HNI Corp (HNI) 2016 Q3 法說會逐字稿

Good morning. My name is Crissy, and I will be your conference Operator today. I would like to welcome everyone to the HNI Corporation third quarter 2016 fiscal results conference call. All lines have been placed on mute to prevent any back ground noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Mr. Herring, you may begin your conference.

Thank you. Good morning. I am Jack Herring, manager of Investor Relations. Thank you for joining us to discuss our third 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 preparation and non-GAAP reconciliations 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 assumed no obligation to update any forward-looking statements made during the call.

I am pleased to turn the call over to Mr. Stan Askren.

Good morning, everyone. We will share our assessment of third quarter 2016, provide some thoughts on our outlook for the fourth quarter of 2016 and then give you a brief look at 2017. And then we will open the call up for questions. First let me step back and provide some perspective on our performance year-to-date. (inaudible) performance through the first half of 2016 was strong. We delivered a 35% increase in non-GAAP earnings per share on 5% lower sales.

Then in July, we provided earnings guidance for the third quarter and full year 2016 and we expected a slightly improving economy based on the trends and activity level seen at that time. This included modestly strengthening the office furniture markets, continued growth in single family housing starts and a bottom of the hard retail pellet market. What developed during the third quarter, particularly in the latter half of the quarter, was different than we anticipated.

We saw a broad-based step down across our markets, businesses channels and product categories which then did not bounce back in the quarter. This led to significantly lower quarter results than we originally projected. Despite the recent choppiness, however, we remain focused on the long-term. I feel good about what we are doing and believe we continue to compete well.

Let me add additional color here. We have been focus the on streamlining our business and tightening up our portfolio and really sharpening our focus on the business. This includes simplifying businesses, product lines and business processes. In fact, in some cases, we have been willing to forego top line growth to drive bottom line improvement. Our results include office furniture operating margins increasing more than 350 basis points over the past three years in a relatively slow economic environment.

We have also achieved margins in our hearth business exceeding previous peak levels by 350 basis points. At the same time, we are doing all this, we also improved our competitive position within our core markets while also continuing to significantly invest for the long-term. We built a strong foundation for future profit growth and long-term shareholder value creation.

Our operational performance remains strong while we continue to significantly transform cost structures and capabilities, we continue to make progress on our business system transformation initiative. We achieved a significant milestone this quarter. We successfully brought up two additional office furniture companies on the new enterprise system. BFT is one of the largest initiatives the Company has ever undertaken as in a critical enabler to our long-term profitable growth.

We remain on track with the previous announced plan to deliver $35 million to $40 million of structural cost savings by 2018. Related to this, we recently announced the consolidation of an Indiana office furniture manufacturing facility into other HNI manufacturing operations. This move is expected to deliver more than $7 million of annual savings and bring our total announced annual structural cost savings to $16 million. We continue to work several other significant transformation initiatives. I'm confident we remain focused on the right opportunities to drive long-term profitable growth. So, with those comments I will turn the call over to Kurt Tjaden. Kurt?

Thank you, Stan. For the third quarter non-GAAP net income per diluted share was $0.80 compared to the third quarter of 2015 when it was $0.93. Consolidated net sales decreased 5.1% to $585 million, or down 6.6% on an organic basis. Sales for the office furniture segment decreased 4.4%, or down 6.4% organically. In our supplies (inaudible) business sales increased approximately 2% or decreased by 2% on an organic basis. Sales in our North American contract office furniture businesses decreased 10% while sales in our international office furniture businesses decreased 17%.

In our hearth business sales decreased 7.3%. New construction sales decreased 3%. Sales of retail wood and gas products increased 3% while sales of pellet appliances fell 38%. Non-GAAP consolidated gross margin increased by 30 basis points to 38.3%. Favorable price cost benefits were mostly offset by lower volume. Non-GAAP selling administrative increased 100 basis points, as a result of lower volume and the impact of acquisitions partially off set by lower grade costs and expense timing. Stan?

As we look at the fourth quarter of 2016 we continue to expect an uncertain economic environment. Our markets remain dynamic and we project demand will continue to be choppy. In office furniture we expect our contract business to improve modestly based on slightly increased activity levels. Our supply service businesses projected lower as small business confidence remain subdued. In hearth's we expect continued growth in our new construction business driven by single family housing starts and we project modest improvement in our retail wood and gas business while retail pellet appliance sales stabilize near the bottom. Let me turn the call back to Kurt for specifics on the numbers.

For the fourth quarter office furniture sales are expected to be down 1% to 4%. Organic office furniture sales are expected to be down 3% to 6%. Supplies driven office furniture sales are projected to be down 2% to 5%, or down 5% to 8% organically. Sales in our remaining office furniture businesses are forecasted to be flat to down 3%. And within that, organic sales in our North American contract businesses are expected to be flat to up 3%.

