HNI Corporation
Q1 2013 Earnings Call Transcript

Published: 18 Apr 2013

[Operator:]

Good morning. My name is Jay and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation First Quarter Fiscal 2013 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 conference call is being recorded. Thank you. Mr. Derek Schmidt, you may begin your conference.

[Derek Schmidt:]

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss first quarter 2013 results, which were announced yesterday after the market closed. My name is Derek Schmidt; I am Vice President, Corporate Finance for HNI Corporation. If you have not received a copy of the financial news release, it is available on our website, www.hnicorp.com. A presentation intended to accompany this call has also been posted to our website under the Investor Information section. We encourage you to review this presentation as it contains details of our financial performance, including the non-GAAP to GAAP reconciliation. Joining me on the line today from HNI Corporation are Kurt Tjaden, Vice President and CFO and Stan Askren, Chairman, President and CEO. Stan and Kurt will review the results and then open the call for questions. Before we begin, please be advised that statements made by the Corporation during this call that are not strictly historical facts are forward-looking statements. Forward-looking statements are subject to known and unknown risks. Actual results could differ materially from expected results. Additional information concerning factors that could affect actual results can be found in the conference call presentation posted to HNI Corporation’s website. The corporation assumes no obligation to update any forward-looking statements made during the call. I now have the pleasure of turning the call over to Stan Askren. Stan?

[Stan Askren:]

Thank you, Derek. Good morning. We started the year with solid performance and profit growth over prior year. I am pleased with our strong operational execution, good cost control and investment returns which drove first quarter profit improvement. I am also encouraged by our ability to simultaneously deliver strong operating results and maintain our investment spending for long-term profitable growth. Overall, sales were relatively flat as increases in our hearth and supplies-driven businesses offset anticipated softness in our other office furniture businesses. As we expected, office furniture sales declined due to factors related to economic uncertainty in the fourth quarter of 2012 and continued then in the first quarter. Excluding federal government, our office furniture sales would have been approximately flat. Demand in our supplies-driven business improved 3%. These are strong results considering the federal government slowdown of the large (inaudible) at 2012 year-end related to price increases. We are executing well and our brands have significant momentum in the markets. Sales in our contracted international businesses declined 9% as anticipated and were most severely impacted by the economic uncertainty in late 2012. Sales activity is improving and we entered the second quarter well positioned to deliver solid growth. Our hearth business continues to deliver strong and improved performance. Sales in the new construction channel increased 23% on the strength of our market position and the housing market recovery. Remodel retrofit sales increased 9% as extended cold weather stimulated demand for our products. Overall, I feel good about our first quarter results which exceeded expectations and are accelerating momentum. I'll now turn the call over to Kurt to review the specific financial data for the first quarter. Kurt?

[Kurt Tjaden:]

Thank you, Stan. For the first quarter 2013, consolidated net sales decreased 0.7% to $442 million or down 0.2% on an organic basis. As a reminder, the first quarter 2013 includes results related to the addition of BP Ergo and the disposition of several small businesses including dealer spin-offs. Sales for the office furniture segment decreased 3.4% to $366 million or down 2.9% on an organic basis. Net sales for the hearth product segment increased 14.8% to $77 million. Consolidated gross margins increased 33.4% compared to 33% in the prior year quarter due to higher volume in the hearth product segment and increased price realization which were partially offset by lower volume and unfavorable mix in the office furniture segment. As a percent of net sales, total selling and administrative expenses including restructuring and impairment charges increased to 0.2 percentage points due to selling initiatives and higher incentive based compensation partially offset by network realignment savings and lower restructuring cost. We ended the quarter with $31 million of cash. We used $30 million of cash in the quarter compared to $28 million in the prior year quarter. I will remind you the first quarter is typically our lowest quarter for operating cash flow due to business seasonality and funding requirements. Stan?

[Stan Askren:]

Looking forward, I am encouraged by improved conditions in our core markets and the strong performance of our businesses. Our strategies are working and we remain on-track to deliver double-digit profit improvement for the year in a low growth environment. We entered the second quarter with strong momentum and are well positioned to deliver solid sales and profit growth for the year in both segments. Strong growth in our supply-driven business is expected to continue; year-over-year growth rates within our other office furniture businesses are expected to rebound in the second quarter. In our hearth segment, strong growth in the new construction channels is expected to continue as the housing recovery remains intact. Growth in the remodel and retrofit business is projected to be down modestly as lower energy costs will adversely impacted demand for alternative fuel products. Overall, I feel good about our performance; investments and market momentum in 2013 across our businesses. We are executing our strategic objectives to grow faster than the market, deliver improved returns and invest for long-term profitable growth. Our success remains rooted in the foundations which make HNI strong. Our unique members are culture focused and rapid continues improvement, our split and focus would leverage business model and our core plus philosophy. The vast majority of our members are owners of HNI stock and share HNI profits and they behave like owners by constantly drive our ways in the businesses and driving profitable growth. Our split and focused model gives us the agility of a smaller company to quickly adapt to changes in our markets, while simultaneously leveraging the scale of a larger company. Our core plus philosophy drives proper growth for multiple perspectives. We are constantly transforming our core businesses to extract new growth opportunities while pursuing new plus opportunities in attractive adjacent markets. The foundation of HNI is strong and growing stronger and I am optimistic about our ability to continue to deliver long-term shareholder value. Kurt will now provide the financial outlook for the second quarter and full-year 2013.

