort of take costs out but also continue to invest in the long term.

And that continues to be our emphasis is investing for the long term while we attack the way -- find a better way of doing what we're doing today to drive value for our customers, drive value for our shareholders and drive value for our member-owners.

Okay.

But it did seem like there was maybe an increased emphasis on -- I know that's the way you operate and you guys are very efficient (inaudible).

I know it's a day-to-day thing, but I guess it seemed like there was maybe a bigger effort applied to this soft (inaudible) environment.

And if so, is there any way to break out the expected cost, expected savings, the timing of those savings?

How much is assumed in the $2.60, $2.85 -- those types of things?

I think, Matt, why did we break it out?

Because the big question you should be asking -- or our shareholders should be asking, more importantly -- is how do we beat earnings on a sales miss.

Well, we got on it early.

We saw this thing coming down.

We made the call.

We began to tighten up.

We accelerated some -- took some priorities off the table, accelerated some structural cost and that's how we get on this sort of beating earnings when sales are softer than anticipated.

So we wanted to make sure we emphasized that point in this press release.

And this goes back to sort of -- this environment, we actually do pretty well in this type of environment with our split and focused model with our member-owner culture, with our rapid continuous improvement sort of set of tools.

I'm not going to break out what specific projects and what the returns -- I don't think that's important for our shareholders.

Quite frankly, what's important is our forecast for what we think sales are going to be and our EPS.

And as you know, there are many ways to get there.

We simply are saying, look, we've got this target in front of us.

We're responding to multiple possible scenarios.

We have the experience, we have the tools in place that we're going to get after there and we're going to get after there with all sorts of different ways.

And we would spend hours trying to describe specifically what those are and how we're going to go get them.

You'll just have to wait and see as we release our earnings results on whether we are able to do that or not in the long term.

Okay.

I understand.

Let me squeeze one more in.

You said -- you talked about reallocating assets on the front end for markets that are hot and away from markets that are not.

Can you talk about what areas of the business are the hottest right now, whether it be geographies or end markets or products -- product categories?

Anything you can point out as being a leading market?

Yes.

As you know, Matt, I'm going to give you a general response.

We are so broad and diversified between our companies and the segments that we play in and our selling models and geography.

We generally are tracking the overall economy.

Some of this is strategic competitive as well.

So we are identifying markets that we think we should -- are more likely to grow and where we have a competitive advantage and where we don't.

A lot of this is specific competitive strategic sort of diagnosis, so I'm going to defer on answering any of that specifically.

Okay.

All right.

Thank you, Stan.

Kathryn Thompson, Thompson Research Group.

Thank you for taking my questions today.

The first is on hearth.

I know that you've given guidance for that from the quarter and for next year with your hearth business.

But, realistically, how should we think about the biomass business on a go-forward basis not only for the balance of this year but as we go into next year taking into account comps and other fundamentals?

The second part of that -- how much of a (technical difficulty) biomass specifically to the quarter?

And then finally, do you have any clarity on what percentage improvement you saw from the new construction business which has been improving?

And I know you talk about tracking overall economy, but all indications are that housing starts have been healthy and should be benefiting this business.

Thank you.

Okay.

Thank you, Kathryn.

Those are very thoughtful questions.

Let me see if I can answer some of those.

And I don't write fast to get those, so I may need Kurt to clarify.

Let me talk about new construction, first off.

That of our hearth business is right now 40% of that business, likely to be more.

We are very, very strong in that business.

We are very well-aligned in those markets.

We have an excellent share of market.

We have the best brands with builders.

We have, I think, the best products, the best management team, the best distribution, et cetera.

And we should continue to benefit disproportionately as new single-family new constructions starts to continue to grow.

We see the single family continuing to grow back towards -- you look at these numbers -- back towards historic trends for single family, which means there's lots of runway there.

We also continue to work aggressively to help try to promote more fireplaces per home, et cetera.

So not only do we want to sort of track with the market, because of our position we want to exceed the market and then we also want to help grow the category is part of the initiative.

So the other side, biomass then is currently 60% of the business.

Which, retail gas we call it is basically half that.

And then pellet stoves and cordwood would be the other part of -- excuse me, I did that wrong -- remodel/retrofit would be half retail gas and then half biomass.

Of the biomass, we have cordwood wood-burning stoves and then we have pellet stoves.

So what's really going up and down is the biomass largely driven by the pellet stoves.

