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Operator
Good morning.
My name is Melissa and I will be your conference operator today.
At this time, I would like to welcome everyone to the HNI Corporation first-quarter 2016 fiscal results conference call.
(Operator Instructions) As a reminder, today's conference call is being recorded.
Thank you.
Mr. Herring, you may begin your conference.
Jack Herring - IR Manager
Thank you.
Good morning.
I am Jack Herring, Manager of Investor Relations for HNI Corporation.
Thank you for joining us to discuss our first-quarter fiscal 2016 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 risk.
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 the call.
I am pleased to turn the call over to Stan Askren.
Stan Askren - Chairman, CEO, and President
Good morning, everyone.
We'll share our assessment of the first quarter 2016, provide some thoughts on our outlook for second-quarter and full-year 2016, and then as usual, we'll open the call up for questions.
Non-GAAP earnings per share increased 48% on a sales decrease of 4%.
It was a great start to the year, with profits exceeding our expectations.
We are managing the business well and we delivered another quarter of strong operational performance driven by productivity improvements, structural costs takeout, and strong returns from previous investments.
Now, I'd like to make a point here: this is not profit performance just from short-term cost cutting.
This is about managing the business for the long term through a focus on productivity and working to facilitate flow through our businesses and investing in projects that we think are going to drive long-term growth and long-term profitability improvement.
Operating margin decreased in both our office furniture and hearth segments while we continue to invest for long-term profitable growth.
Sales results for the quarter were as expected.
Office furniture sales were down 5%.
On an organic basis, office furniture sales were down 6% against very strong prior-year comparisons of 14% growth in the first quarter of 2015.
Sales in the supply driven channel were down 6% or down 8% on an organic basis.
Sales in our other office furniture businesses were down 4%.
Hearth sales decreased 2%.
Strong momentum continued in new construction, with sales increasing 10%.
Warm weather and the low-energy costs continue to negatively impact sales of pellet appliances, which declined 35%.
During the quarter, we also met a significant milestone in our business systems transformation.
We had the successful transition of one of our small office furniture companies to our new enterprise system.
We are projecting -- I want to remind you that this business system transformation is a broad-based transformation on how we work.
It's a natural extension of our rapid continuous improvement culture with substantial process simplification has already occurred that eliminates waste from our combined total business.
While we're only in the middle innings of our implementation timeline, we are in fact seeing the financial benefits of BST, this business system transformation, across our businesses.
Overall, I'm very pleased with our first-quarter results.
Kurt Tjaden - SVP and CFO
Thank you, Stan.
So a couple additional highlights for the first quarter include non-GAAP consolidated gross margin improved 190 basis points versus the prior year to 37.4%.
These results were driven by strong operational and material productivity and better price realization, which were partially offset by lower volume.
Non-GAAP selling and administrative expenses were down versus the prior year due to broad-based cost reductions, partially offset by strategic investments and incentive-based compensation.
During the quarter, we completed the acquisition of a small office furniture business.
This acquisition will contribute approximately $30 million of sales and $2 million of profit in 2016.
So as we look to the second quarter 2016, we anticipate consolidated sales to be down 4% to 7%.
Office furniture sales are expected to be down 4% to 8%.
Supplies-driven office furniture sales are projected to be up 2% to down 2%, or down 1% to 5% organically.
Sales in our remaining office furniture businesses are forecast to be down 9% to 13% against very strong prior-year comparisons in a challenged China market.
Hearth sales are expected to be flat to down 4%; new construction channel sales expected to be strong again, up 10% to 14%.
And we are projecting retail pellet sales to be down 26% to 30% and retail non-pellet sales to be down 10% to 14%.
Non-GAAP gross profit margin is expected to increase significantly over the prior year, consistent with our recent quarterly improvements.
Non-GAAP SG&A is expected to be comparable to the second-quarter 2015 amount of $167 million.
And our estimate of non-GAAP earnings per diluted share for the second quarter is in the range of $0.54 to $0.59.
So let me shift to the full-year 2016.
For the full year, we expect consolidated sales to be down 2% to 4%.
We are forecasting office furniture sales to be down 2% to 5%, and sales in our hearth business are expected to be flat to down 3%.