Hearth sales are expected to be up 1% to down 2%. New construction sales are forecasted to be up 2% to 5%. And we are projecting retail wood and gas sales to be flat to up 3%. Finally, retail pellet sales are projected to be down 10% to 15%. Non-GAAP gross profit margin for the quarter is expected to be approximately 40%. And non-GAAP SG&A which includes freight and distribution expenses, is expected to be approximately 29% for the quarter.

We are now projecting the full-year 2016 tax rate to be approximately 34.5%. And free cash flow for the year is expected to be in the range of $80 million to $90 million. Our estimated non-GAAP earnings per diluted share for the fourth quarter is in the range of $0.81 to $0.91 resulting in full and projected full year 2016 earnings per share of $2.60 to $2.70. I will remind you that the fourth quarter 2015 results included approximately $0.05 of nonrecurring tax benefits.

Excluding these one-time tax items, we expect EBIT for the fourth quarter of 2016 to be at or better than the fourth quarter of 2015. Finally, to reiterate our outlook for 2017. We continue to remain committed to providing you our shareholders our best current view of the business. The guidance range provided in our press release is broad, however, given the uncertainty in the economy. We expect again to reiterate full year consolidated sales to be in the range of up 2% to down 2% resulting in an initial estimate of non-GAAP earnings per diluted share for the full year 2017 in the range of $2.75 to $3.15. Stan?

Let me wrap it up here. Our businesses are strong and well positioned for the future. Our brands are competing well in their markets. We continue to identify investment opportunities that will deliver strong financial returns and I remain confident in our ability to drive long-term shareholder value creation. So with those comments complete, Kurt and I stand by for your questions.

(Operator Instructions). Our first question comes from the line of Budd Bugatch, of Raymond James. Your line is open.

First question I guess is; has anything changed since you gave your business update? What are you seeing in the marketplace that is different than what you did when you gave your assessment of the third quarter?

Budd, what the best comment would be is that the markets have firmed up. As I indicated in my opening comments, we projected third quarter based on the trends we saw big step down. We have seen lots of volatility in certainly this year and recent years and so you see a step-down and then you see a step back up and step down it stepped down and it stayed there and then as we finished out the quarter we saw it firm back up. And I think that is the significant change since we announced last.

I'm not sure I understand that. It firmed back up at the lower level or you actually saw some increase from where it stepped down to?

It firmed back up to where it was, which is at a lower level, historically. But better than the step down.

Can you quantify that at all, Stan?

You know, I think it is in the guidance we provided here.

Go ahead, Kurt.

I think that is the best way to think about it, Budd. If you think back to what we have given for full-year guidance originally back in July and look at what we have given now for the full year, and you take out what happened in the third quarter, we are kind of back with what we would have called, implied in that fourth quarter guidance.

So overall, I would say it's flat to minus a couple of percentages.

Okay. Talk to me a little bit about what you are seeing in costs. You had a tailwind for now a few years in costs. And we are beginning to see, I think, the early signs of some commodity inflation, first in steel and now more recently with some things that are going on around the world in some of the chemicals that go into foam. Are you seeing the same or can you tell us?

Our outlook on commodities is going to be moderately more inflationary, moderately up. I think it's going to be interesting to see where steel ends up. As you recall, we index steel and so we lag on the way up and we lag on the way down. And I think we have got a pretty good picture for first half, but I think the second half is a big picture. And then I think, the commodity picture there is lots of sort of input cost questions and lots of supply changes as well. Unless the economy picks up significantly, I don't think we're going to see significant inflation. Moderate, but I think we are well prepared to handle whatever comes based on the picture that we have in front of us.

And your last price increase was early 2016, is that right? Is that when you normally adjust prices once a year or so?

Generally, yes, Budd.

Okay. And in the fourth quarter what are the charges that we look and how should we think about that?

So, you're talking about the non-GAAP restructuring charges, Budd?

Yes, sir, what charges do we have?

So you would have what was filed recently in the 8-K, I believe that was laid out for the [Orleans/Indiana??]. There would be some with that. There would be a little bit left in Paris which is is a hearth operation. Which was announced earlier this year and then we will also have the donation of the building which we referred to in our press release. And then we have some ongoing charges for other operations transformations here in our Muscatine operations.

That's all third quarter, right? Or is that fourth quarter?

Those will all continue in the fourth quarter.

So you donated a building and that charge continues into the fourth quarter?

There are some charges that continue in the fourth quarter with that.

It was a $1.6 million in the third, right?

Right. So we started accelerating that depreciation. That donation will actually happen in the fourth quarter so you will see charges continue into the fourth quarter.

Can you quantify for us what the charges are likely to be total or?

Total for that building or in total across all of those, Budd?

I will get it from you offline.

Yes. It's probably easier to walk you through that. I think at a macro level for the year, Budd, let's handle it offline. Probably easier to do that.

Let's do that and we will talk about that then. Okay. Thank you very much.

Thanks, Bud.

We have time for one last question and the last question from the line of Katherine Thompson, from Thompson Research Group. Your line is open.