[Kurt Tjaden:]

For the second quarter of 2013, we anticipate overall sales to be up 5% to 8%. Office furniture sales are expected to be up 5% to 8% organically or up 4% to 7% including the impact of acquisitions and divestitures. Organic sales in both the supply-driven and contract channels are expected to be up 5% to 8%. Hearth sales are expected to be up 7% to 11%. Non-GAAP gross profit margin is expected to be relatively similar to second quarter 2012 when it was 34.4% excluding restructuring and transition charges. Non-GAAP SG&A as a percentage of sales excluding restructuring and transition charges is expected to be lower versus second quarter 2012 when it was 31.4%. Net interest expense is projected to be $2.6 million and the effective tax rate is projected to be approximately 35% for the full-year. For the year, we are expecting capital expenditures to be $70 million to $75 million. We expect full-year 2013 depreciation and amortization to be $46 million to $48 million. Our estimate of non-GAAP earnings per diluted share for the second quarter is $0.22 to $0.27 and for the full-year we are narrowing our estimate of non-GAAP earnings per diluted share to $1.30 to $1.45 which excludes restructuring charges and transition costs. This summarizes our outlook for the second quarter and the full-year 2013. I will now turn the call back to Stan.

[Stan Askren:]

Thank you, Kurt. So I’ll wrap it up here and just summarize, but like I said, I am pleased by the gradual improvement and the markets remain confident in our strategies to drive profit improvement, while (inaudible) investing for long-term profit growth. We remain on-track to grow sales and solidly increase profits in 2013. So with those comments from Kurt and myself complete, we will now open it up to questions.

[Operator:]

(Operator Instructions) Our first question comes from Budd Bugatch with Raymond James.

[Budd Bugatch:]

Talk a little bit if you would, you talked about your investment spending delta, and I just wanted to make sure I know where we were in the program on that you had started I think a little bit earlier in some of your comparable companies.

[Stan Askren:]

Yeah, I think Budd if I understand your question the delta in year-over-year is basically flat. So we have reached our run rate so to speak and we are not continuing to increase that delta, we are also not shrinking that. We are simply applying what we started in previous periods.

[Budd Bugatch:]

And that will continue for the foreseeable future.

[Stan Askren:]

Yes.

[Budd Bugatch:]

Okay. And you want to put any colors to where those dollars are going and what kind of returns or how you are measuring that.

[Stan Askren:]

Yeah, I mean its similar to what we said in the past Budd, which is the split-and-focus model means that we are applying it in multiple segments of the market, multiple companies, multiple brands, its investments around selling capabilities, selling resources, its investment around new product development, its investment in e-business, content and syndication and delivery; its investment in some new business areas such as we talked about the architectural wall segment, the [K-212] our expansion in India and there's lots of other little things around that. Our returns on that vary. We most of the time expect to see a return somewhere in the 18 to 24 month time period again depending on what the investment is and kind of what happens in the market in the meantime.

[Budd Bugatch:]

Second question is just to make sure I understand, government spending in office was down did say 27%?

[Stan Askren:]

Our business in federal government was down 27%, that's correct.

[Budd Bugatch:]

And that's primarily in office right, its all in office I would think.

[Stan Askren:]

It is all office Budd.

[Budd Bugatch:]

And where do you see that going for the balance of the year, how do you see that trending.

[Stan Askren:]

Well, its pretty big unknown, one of the bigger unknowns, but I think we are believing the year is going to run somewhere between 15% and 20% down, but I would probably put an ask on that and say that's one of the bigger unknowns as we look forward.

[Budd Bugatch:]

And can you put some numbers to that in dollars, what was it last year in the quarter, what was it this year and what was it a year.

[Stan Askren:]

Just give us a second here Budd and see if we can pull that out. Derek do you have that?

[Derek Schmidt:]

Yeah, I mean what I can frame up for you Budd is, this quarter the fed government was roughly 6% of our sales for the full year. We'd expect it to be 6% to 7% of our office furniture sales, that's helpful.