We are narrowing and increasing our estimated range of our full-year earnings per share guidance.
Our current best estimate of non-GAAP earnings per diluted share for the full year is now in the range of $2.40 to $2.70.
Stan?
Stan Askren - Chairman, CEO, and President
All right.
Thank you, Kurt.
So I'll summarize here: our businesses are strong, agile, and well positioned for the future.
Our brands are competing well in their respective markets.
Despite this uncertain economic environment, I'm confident in our ability to continue to drive long-term profitable growth.
So with those comments complete from Kurt and myself, we'll now open it up to questions.
Operator
(Operator Instructions) Matt McCall, BB&T Capital Market.
Matt McCall - Analyst
So let's see.
I guess talk about the commentary in the release.
You're seeing some modest -- some signs of modest market improvement.
I assume you're talking about in -- well, I'll just leave it.
Which markets are you seeing signs of improvement?
It looks like the outlook is still for down-ish top lines, but what led to that comment?
Stan Askren - Chairman, CEO, and President
Well, I think, Matt, as we look out and talk to our dealers and talk to our dealer sales folks, and we look at pipeline activity and just sort of gauge overall sentiment, I am feeling more optimistic about the second half than I was the last time we talked to you.
If you look at our outlook -- in fact, we're showing the second half is going to be up slightly, and so feeling better.
It's early, though.
I think there's lots of choppiness in our markets still.
And we are seeing the upturn or I would say my sentiment is improving in both the supply-driven side as well as the contract side.
Matt McCall - Analyst
And so that's from feedback from salespeople, feedback from dealers.
Just any change in order patterns or anything like that?
Stan Askren - Chairman, CEO, and President
The answer is it's probably too early to really comment on the order pattern uptick.
So it's more about sentiment, just being in the market.
Our executive group in the market talking to people we think are the closest to the customers and feeling more positive.
Matt McCall - Analyst
Okay.
So in our model, we had noted that you were going to see most of the savings from some of the cost initiatives in Q4.
I think we had 5% to 10% of savings beginning to show up in Q4.
Was the margin improvement this quarter related to something else or did you just get the savings sooner than you expected?
Stan Askren - Chairman, CEO, and President
Related to something else is the answer.
Those structural cost savings are still out there as we projected earlier.
As I indicated pretty emphatically in my opening comments, we are seeing broad-based productivity improvement.
The operations and the distribution and the front end are executing very well.
We're seeing the savings and it's in lots of places from our business system transformation initiative.
So as you recall, that BST is not just an Oracle implementation, it's really an understand, simplify, standardize, and then flow.
And so we have 100 to 150people working full time on that.
And we're seeing the benefits in the business even before we roll to an Oracle implementation.
And then final point is as you have noted in the past, we've invested significant capital back into the business that we've indicated has a relatively quick, like 12- to 24-month, payback and we are seeing those results flow through to the operations.
So I'll go back: we're really seeing broad-based productivity improvements across the business, and the structural stuff is still out there.
This improvement is not due to that; that's yet to come.
Matt McCall - Analyst
Okay.
Let's see, couple more.
The acquisition, I understand is small, but $30 million.
What did you buy and what do they bring to the suite of products that you are ready had?
Stan Askren - Chairman, CEO, and President
We bought a small company that is more of a catalog-based, click-to-buy business heavily focused in seating.
It was a nice little acquisition that came on our screen.
It's called OFM.
They fit in nicely; it tucks in.
It's not a huge deal for us, but it's a nice little profit contributor to the overall Corporation.
Matt McCall - Analyst
Okay.
Okay, thank you.
And then last one -- you gave the outlook for the full year.
Can you talk about your expectations for new construction?
Overall, the hearth channel growth overall for the year you've given, but if I talk about just the new part.
I think you said new next quarter up 10 to 14%.
What about the full-year view?
Is that consistent with your full-year view?
Stan Askren - Chairman, CEO, and President
Yes, pretty much.
You know, and it's jumping around.
We, as we've indicated to you before, look at permits.
And permits -- I don't have in front of me.
It seems like last month were up 20%, 21%.
The previous month were up 18%.
So we're pretty -- we continue to be pretty bullish on new construction.
