HNI Corp (HNI) 2015 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the HNI Corporation fourth-quarter and year-end 2015 fiscal results conference call.

(Operator Instructions).

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

Thank you.

Mr. Tjaden, you may begin conference.

Good morning.

Thank you for joining us to discuss our fourth-quarter and year-end fiscal 2015 results.

Joining me is Stan Askren, Chairman, President, and CEO.

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.

Good morning, everyone.

As is typical, I'll share a brief assessment of our 2015 results, and then provide some thoughts on our outlook for 2016.

And then we will conclude it with an open call for questions.

First, let me start with the year.

2015 was another strong year.

Non-GAAP earnings per share increased 31% on modest sales growth.

We again generated solid cash flow to support our long-term business investments, and increased our already strong dividend.

We executed well on our core strategies, which I'll remind you include focusing on the core; split and focus with leverage; and then finally our rapid continuous improvement, which is driven by the strength of our member/owner culture, which is very unique and very powerful.

Our businesses performed well against the competition in a challenging, slow growth economic environment.

Office furniture markets were negatively impacting in the second half by muted CEO and small business confidence and economic turmoil in the PRC.

In our hearth markets, single-family housing starts continued to improve modestly, while warm weather and dramatically lower oil prices severely impacted the biomass market.

Our hearth business achieved another record year of profits, delivering $80 million in non-GAAP operating profits on sales of $527 million.

Sales results across that business were mixed.

Solid growth in new construction and retail gas were more than offset by a significant decline in the biomass business due to low oil prices and very warm weather.

We continue to invest to strenghten our industry-leading brands, products, and distribution.

And we are the preferred choice for builders and homeowners.

Our office furniture business non-GAAP operating profit increased 25% on modest sales growth.

Strong operational performance, consistent flawless execution for our customers, and benefits from our operational investments were key drivers for those increased earnings.

North America sales increased approximately 2%, led by 5% growth in our contract business.

Our supplies business sales were basically flat, impacted by muted small business confidence.

Sales in our international businesses were up 3% despite a significant drag from the economic upheval in China, mainly the PRC.

We continued our investment and commitment to our Business System Transformation initiative.

We made strong progress simplifying and transforming our business processes to deliver more value to our customers and reduce non-value-added cost.

BST remains a significant focus for our organization and a strategic investment for HNI.

We believe our unique, member/owner culture is a competitive advantage that stands the test of time, and we remain committed to our core beliefs and values.

And let me now comment on the fourth quarter.

We finished the year strong.

Non-GAAP earnings per share increased 40%, despite a slowing economy and 8% lower sales.

Office furniture non-GAAP operating profits increased 23% on a 5% sales decline.

In our hearth business, non-GAAP operating profit margin improved 170 basis points on a 14% sales decline.

Overall, I'm very pleased how our businesses are performing and are positioned for the future.

And I'd like to thank our customers, members, and suppliers for their outstanding contributions to our success.

Kurt?

So let me comment on the fourth quarter of 2015.

Consolidated net sales decreased 7.7%.

Office furniture sales decreased 5.3%.

Sales in our supplies-driven business were down 7%, while sales in our other office furniture businesses were down 3%.

Sales in our hearth business decreased 14%.

New construction sales increased 4%.

And sales of our biomass products decreased 38%, due to dramatically lower oil prices and unseasonably warm weather.

Non-GAAP consolidated gross margins improved 220 basis points versus the prior year to 37.9%.

Strong operational performance, structural cost reductions, favorable material costs, and price realization were partially offset by lower volume.

As a percent of sales, non-GAAP selling and administrative expenses decreased 50 basis points, primarily due to cost reductions and lower incentive-based compensation, partially offset by investments.

During the quarter, we recorded $12.7 million of restructuring and impairment charges and transition costs.

These expenses included goodwill and intangible impairment charges of $11.2 million, related to a small office furniture business; and $1.5 million of restructuring and transition costs in connection with previously announced closures, acquisition (technical difficulty), and structural realignment.

For the year, we generated $61 million of free cash flow.

And our year-ending debt to EBITDA leverage ratio was less than 1X.

Stan?

Okay.

Thank you, Kurt.

As we look to 2016, we expect the weak economic environment to continue, impacting our competitive markets.

Our exposure to short cycle business provides us early visibility into market shifts.

We (technical difficulty) in the near term while remaining focused on long-term value creation.

I'm confident we can deliver strong profit performance in any market environment.

Our seasoned and experienced team has effectively managed through multiple business cycles in the past.

Consistent with our long track record -- and listen to this, please: consistent with our long track record of driving significant structural cost reductions, we are working several large restructuring initiatives.

The estimated impact of these initiatives will result in $50 million to $60 million of restructuring charges over the next three years.

