HNI Corp (HNI) 2016 Q4 法說會逐字稿

Good morning. My name is Kelly, and I'll be your conference operator today. I would like to welcome everyone to the fourth quarter and year end fiscal 2016 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). As a reminder, today's call is being recorded. Thank you. Mr. Herring, you may begin your conference.

Good morning, I am Jack Herring, Treasurer and Director of Investor Relations for HNI Corporation. Thank you for joining us to discuss our fourth quarter and full year fiscal 2016 results. Here with me are Stan Askren, Chairman, President and CEO, Marshall Bridges, Vice President and Chief Financial Officer, and Kurt Tjaden, Senior Vice President and President of HNI International. Copies of our financial news release, earnings preparation, 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 the call. I am pleased to turn the call over to Mr. Stan Askren.

Good morning everybody. We'll share a brief assessment of our 2016 results and provide some thoughts on our outlook for 2017, and then open the call up for questions. Before I start, I'd like to take a moment to welcome Marshall Bridges, as we recently Marshall had been appointed Vice President, Chief Financial Officer for HNI. Marshall has been with HNI for 16 years in a variety of financial executive positions, and he possesses significant finance business strategy and transactional experience and expertise. Marshall is succeeding Kurt Tjaden, who was promoted to President of HNI International, following the retirement of Marco Molinari. Kurt possesses a strong background and knowledge of the Asia Pacific region, and we are excited about what he brings to that role.

I want to thank Marco for his 13 years of service and contributions. He did an outstanding job, and we're excited for him, as he pursues the next stage of his life and requirement. I also want to thank Kurt for his role and great leadership as CFO. We are excited that we have such capable, experienced members ready and able to fill in these critical roles, as we pursue development and succession for the corporation.

Now let me shift back to a look at our full year results. 2016 was another strong year. Our business has performed well. We increased earnings, generated significant cash flow ,and increased our strong dividend. Non-GAAP gross profit margins have increased by more than 100 basis points for the third year in a row, and have now approved year-over-year for 14 consecutive quarters. We continue to make deliberate strategic choices to further strengthen our core foundation. This process is an extension of our rapid and continuous improvement philosophy and culture, which includes product simplification, design commitization, operational consolidation, and significant productivity improvements. These actions that we have taken will continue to improve future profitability, while providing a stronger platform for growth.

During the fourth quarter we completed the sale of artcobell, a kindergarten through 12 education furniture company. Our divestiture of this business allows us to improve our focus on the core, and will increase profits by nearly $5 million per year. We learned a great deal from this experience, and we'll leverage those insights moving forward. Let me pause a little bit here and expand on this artcobell divestiture. We bought the company five years ago as an extension to our core. We periodically make these types of acquisitions to expand our frontiers. During my tenure with HNI, we have used the same strategy to build our hearth business into a leader in their industry, in a powerful economic engine for shareholders. We've done the same to build a strong and profitable contract furniture presence. Some of these probes work, and some do not. We had a thesis around artcobell that we failed to realize.

I called to question the latter part of last year, and we are now moving on. It was not an inexpensive probe, but we learned a lot, which we have incorporated into our core businesses. In the future, when we see opportunities to invest money to extend our frontiers, we will do so. We will go. Not all will be successful. The connection of risk and reward continues to live. There is no reward without risk. We have a strong but not flawless track record, of taking calculated risks to drive rewards for shareholders and customers, and we will continue to do so in the future. Back to the comments.

We make strong progress on our long term quarter core growth strategies with our investments in new products and selling capabilities. Yesterday we announced the consolidation of a Hearth manufacturing facility into existing operations. This difficult decision was another action on our never-ending journey to reduce structural costs. Consistent with our long history, we continued to derive core productivity, and pursue structural cost reductions, in good times and in bad times. We feel good about our results, and our improvements and earnings and profit margins. We enter 2017 a stronger company, positioned to drive increase value for our customers, and long term profitable growth for our shareholders. I will now turn the call over to Marshall Bridges for some specifics on the fourth quarter. Marshall.

Thanks Stan. For the fourth quarter non-GAAP net income per diluted share was $0.82, compared to $0.91 in the fourth quarter of 2015. Consolidated net sales decreased 2.6% to $581 million, and were down 4.3% organically. Sales for the office furniture segment decreased 2.3%, or minus 4.6% organically. Looking within our office furniture segment, sales in our supplies [inaudible] business increased approximately 1%, or decreased by 3% organically. Sales in our North American contract business decreased 2%, while sales in our international businesses decreased 24%.