[Budd Bugatch:]

And when you say 6% Derek is that 6% of total sales including hearth, there's a total…

[Derek Schmidt:]

That's total office furniture sales.

[Budd Bugatch:]

Total office furniture sales. Okay, alright and last question I guess has to do with the CapEx over D&A, did you say $70 million to $75 million CapEx versus a $46 million to $48 million D&A.

[Stan Askren:]

We did Budd.

[Budd Bugatch:]

And so Kurt where does that money get spent, is it primarily on some of these investments in key areas.

[Kurt Tjaden:]

Yeah, so and some of that's in the things. Stan talked but two big ones, one is some laminate capacity and capability, though I think we've talked about in the past that’s coming online here in Muscatine. The other place is as we've talked in the past is our business system transformation. Those are probably the two big incrementals year-on-year.

[Budd Bugatch:]

Yeah, I thought the business just in transformation was actually an additional spending and was going in to expense directly, but it's also going in the capital.

[Kurt Tjaden:]

The bigger portion of it Budd is actually capital. There is an expense element but it is predominantly capital.

[Budd Bugatch:]

Last question, did you quantify the restructuring and transition cost for the quarter in the year?

[Kurt Tjaden:]

Minimal Budd.

[Operator:]

The next question comes from Matt McCall with BB&T. Your line is open.

[Matt McCall:]

So, I will follow up on the government question. You are talking about 5% to 8% growth and maybe little bit more modest or moderate decline as you progress through the year versus 27%. But what's the government assumption in the Q2 guidance?

[Kurt Tjaden:]

So for Q2 specifically, Matt, Fed government outlook is modestly down in the difference between Q1 and Q2, we have a very large project, GSA project hitting in Q2 that’s shifted between quarters. But beyond Q2, as Stan suggested, we really were looking at down 15% to 20% for the back half of the year and the full-year, and the bulk of our sales, 60% of our Fed government sales come in the back half.

[Matt McCall:]

Right and then maybe more broadly on the commercial side, you gave the outlook of what you expect the government segment to look like, Stan what you think the four years going to look like commercial side given what the ABI is telling us given what can be your leading indicators may be telling you?

[Stan Askren:]

Yeah Matt our estimate that we have given has 5% to 8% growth on the rest of the business of the non-government business.

[Matt McCall:]

Well, I thought that was a Q2 number, I was more talking about how the balance sheet year given your comment about what you expect for the government for 2013, what do you expect for commercial side?

[Stan Askren:]

Yeah for Q2, Matt as I suggested Q2 is specifically for Fed government is going to be modestly down so low single-digit. So the commercial business in total is very similar to the overall projection for office. I think for the remainder of the year, we’d say commercial business is in the range of mid single-digit growth may be low high single-digit growth.

[Matt McCall:]

And Kurt this might be for you any commentary on price cost, anything, any color you can add there?

[Kurt Tjaden:]

So on the price side ability to take pricing across 80% of our businesses in this year announced already material inflation nominal; you want to talk discounting, discounting environment is steady, no significant change. So I would say our spread is consistent hasn’t really changed kind of a non-factor.

[Matt McCall:]

Okay and then the final one I had, was on the hearth incremental. I don't think there is as much spending going on in that segment, correct me if I am wrong, but incremental margin I think is 25% clearly respectable and on a tough comp a year ago, and it was a good margin number. I am just trying to get a hand on how to kind of look at that contribution opportunity on growth as we move forward is 25% impact the right number or is it something different in that?

[Stan Askren:]

So correcting as there is spending going on and hearth is well, they are investing to front end brands selling capability in products, so its not just a cost reduction leverage slight there, they are on thinking about longer term investments and proper growth there as well. And the leverage you should expect is at 25% to 30% for the foreseeable future we believe.

[Matt McCall:]

And then can you break out its spending when you talk about this the level of spending that you maybe targeted in the past and targeting in the future. How much of that has been aimed at the hearth side?

[Stan Askren:]

I am going to decline to break that out Matt, because we are in to some granularity that I just assume avoid.

[Matt McCall:]

But 25 to 30 numbers is your point?

[Stan Askren:]

Yeah, I think so Matt.

[Operator:]

(Operator Instructions) Next we have Peter Lisnic with Robert W. Baird. Your line is open.

[Peter Lisnic:]

First question, I think I heard, I missed the first part of call side of that but I heard conversation on network realignment savings. Can you give us a feel for maybe A, how much that helped in the quarter; but more importantly just kind of how that might layer on as we look through the rest of 2013 and then in to ‘14 and beyond?