Once completed, we expect to realize $35 million to $40 million of annual savings.

While these initiatives are not yet final, I have confidence in the opportunity and the magnitude that I have just indicated.

The initiatives are broad-based, including corporate functions, office furniture and hearth businesses, and both domestic and international businesses.

These actions were not developed just in response to the slower economy.

These initiatives have been in process for some time in varying levels of readiness.

We will not provide additional detail on specific initiatives at this time, so as to allow flexibility for planning, communication, and execution.

We will disclose the economic impact of each of these initiatives at the appropriate time, consistent with our past practice and regulatory requirements.

I continue to believe we are well positioned to create long-term shareholder value.

We have the right strategies, the right products, and the right people to continue to outperform the market.

Kurt?

So our financial outlook for the first quarter of 2016: we anticipate overall sales to be down 3% to 7%.

Office furniture sales are expected to be down 4% to 8%.

Supplies-driven office furniture sales are projected to be down 6% to 10%.

Sales in our remaining office furniture businesses are forecasted to be down 3% to 7%.

In our hearth business, overall sales are expected to be up 1% to down 3%.

New construction channel sales are forecasted to be up 4% to 8%.

And we expect remodel/retrofit channel sales to be down 3% to 7%, driven by lower biomass sales.

Non-GAAP gross profit margin is expected to improve modestly from the first-quarter 2015 results of [35.5%].

Non-GAAP SG&A as a percentage of sales is expected to be modestly higher than the first-quarter 2015 results of 32.2%.

Our estimated non-GAAP earnings per diluted share for the first quarter is in the range of $0.16 to $0.21 per share.

So our full-year 2016 outlook, we expect consolidated sales to be down low- to mid-single-digits.

We are forecasting office furniture sales to be down 4% to 7%.

And sales in our hearth business are expected to be down slightly to up slightly.

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

And we expect capital expenditures to be in the range of $105 million to $110 million.

Consistent with Stan's earlier comments about the weak economic environment and high degree of uncertainty, we are expanding the range of our full-year earnings per share guidance.

Our current best estimate of non-GAAP earnings per diluted share for the full-year 2016 is now in the range of $2.20 to $2.60 per share.

Stan?

Okay, let me wrap this up and summarize.

I'm confident in our ability to deliver long-term shareholder value in any market environment.

Our businesses are strong, agile, and well positioned for the future.

Our brands are competing well in their markets.

Our strategies are working, and our investments continue to deliver strong financial returns.

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

Operator?

(Operator Instructions).

Budd Bugatch, Raymond James.

This is Bobby actually filling in for Budd.

Thank you for taking my questions.

First up for me is just a little bit more around biomass and the comparisons.

How should we think about those comparisons throughout 2016?

When will the comps from the lower fuel start to ease, I guess is part of my question, or the main bit of my question?

Yes, it should, Bobby, work through, and we should reach the bottom in 2016.

Likely to step down another 10% to 15%, down to sort of historic lows, and then level out in 2016.

Would the historic lows probably hit sometime in mid-summer?

Would that be a rough guess?

It's very seasonal, Bobby, so usually mid-summer is not really representative (technical difficulty).

Heating appliances [purchased] seasonal.

And so you'd say, not till the end of the year -- not till we get to the burn season, at the end of the year, are you really going to be through it.

Okay.

And then on the office segment, inside the office segment, was there any big shifts in products that you are seeing pressure on?

A shift from the consumer to a different style product, maybe?

No.

And the weakness is pretty broad-based, across all your product categories?

Yes, sir.

And price points, as well?

Yes, sir.

Okay.

And then lastly, when you look at supplies, the supplies channel business -- and you referenced the other non-supplies channel business -- that's mostly North America contract, correct?

It includes international, as well.

It's mostly North American contract, yes.

All right.

I was just trying to get a parse of what North America contract did for the quarter.

Are you guys disclosing that?

For which quarter, Bobby?

For the fourth quarter that we just had.

So, fourth quarter, we would have seen North American contract down slightly, in line with our expectations.

All right, thank you.

I appreciate you guys answering my questions, and best of luck in 2016.

Matt McCall, BB&T Capital Markets.

So, maybe I'll follow up on that last question.

North American contract down a little bit; did you talk about the specific expectations for North American contract in 2016?

We did not on that, Matt.

We talked general office furniture, as we talked about 2016.

Down overall (technical difficulty).

Okay.

So any comments on underperformance, outperformance, for your different segments?

Well, Matt, I think if you look at what has transpired over time, we have outperformed -- certainly in the contract side, we have, if you look at over the last 24 months.

So I remind you, our perspective (technical difficulty) any quarter, or even a year, to compare -- you really run the risk of distorting your picture.