In our Hearth segment, sales decreased 3.4%, looking within the hearth segment, new construction sales increased 3%. Sales of retail wood and gas products decreased 2%, and sales of pellet appliances fell 19%. Non-GAAP consolidated gross profit margins increased 70 basis points to 38.6%, labor and material productivity gains were partially offset by lower volume. Non-GAAP selling and administrative expenses increased 110 basis points, as a result of lower volume, and the impact for stock price depreciation on deferred compensation. The increase in stock prices resulted in a $0.05 per share reduction to quarterly earnings. Stan.

As we look at 2017, we expect strong performance driven by top line growth, and the continued benefits of structural cost reductions, and business productivity improvements. We expect demand to start slowly and build throughout the year, driven by the improving economy, investments in our new products, selling and fulfillment capabilities. In office furniture, we expect mid single digit organic growth that will improve throughout the year. In hearth, we expect continued growth in our new construction business driver by single family housing starts. We project modest improvement in our retail wood and gas businesses, while retail pellet appliance sales are projected to stabilize. Marshall.

Thanks Stan. As we look into the first quarter of 2017, we expect consolidated organic sales to be down 3% to 6%, or minus 5% to minus 8% including the effects of acquisitions and divestitures. Office furniture sales are expected to be down 7% to 10%, or minus 5% to minus 8% organically. Within office furniture, our sales and our supply driven business are projected to be down 7% to 10%, or down 5% to 8% organically. Sales in our remaining office furniture businesses are forecasted down 7% to 10%, or minus 6% to minus 9% organically. Hearth sales are expected to grow 1% to 4% versus the prior year, within the hearth segment , new construction sales are forecasted to be up 2% to 5%.

We are projecting retail wood and gas sales to be flat to up 3%, and retail pellet sales to be flat versus prior year. Non-GAAP gross profit margin as a percentage of net sales is expected to be approximately 39%, which represents an improvement over prior year. Non-GAAP SG&A which includes freight and distribution expense is expected to be approximately 35% of net sales. Our estimate of non-GAAP diluted earnings per share for the first quarter is in the range of $0.17 to $0.24. For the full year 2017 we expect consolidated organic sales to grow 3% to 6%. The net impact of small office furniture company acquisitions and divestitures will reduce sales by approximately $80 million.

As a result total net sales are forecasted to be in the range of minus 1% to plus 2%. Office furniture sales are expect to be up 3% to 6% on an organic basis, and sales in our hearth business are expected to be up 2% to 5%. We are projecting the full year 2017 tax rate to be approximately 34%, full year free cash flow is expected to be in the range of $100 million to $110 million, including approximately $110 million of capital expenditures. Our best current estimate of non-GAAP earnings per diluted share for the full year 2017 is now in the range of $2.80 to $3.15. Stan.

Okay, so to conclude, our businesses are strong. Well-positioned for the future. We continue to see attractive investment opportunities that will deliver strong financial returns in the future. I remain confident in our ability to drive long-term shareholder value. With those comments complete, we will now open it up to questions.

(Operator Instructions). Your first question is from Budd Bugatch from Raymond James. Your line is open.

Good morning this is David [Long] on for Budd. Thank you for taking my question. My first question is, how much of your revenue in Q1 of 2016 was from artcobell, and trying to get an idea of what the base should be to apply the organic growth to?

For the year, artcobell approximately $50 million in sales, and in Q1 it's much smaller than the annual rate would be. It's about $6 million.

Great, thank you. And in Q1 and for all of 2017, what are you seeing and what are you assuming for headwinds from raw material? When we are going to start to feel that, and are there any plans of a price increase to help offset that?

We are starting to see modern signs of inflation for 2017. I'd like to remind you about half of our input costs are on contracts in which we lag the spot prices. So we'll see the impacts of that as we go through the year. We're basically seeing around 4% on input costs, and we do expect to input productivity increases and price increases to offset that.

Typically price increases are earlier on in the year versus later. Is that how it has gone historically?

Yes.

Okay, great. And then last question. In terms of price competitiveness in the contract office furniture channel, what are you seeing there? Is it more competitive on pricing, or what's the trend?

I would say the trend is stable, David. If you look at the contract furniture industry, there are periods market by market, and quarter by quarter, where it kind of ebbs and flows, got a little bit more intense, I think last fall, just I think demand and supply, local skirmishes, it seems that it has stabilized. I don't think there are any significant trends that we need to communicate, or you need to be worrying about further deterioration. We are always well-positioned with our sort of focus on cost and our cost structure to respond to those moves. We are in good shape if it we need to respond to those. It's not a challenge, or not a big issue for us.