Thank you for taking my questions today. I would like to dig a little bit more into your 2017 guidance. You look at the past two fiscal years you typically give the year guidance in conjunction with Q4 earnings but decided to move it a little bit early this year. One, what is the thought process for taking that stance and strategy? And then second, in the same spirit that you were able to give some granularity for Q4 guidance if you could at least give the logic for the fundamental demand, gross margin and SG&A pipe levers that dictated 2017 guidance? Thank you.

Let me take a shot at it, Katherine. One, I think if you go back the last couple of years we have actually given guidance in on this call for the full year at a fairly broad range and then updated that and narrowed that range through the year. So, this is consistent with our past practice. In answer to your second one, A, we give a pretty broad range across, as we said given the uncertainty, across the business. But I think as we have talked about, you can get to between inflation and the structural cost actions that we have talked about, you can get to a margin assumption.

We have talked about our operating leverage targets of 25% to 35% across our businesses that will help you to those ranges. And that would include pricing and inflation on your assumption. So I think that the components are there and as you look at the two segments and your view on housing and then how that trades off with what might happen in office, I think you got the components. At a high level, that is how we come with that sales range and that earnings range. But again, great degree of uncertainty, I think, as we look through the end of this quarter on how 2017 develops.

So, maybe just conceptually if you look at, for instance, what you discussed for Q4 for supply sales being down and office being flat to down, are you anticipating a continuation of that trend? Really, it is more of a do you a little bit more of the status quo that you are expecting for the back half of this year to continue into next year? Or do you expect any type of change in that trend? I know it's your first stab at it, but it just helps us understand.

Sure, yeah, I understand, Katherine. This is Stan. So Kurt indicated we even talked about not following past practice and not giving any guidance because it's relatively uncertain. A lot of this depends on what happens with the economy. So, we are anticipating I think a similar economy and then I would say a relative growth against the economy is going to firm up some next year 2017 versus 2016. We should be through a lot of our, sort of our, I have talked about our focus on improving the (inaudible) foundation and selecting out of some businesses and some things.

We should be through that and we should start to see some growth relative to the economy. Now, if the economy is down significantly we are not projecting that we are going to just smoke the whole thing and be up, you know, big time. It started with the fundamental which is the economy stayed relatively the same, we are going to roll into the first half of the year at a similar trend, slightly increasing as we finish the year out on virtually all of our businesses. Then when you roll in, as Kurt said, our ongoing leverage and then roll in our structural cost takeout and then you add in some other factors, you get generally at those numbers that we laid out for you.

Okay. Thank you. Just for the quarter, freight and distribution costs were down roughly 7% or so. Was this driven by lower volumes or was this part of your overall structural expense reduction efforts? Really trying to get of sense is this something more structural or something more a function of volumes?

So the answer is it is kind of business as usual for the most part. You will always see us driving productivity and some of it is relative. Last year we were bringing up some regional distribution centers. Maybe there is some additional costs there, it's not recurring. It's no big switch or change in what we're doing. It's really more sort of ongoing productivity initiatives, I believe.

Okay. That's helpful. And I know that you mentioned in your prepared comments and release this fall about closing your Indiana facility but as you continue to focus on continued lean efforts and efforts to take out structural costs, what are other types of actions you may consider taking as we look towards the back half of this year and into 2017?

We think about this a couple of ways. So the answer is, Kathryn, we always are working prospective of a structural, I call it core productivity, and then B, structural cost takeout. And so, we came forward and announced earlier in the year this $35 million, $40 million of structural cost savings by 2018. We are mid innings on that, I would say. We probably now have officially announced half of that. We have several other major projects teed up to continue to take that structural cost savings out.

In addition, we are just continuing to drive core productivity around our material flows, our information flows, and just sort of running our business more efficiently. We have got a pretty good track record over the last, well, over the last 30 years, I guess, of kind of just trying now so I think there will be more of that. There is a very intensive activity always at HNI around those sorts of things. Good times and bad times. I would tell you that often we are attacking structural costs when things are the best. We don't wait around until things get tough.

If I can add, Katherine, to Stan's comments what you should feel good about when we talk the $35 million to $40 million in structural costs by 2018, was getting roughly two thirds of that in place next year. We are on track to deliver that. So, to your earlier question as you think about 2017, that is well in play and well advanced to meeting that objective.

Okay. And final cleanup question related to the 35 to 40. This is all achievable regardless of the 30 to 45 structural costs is there any lever tied to sales trends? This is achievable even if sales were to drop? Just theoretically?

Yes. The answer to that question is yes.

Okay. Great. Thank you very much.

All right, Kathryn, thank you.

That was our last question in queue. We will turn the call back over to our presenters for any closing remarks.

Thank you so much for tuning in to our earnings release conference call. We look forward to talking to you in the future. And hope you have a great day.

And ladies and gentlemen, this does conclude today's conference call. Thank you for joining us today. You may now all disconnect your lines.