So it's more likely to use a 24-month period.

We would say HNI North American contract the last two years is up, I think, 6.7 on average.

BIFMA was up 4.6.

2015, I think we indicated, for the year, North America contract in HNI was flat to BIFMA, so about the same.

Supplies has basically been flat to up modestly.

We think, based on what we look at with our largest customers and the market research we do, we're tracking slightly ahead of that.

So we would expect, regardless of what the economy gives us, that we would continue to outperform.

The numbers we're giving you here are more reflective of what we think the economy is going to do, rather than us indicating that we think we're going to lose some position.

I think -- if we said it once in these comments, we've said it at least four times: we expect to continue to outperform the market in the long term.

Watch the short-term stuff, because in this industry, you will get all screwed up.

Got it, got it, okay.

So, you talked about your several large restructuring initiatives.

I know you don't want to give specifics.

I understand that.

But you said you'd been working on these for a long time.

So maybe outside of just the cyclical softness -- I know that didn't drive the decision -- can you just talk about maybe the strategic nature of what you're trying to accomplish here?

It sounds like it's been on the drawing board for a while.

What changes are you trying to make?

Yes, first, let me comment on the drawing board for a long while.

If you go back and you look at our history, Matt, certainly since I've been CEO, we always have major productivity structural cost take-out initiatives underway.

It's part of our lean, RCI sort of environment and culture.

The second part is the industry is always changing.

We're always changing.

We're always responding.

We're getting smarter.

There's new ways of thinking about things.

We do acquisitions; on and on it goes.

So these are simply things that impact logistics, costs; impact operational cost; impact overall facility costs.

These are investments in productivity and new technology.

These are investments to deal with the shifting mix of products, et cetera.

So it is extremely broad-based, and I said, corporate, office furniture businesses, hearth businesses, international, domestic.

It just goes on and on.

So the objective is to continuously drive more-better-faster, with less, for our customers, to create value for our shareholders, deliver return on these investments.

And so (technical difficulty) more of the same.

The point is, is these things were underway before the slowdown.

We simply are -- I guess I'm quite pleased that we're in a spot that these things have been worked.

They've been vetted.

We've done our due diligence.

We've done our homework (technical difficulty) actually underway, and we will begin to roll of those things out over the next 2 to 3 years.

And we're simply saying, hey, ladies and gentlemen, this is a slower economy, but we're going to do well through it.

And we're not going to waste this crisis.

We're going to use this an opportunity to do what we do well, which is continue to invest for growth, but also adjust our cost structure so that we're more competitive, driving better returns for shareholders.

Okay, okay.

That's helpful.

So you quantified the total benefit, I think, at $35 million when everything is done.

Can you talk about maybe what is assumed -- what kind of benefit is assumed in the guidance for 2016, your outlook for 2016?

And I don't know if you gave a margin outlook for 2016, either.

If you had that, that would be helpful.

Yes, as you think about this, Matt, it's assuming we proceed with ease, it really becomes a -- it's a total of $35 million to $40 million of benefit.

And it's over a three-year period.

And assuming we proceed with these, you would start to see nominal benefit in the fourth quarter of 2016.

I would call it 5% to 10% of that range, that Stan talked, ramping up to kind of a half to two-third run rate in 2017.

And by 2018, we would be expect to be on plane with that number that Stan talked.

Again, all subject to timing, but that's how I think about the ramp.

So not a big impact on our guidance for this year.

And then, Matt, the other thing is right behind these, we'll be working and developing the next initiatives to continue to drive productivity and structural cost, as well.

So we're simply stating, over this next period, this is what we have teed up.

But behind that, we will be looking for more.

Okay, okay.

And I have two more quick ones -- well, two more quick questions; we'll see about the answers.

The deflationary environment, maybe talk about it in two ways.

The impact on your customers -- I know, I think, Bobby asked about where you are seeing weakness.

We've heard there's more weakness in energy and industrial than there is elsewhere.

It sounds like you're seeing it across the board.

So is there any negative impact from deflation in some of your customer groups?

And then talk about the deflationary benefit on your price/cost situation.

Yes, let me comment on Bobby's question.

The way I took Bobby's question: is there anything that we're seeing in our business that's inconsistent with the overall economy?

I think anybody in business these days is seeing the energy section slow down.

We're participating fully in that.

Okay.

And there is (technical difficulty) across the board.

I think my answer is is look, ladies and gentlemen.

Look at the overall economy; we're tracking the overall economy.

Look at the overall sector; we're tracking the overall sectors.

Look at the overall price points; we're tracking the overall price points.

So I don't want to imply to you that energy is -- we're just skating along and everything is good, and we're not doing as well in some of these other areas.