Great. Thank you very much for taking my questions.

Your next question comes from the line of Matt McCall from Seaport Global Securities. Your line is open.

Thank you, good morning everybody. First congratulations to Kurt and to Marshall, and I think Jack has a new title, so congratulations there too, and Stan for the bench strength. Congratulations for all of these moves for everybody. So let's see, first, maybe talk about the assumed acceleration. It's early days but there are obviously some nice acceleration in demand assumed in the outlook, can you just give us some of those indicators that are giving you comfort to forecast that?

Matt, we're on a bit of an economic uptick. We are feeling there, a large part of our business, or a significant part of our business is driven by small business confidence. It feels like to us that even though there is lots of volatility and lots of crazy press, and lots of crazy stuff going on, overall small business it is going to feel more confident, therefore going to invest more, and therefore it's going to drive furniture events. As far as what we're seeing now, we're feeling that or hearing that from our dealers, are more optimistic and talking about increased activity, we are seeing a modest increase in our activity quote levels, bid activity, and just overall sales momentum, and so we're simply saying, it feels like to us like we should see the overall economy up, and then finally we're gone through a period of pruning and cleaning up the portfolio, and at the same time investing. We believe that we'll see the return on those front end investments which include product, selling resources, distribution, programs, and those sorts of things as well.

So you said you're seeing some of the activity picking up, some of the quoting activity picking up. Do you think, and I have heard this before, that maybe there's a bit of a pause or hesitation around some of the tax policy, and what's going to happen with CapEx expensing, and things like that? Are you hearing that from your customers, and should there be some clarity, could we see a pretty quick acceleration in some of this activity turning into orders?

We're not hearing that specifically. I'm reading that same speculation. But I think that's a pretty fine point for sort of our fitters to pick up. I think it's a really interesting sort of time around what's going on here, and who knows how it's going to work out. We're, as we said, forecasting it to go up. Position prepared if it doesn't. To sort of react like we always do.

Okay. Keeping with that theme, can you talk about your import exposure from a cost of goods perspective? I think there may be some, well, there's clearly some folks that are looking into that, and trying to ascertain the risk associated with any type of change in tax policy. Where is your exposure, and how great is it?

Yes, it is an interesting question, so I am going to use your question, Matt, if you are okay, to expand a little bit on how we feel about this potential for a border tax, or whatever. We're okay with that. We do import components from China, from Asia, other parts of the world. It's not a huge exposure, it is relatively moderate, by the way we have the ability to domestically source or domestically produce a lot of those components. Quite frankly, we have a significant product underway to develop manufacturing capabilities specifically around seating, et cetera. Before this whole sort of phenomena, political phenomenon happened, really to in-source, or to resource or back source seating made in America for our largest customers, so we can play this either way. I think we're in a good spot regardless of where it goes with our domestic manufacturing capability, along with our offshore sourcing, and so I can paint a picture either way, that it will be fine, it may be good, either way as we think about it, Matt.

Okay. So looking at it as a percent of cost of goods is kind of meaningless, because you would be able to adjust if you need it?

That's a good way to think about it.

Two more for me. As you have talked about the plan or the targeted doubling of earnings over the next 3 to 5 years. I think you said that last year. Was the Artcobell sale in that plan?

That plan is a commitment, an objective, a very attainable aspiration, and so we don't parse it that finely. I mean, if you look at the actions we've taken, the Artcobell is relatively small, in the structural cost reductions. So you can add it on. It wasn't specifically in there. There are a lot of other bigger things that make it look rather small, to be honest with you.

Okay. And then, when you look across the remaining businesses, are there other, I'm sure you have a range of profitability across, and maybe not as extreme as Artcobell, but are there other artcobells out there, where I think you said, I don't remember how you said it, where the thesis has failed, or they haven't met your expectations, or was that kind of an extreme example?

Yes, I mean, we always are thinking about, we have a pretty good process to look at our portfolio. Artcobell was a very deliberate probe. When we did it, we said this is a probe. The profitability of that K-12 classroom furniture has been challenged. Our hypothesis was we can bring cost efficiency to this, and create a profit pool that currently doesn't exist. We found that we were not able to do that for all sorts of factors. And so, it was really standalone probe that stood out. Now, we are always cleaning up our portfolio. When we look at it, we say look, does this business have a long term strategic bid. Is this something that we can generate a fair return for our shareholders over time. Is it something that our largest customers want from us and value from us? And we constantly are running those screens, and some businesses come, and some go.