And I would say that our outlook is based on these recent two months is improving.
I don't think we've moved on our numbers big.
Yes, we want to see [on joint] improvement.
But I would say again, if I give you how I'm feeling, I feel better about them than I have in the past.
Matt McCall - Analyst
Better relative to that 10% to 14%?
You mean -- so you're actually seeing trends that are better than that, but you're not ready to make that change yet?
Stan Askren - Chairman, CEO, and President
That's correct.
Matt McCall - Analyst
Got it.
All right, perfect.
Thank you, guys.
Operator
Budd Bugatch, Raymond James.
Budd Bugatch - Analyst
Congratulations on the operating performance, Stan and Kurt and Jack and to your team.
Question for you.
As I look at I think on page 5, a slide for office, it says organic sales down 6.1%, supplies down 5.9%, and all other down 4%.
All other being North American contract and international contract?
Is that the way to read that?
And how do you parse that?
Kurt Tjaden - SVP and CFO
That is the way to read that, Budd.
You have that correct.
Budd Bugatch - Analyst
And so difference between North American and China, how does that factor in?
Kurt Tjaden - SVP and CFO
Well, China is down -- you know, is going to be down significantly more than North American contract.
But as you recall, that business is still, relative to North American contract, smaller.
So the mix would be -- China would be down more, but it's not -- it's a much smaller part of the mix.
Budd Bugatch - Analyst
And North America -- well, let's take it the other way.
How much was North American contract down?
Kurt Tjaden - SVP and CFO
It would've been close to that, Budd.
North America contract -- hang on here is second.
Stan Askren - Chairman, CEO, and President
A little bit less.
Kurt Tjaden - SVP and CFO
A little bit less.
Budd Bugatch - Analyst
I guess that's the way the math works.
Stan Askren - Chairman, CEO, and President
Yes, that's right.
(laughter)
Kurt Tjaden - SVP and CFO
We'll look here, Budd.
Just keep going.
Budd Bugatch - Analyst
The pellets.
Let's go to pellets and the comparisons as the year progresses.
And I understand the reason for the pellet comparisons.
When do they start to ease?
Do we have to wait for fourth quarter or is that where we are?
Stan Askren - Chairman, CEO, and President
Yes, it starts to ease a bit in third quarter, but really it's fourth quarter when everything kind of anniversaries and settles down.
It's still interesting to see where pellet ends up.
It may go down a bit more in fourth quarter depending on this weather and alternative fuel costs.
You know, one thing I always have to mention, Budd -- I'll use your question the platform.
As it is, it's still a profitable business for us.
We have a significant market share.
It's just facing a huge headwind on fuel costs and on weather.
Budd Bugatch - Analyst
And as you look at it, which is more important or do you know?
Maybe you don't know, which is whether it's weather, whether weather or costs?
Stan Askren - Chairman, CEO, and President
Again, it comes back to the homeowner and how hard they are getting kicked in the head on their bill.
So the colder it is, the more they're running their furnace.
And you know, the higher the alternative is LP or fuel oil.
So it's a combination thereof.
And it depends on which is spiked and which has not.
I would guess, if I had answer your question, that costs of the fuel is probably the biggest issue and weather would be second.
Budd Bugatch - Analyst
Okay.
Let me go back to North American contract.
As I think about that for the next several quarters, you said you had heavy strong comparisons.
When do those comparisons ease, Kurt?
When do we see positive and specified in your planning horizon?
Kurt Tjaden - SVP and CFO
So I'll echo Stan's earlier comments, Budd.
As you look at second half of the year, you'd start to see those comps turn modestly positive.
So based on where we sit today, third quarter we'd start to see that turn.
Budd Bugatch - Analyst
And shouldn't we see that in the order book already?
Wouldn't we start to see some backlog growth?
Stan Askren - Chairman, CEO, and President
Pretty early yet, Budd, is what I would respond there.
And as far as our sales for second quarter, that's -- we're still delivering that which was ordered in this softer period.
So it's still relatively early on the order book and I would say it's really more about how I'm feeling about the sentiment.
As you know, and I know you know this, it's really for us, it's a very choppy sort of environment out there around size of orders, around geographic sort of movement, around walls versus other stuff.