The big driver of that is that is a decision around efficiency and an economic sort of decision around the cost of liquid propane and the cost of fuel oil out of the Northeast.

It's also impacted heavily by cold weather.

So as oil has come down, as LP prices have come down, that order activity has come down in a big way.

In 2014, that business went up 47% and this year is down roughly 30%.

So how do we think about that going forward?

We really think you need to take a multi-year sort of look at that and kind of average that out over high fuel prices, low fuel prices and somewhere in the middle.

So I would guess next year we're going to continue to see moderate decline less because I think it's starting to reach the bottom.

And then we'll reset based on summer between the peak and the trough there.

The thing I would say to you, Kathryn, is that we have an excellent share position in that.

Again, we make money on those products up-cycle and down-cycle.

We're constantly thinking about where do we set our cost structure to make sure that that continues to happen as we go forward.

Kurt, what did I miss?

You got it.

Okay.

Anything else, Kathryn?

That's helpful on the hearth business.

I have a few follow-up questions on office.

Go ahead.

In the office segment, did you see any changes in mix that impacted the trends in the quarter?

And then I'll wait for a follow-up for another office question.

Nothing notable to report.

Nothing out of the ordinary.

Again, because we play in virtually all of the categories, all of the segments, it's the normal sort of stuff.

Okay.

And I guess, a follow-up -- I know that you said there earlier when answering Matt's question that you are tracking the overall economy.

But we over here at TRT look at the entire value chain of the construction process from bonding and contractors to distributors to office furniture retailers.

My question to you is, I guess, two parts with that.

First, what were some of the greater differentiations within contract?

Because seeing a greater weakness in that would be more troublesome than the day-to-day.

So, what were contract sales trending in the first half till now -- the quarter you just reported?

And, based on your prior experience, you were talking about just not seeing your pipeline converting to orders.

How does what you are seeing now compare to what you have seen in prior cycles?

Is it (multiple speakers) less or in line with what you have seen?

I think first off, Kathryn, the thing I would say to you is you really have to -- look, new construction is not necessarily the primary driver of office furniture events.

It certainly has an impact, but there is a -- it is -- there's not a direct sort of correlation there.

Obviously, furniture events often can come from consolidation as well.

Really what drives the CEO confidence -- small business confidence leading to furniture events.

So, the result of that then as well is that to your broader contract, contract came off.

It came off slower and is much more volatile than small business.

Why?

Because big projects -- isn't it interesting -- in fact, I find it sometimes -- I don't think it's terribly helpful that this industry actually looks at quarterly sales data.

And you find some of the competitors talking about whether they won a project or didn't win a project in the previous quarter.

So, you know, it's very lumpy by its nature in the contract.

So you have to kind of watch, looking at one competitor versus the other on a quarter.

You find if you track us a bit you'll never find me pounding my chest when we do better on a quarter.

Likewise, I don't get terribly concerned if we don't do as well on a quarter because it's so dang lumpy when you look at that data.

Back to your point, we're seeing similar sort of trends.

Now, this is not the global recession.

This is not like the last cycle; it's not as dramatic.

But every time we see a softening in the economy, office furniture events tend to lag.

So you'll see there's projects that are started, there are decisions that are made and typically our dealers are far down the line.

In other words, the train is stopping, you start to hear the cars crashing into the next one.

And office furniture is way down the line.

So, the pipeline tends to look good, look good, look good.

And the economy is so closely connected, if it takes a dip it takes a while for it to show up in the pipeline.

So you've got good bid activity, you've got good selling activity, you've got good showroom visits and all that sort of stuff, and it doesn't convert.

And we saw similar the last time, on a smaller scale, that same thing happen, where people are looking at all the activity and saying it's good.

But then the orders don't come or they get delayed, they get deferred and then they get pushed out, and then they get de-scaled, down-scoped, whatever, and then you have a softer sort of order period than you were anticipating.

Okay.

Final question -- on the supplies-driven sales, down 4% in the quarter.

But did you see a stabilization in that segment of the business too once you got into September and October?

Yes.

It has kind of run at about that same rate.

The answer is yes.

Okay.

Thank you very much.

You have no further questions at this time.

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

Thank you so much for tuning in and your interest in HNI.

We look forward to speaking to you in the future, and we hope you all have a great day.

Thank you.

Ladies and of them, this concludes today's conference call.

You may now disconnect.