I simply was commenting we are tracking the overall economy.

Your deflationary question is a good one, Matt.

Certainly that is a benefit to us as it relates to materials.

We are seeing inflation, though, in people costs.

So, pay range, healthcare, et cetera, continues to go up.

And that's a significant cost as part of our business.

The opportunity in this lower material installation environment to get price is less.

So, it offsets when we look at it.

We've benefited in the past from a decent ability -- opportunity to get price.

That's going to be harder, going forward.

The other side, material costs, should get better as things go forward, and we should benefit from that.

Okay.

All right, perfect.

And the last one -- I'm sure you've been asked this -- but the current situation, you compare it to previous periods.

The most recent we had to compare it to were kind of 2011, 2008.

So if you think about what you're feeling today, what you're hearing from customers, what you're sensing in your business, does this compare more to what happened in 2008, 2011?

Or does it feel totally different than those two periods?

Yes, again, this is the question everybody is trying to answer, regardless of what your business is.

And the question is, [by restating that]: is this a soft patch or is this a recession?

I don't know.

I don't know.

I think it's more likely to be somewhere in the middle of soft patch.

You see what we're calling.

Again, I think we're calling not just our performance, but we're calling the overall view of the economy, which is -- it's going to be down.

We've gone back and looked at all this data.

It's not the same as the Wall Street mortgage crisis.

It's not.

There's not that big of a shock.

I think this is more of a global asset repricing, sort of the quantitative easing coming off, global slowdown.

And I think it's more likely to be a soft spot, soft patch, or a mild recession, if you ask me.

And, look, my opinion is not worth much on this.

There's all sorts of people that are smarter than we are, [looking at this and feeling this].

This is simply our response to, I think, an overall slowdown; an overall, I think, souring or slowing of CEO confidence.

I think most of the indicators you're seeing are lagging (technical difficulty) what I would say.

And small business confidence has been shaken.

And the question is, is how long does that go, and how fast do they shake that off and then begin investing in our very important but non-revenue-, non-income-producing asset called office furniture?

Very helpful.

Thanks, Stan.

Good luck.

Kathryn Thompson, Thompson Research Group.

This is Steven Ramsey filling in for Kathryn.

My first question on non-GAAP operating margins, the improvement in Q4, in reference to the structural costs you are taking out in the office business so far.

How much of this is permanent, versus costs being only reduced in the low-volume environment?

I think the way I'd answer that, Steven, is that is ongoing structural costs.

That is not a temporary adjustment, if you will.

We've been making -- you think about actions we took in the third quarter around structural costs.

We had plants come off-line last year that we've seen the benefits flow through this.

So I would say the majority of that structural cost take-out, I would expect to be repeating and continue.

And it's part of why you see, as we look at our 2016 outlook, and take the midpoint of guidance, a very favorable deleverage.

And continue to expect returns on those investments that will (technical difficulty).

Let me take another shot at this, Steven.

Volume is good for us on cost.

So when volume comes off, there aren't things we can just stop spending to make our financials look better, number one.

Number two, we are actually investing -- continue to invest for the long term.

We have a long-term view of this business.

(technical difficulty) to deliver results, but we get paid to deliver long-term (technical difficulty) creation for shareholders and for customers.

And so, we don't do anything that's going to be a short-term thing that will impact the long-term.

As Kurt says, what we take-out is longer-term structural cost, and we would expect to do that going forward.

So, I'm not sure I totally understood the question, but I think we're hopefully answering that for you.

Right.

No, that's helpful.

I appreciate that.

My next two questions are on the hearth side of the business.

New construction has made up about 40% of the sales there in the past, the recent past, with the recent declines on the R&R side.

Do you expect this 40/60 composition to shift in 2016, where new construction would make up more sales?

And, if so, does that change the margin profile of the business at all?

The answer is yes, obviously, based on how the numbers just work out.

Hearth sales will be made up more largely of new construction than recent.

And the margins will remain generally the same.

The mix doesn't impact the margins, is another way of saying that more clearly.

Great.

And then last question on hearth.

Excluding biomass, how is your core R&R business performing?

The R&R market as a whole seems to be strong, based on our survey work and recent reports from large publicly traded companies.

So I wanted to get your take on that.

Yes, excluding the biomass, our R&R hearth business would be tracking at or above the R&R indices.

So it's doing well.

We are in a great market.

We have a great market position.

We have a great product, and that business is doing very fine.

Excellent.

Appreciate it.

Thanks.

Ladies and gentlemen, there are no further questions.

I turn the call back to the presenters for closing remarks.

All right.

Well, thank you so much for your interest in HNI, and for tuning in.

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

Have a great day.

This concludes today's conference call.

You may now disconnect.