So lots of moving complex pieces.
Budd Bugatch - Analyst
Okay.
Thank you very much.
Good luck on the balance of the year and the second quarter.
Stan Askren - Chairman, CEO, and President
Thanks, Budd.
Operator
Kathryn Thompson, Thompson Research.
Kathryn Thompson - Analyst
Thanks for taking my questions today.
Within the office unit, you cited price realization in the quarter.
Is this driven more by supplies or the pure office segment?
If you could just in general give a little bit more color around pricing improvement in the quarter?
Stan Askren - Chairman, CEO, and President
Yes, Kathryn, it would be in both segments.
And it's a relatively small number: 2% to 3% price increase.
Kathryn Thompson - Analyst
And more color on what has enabled you to gain pricing now versus maybe not as to the great magnitude in the prior quarter?
Stan Askren - Chairman, CEO, and President
It's really just an annual cycle of price increases to offset costs, people costs, et cetera.
So it's actually a much smaller number than we've historically been able to gather over the years.
Kathryn Thompson - Analyst
Okay.
You had talked earlier in your prepared comments and in the Q&A about modest market improvements.
But was going to see if you could talk in a little bit more detail how that relates to project size?
And also if you could focus on end market, be it geographic or literal end-type market, like office, healthcare, et cetera, in order to understand more the color behind this modest market improvement that you're seeing?
Stan Askren - Chairman, CEO, and President
Yes.
And for us, we are broadly diversified between these different segments and these different companies and these different product categories and different geography.
I would say it's broad-based.
Certainly, we're feeling the downstroke from energy.
The other segments were not broken out as much.
I would say the large projects are probably less.
Smaller business would be relatively more stable than the large projects.
I don't know, Kurt.
Anything else?
Kurt Tjaden - SVP and CFO
No, I think you got it.
Stan Askren - Chairman, CEO, and President
Okay.
Kathryn Thompson - Analyst
All right.
And in terms of your fiscal 2016 guidance, if you could put in the buckets the greater driver of that raised guidance, how much of it is your operational improvement going better than expected versus a modestly improving market?
Stan Askren - Chairman, CEO, and President
I would say at this stage, Kathryn, our call is more around productivity improvement, operational improvement than it is market.
Our comment -- the comment in that press release was meant that really signal that the sentiment, my personal sentiment and our collective sentiment as senior management team, is improving.
But we have not factored those numbers into our outlook in a significant way -- or any way, really, is what I would say.
Kathryn Thompson - Analyst
Okay.
Great, that's helpful.
And then finally, we've spent a lot of time talking about the market and then also about what you're doing from an operational standpoint.
But maybe if we could switch gears and focus more on new products.
What percentage of your sales, either mostly by office but maybe perhaps even hearth, are new products?
And how much are new product introductions going to help drive that improvement this year?
And how is that any different, if at all, versus the prior two years?
Stan Askren - Chairman, CEO, and President
Yes, that's great question.
New products, we classify new products as significant new SKUs introduced in the last, let's say, three years, I guess.
That level is running about 25%.
That's higher than we have run in the previous decade, but is consistent with what we've been running in the last several years.
It's a very important part of our story going forward.
We continue to find lots of new opportunities for new products.
And as you know, Kathryn, each of our operating companies run and eat in different segments.
And so if you walk through and look at each of the companies, they are all working significant new product launches.
And so I think the pipeline is strong or stronger than ever.
And I think it's a very important contributor to our ongoing profitable growth initiatives.
Kathryn Thompson - Analyst
Okay great.
Thank you very much.
Good luck.
Stan Askren - Chairman, CEO, and President
All right.
Thanks, Kathryn.
Operator
There are no further questions in queue at this time.
I will turn the call back to Mr. Askren for any closing comments.
Stan Askren - Chairman, CEO, and President
Yes, one thing.
We understand it's Matt McCall's birthday today and we want to wish Matt happy birthday.
And with that, we appreciate your interest in HNI and we appreciate your focus on trying to understand our business and we look forward to speaking with you in the future.
We hope everybody has a great day.
Take care, bye-bye.
Operator
Ladies and gentlemen, this concludes today's conference call.
You may now disconnect.