I wouldn't say there's anything that stands out right now like Artcobell. If there was , if there is, then we'll take action. We're pretty patient by the way about trying to make stuff work, and fix it. I've learned in my career, that if you can't make it work after five years then you ought to take the bitter pill, and this is a bitter pill for us as a Company, for shareholders, and for us, even financially as executives. You take the bitter pill, you move on, you apply the lessons learned, and don't look back too much. Just keep leaning into how do we continue to extend the frontier, get more profit from the core, and then pick up these adjacencies when they make sense.

Okay. All right, one more. Sorry Kathryn. Since Kurt is in the room, and you are in a new role, I would like to hear your voice, and maybe get an update on the plan internationally. It was a tough quarter, but obviously it's one quarter. Give us an update on the changes you're going to make or plans you have?

I think Stan said it well. Marco did a fantastic job of building a strong foundation in that business. It's a long-term growth platform for us. It's two key markets, I will remind you around China and India. So this is a continuation of strategy, and a continuation of that growth opportunity. I would say stay tuned, and you'll hear more from Stan and Marshall over the years.

I'm looking for some brilliant input and ideas for Kurt.

All right. I'm sure you're going to get them. I'm sure you're going to get them. Thanks, guys.

Your next question comes from the line of Kathryn Thompson from Thompson Research Group. Your line is open.

Hi, thank you for taking my questions today. And also, Matt, back at you shout out for you, the startup at Seaport. Good luck there. First question, just really more about a clean-up with Artcobell, following on from Matt's question. We know that you do this process occasionally where you look particular assets, and whether it makes sense to keep within the Company. Help us understand what the process, what's the logic for the trigger to start that analysis? That will be helpful for us to think about future assets you have that may not make sense in your portfolio?

Yes, Kathryn, we're always looking at these businesses. We run this split and focus sort of strategy and we look at individual P&L, and then we spend lots of time with the operating companies, talking about strategy, and what do their customers need, and what are logical extensions, and what are the acquisition opportunities, is it made versus buy probe. And then we run them and then we do constant evaluation, and sometimes, I talked about hearth. We have done this at hearth for years, and we have done this in the contract, and most all of those started off as sort of challenged troubled acquisitions. It's sort of plan, do, check adjust, and plan, do, check adjust, and sometimes we conclude, look, we're not making enough progress. The hypothesis around the strategic finish changed, the industry dynamics have changed, blah blah blah, and then we take action.

It's not like we have a season that we look at all of these and act on it. It's an ongoing consistent dialogue with the operating companies, it is an ongoing consistent dialogue with my corporate group, as to what makes sense and what doesn't. Probably similar to the way you manage your investments, I would guess. You look at your portfolio, you decide what mix you want, you decide whether somebody has got a prospect to getting better, and every now and then you stop and say, this isn't a good fit, I'm going to take my losses, and I am going to move on, and I think it's a similar process for us.

Yes, understood. Although there are some times we look at an investment, and there is a catalyst to make that quick decision. On the guidance just following up again on earlier questions. On that build throughout the year, if you were to wait for your businesses, assume that growth is not necessarily driven by hearth, and would be disproportionately influenced by supplies, also relative to contract. That's our assumption, is that correct? And maybe any other color in terms of, we understand the small business confidence, but on your office side, maybe a little bit more color on the different segments within the office that would be driving that guidance upside?

Kathryn, the growth prospects. We're expecting growth across all of the businesses. There is growth in hearth. As it relates to office furniture, we're seeing relatively similar outlooks for both the supply side and the contract side, albeit maybe a tad more growth on the contract side. So I hope that helps. I don't know if you have more questions on that.

Nope. That's helpful for that. Also, could you give any color on what you're seeing in terms of orders or backlogs, or in terms of size as the quarter progresses? Really maybe more color even into the earlier this year, what's driving this question is what we're seeing particularly with large contractors is projects that were left on the shelf are being put back on the market, which is a change in trend that we have seen with our industry surveys. Wondering are you seeing any type of change in project size and pace of orders?

I would say, Kathryn, first off, it's encouraging to hear your comment. We're seeing a little bit of that. I would say that as we look forward, consistent with small business confidence, and where we historically play is likely to see more of the small to medium sized product activity, less of the large project activity, again based on sort of the economic dynamics and based on our strategic position, and our history in office furniture.

Okay. Great. Thank you very much.

All right, thank you.

There are no further questions. I pass the call back over to the presenters for closing remarks.

Well, we thank everybody for taking the time to tune in. Wish you all of the best in the future. We will talk to you soon.

This concludes today's conference call. You may now disconnect.