[Kurt Tjaden:]

Yeah, so what we are specifically to are some things in the office furniture piece last year, Pete that we closed a regional distribution center and consolidated it was about $3 million of savings in the quarter and that will start to anniversary as we get later in the year here, but run rate we think about that that pretty material savings.

[Peter Lisnic:]

Okay. And that does not include when you talk about those realignment savings. That doesn't include things that you might be getting from the business optimization initiatives, correct?

[Stan Askren:]

Right.

[Peter Lisnic:]

Okay. And then, is there a way to maybe give us a little bit of an update on how that optimization process is working, what sort of benefits, if any, are kind of coming down the bottom line of the cash flow statement?

[Stan Askren:]

Yeah, Pete, we've been consistent on this, which is this investment in [BST] is a significant investment, but it’s a longer term investment. You are really talking about looking at enterprise-wide business processes going through and understand simplified standardized and for instance we just ran our core financials on this Oracle system. And smoothly, the benefits of that are pervasive and very difficult to measure in the short term, so we have opted not to do that. It really has to do with the pay out on this, really has to do with when the enterprise is fully up integrated and running a couple of years out. I'm confident we are seeing savings as we always do through our business simplification, but you know as far as identifying those and measuring those and calling those out here, it’s a little bit of an ambiguous sort of target and I think you will be misleading.

[Peter Lisnic:]

Okay. Consistent with what you've said in the past so I appreciate that. And then if we could just switch back to the question on price, should we assume it’s been pretty consistent with what you've realized historically, you know you mentioned 80% of the business getting some level of price realization, I would assume it's kind of in that couple of point range. Is that the right assumption to make?

[Stan Askren:]

That would be good.

[Peter Lisnic:]

All right. And then with the increase in CapEx and these investments I guess that you are making, at what point do we see the D&A piece kick up on the income statement? Are we seeing some of that now or should we see a more significant ramp as we look to '14 or '15 on the D&A side?

[Kurt Tjaden:]

Yeah, I think it's really '14 and '15, more towards '15 when you start to see it Pete.

[Peter Lisnic:]

Okay. And is there any, I hate to ask about 2015 in the first quarter of '13, but can you give us a feel for how significant the ramp in D&A might be at that point?

[Kurt Tjaden:]

No. I think feasible decline on that one.

[Peter Lisnic:]

I tried. All right. I appreciate the help.

[Operator:]

Next we have Todd Schwartzman with Sidoti & Company. Your line is open.

[Todd Schwartzman:]

Hi, good morning, guys. I missed some of the opening remarks, did you speak to order rates in commercial contracts at all?

[Stan Askren:]

I am sorry, Todd, you broke up here. Say that again please.

[Todd Schwartzman:]

Yeah, order rates in commercial side of things, contract business, did you fill in any numbers out, if not, could you do that?

[Stan Askren:]

We did. I think the best thing would be to go back and look at the transcript there rather than us reading through all that. I think first off we normally talk about order rates, we talk about increased momentum, I don't know Kurt did you?

[Kurt Tjaden:]

No, I think it’s activity and momentum we are positive were the comments, but no numbers, Todd.

[Todd Schwartzman:]

No numbers, okay. Could you speak maybe qualitatively to some of the verticals if there's anything that you think should be called out?

[Stan Askren:]

There's nothing that we would call out specifically Todd.

[Todd Schwartzman:]

So nothing has weakened terribly from Q4.

[Stan Askren:]

We talked about fed government continuing to be soft and down. We said our federal government sales were down 27% in the first quarter and Derek answered several questions on that, went into detail as to what the second quarter and the rest of the year would be. And I think that will show up in the transcript.

[Todd Schwartzman:]

Right. On the commercial side, nothing to speak of really?

[Stan Askren:]

Nothing to speak of, Todd.

[Todd Schwartzman:]

Okay. With supplies driven, maybe could, you spent a little time on talking about what's going right for you lately. It seems that in light of somewhat choppy small business optimism, you know you guys are performing pretty well. Has there been any changes in your distribution or do you suspect market share?

[Stan Askren:]

It's a good question, Todd. I think how we would characterize is just overall strength for us in our channels with our customers. I think it's a product of focus investment on branding, selling, product, distribution, e-business content. It's a lot of factors I think that are coming together to give us very positive momentum in a relatively challenging environment.

[Todd Schwartzman:]

Are there any newly, relatively newly introduced products that are feeling any of that?

[Stan Askren:]

No, I mean there is lots of new product in that channel, but again it's a very broadly diversified channel. So, one product isn’t going to really move the needle in a big way. It's a combination of all those factors I discussed moves the needle.

[Todd Schwartzman:]

On to hearth for second. Just looking at the gross margin opportunity you have going forward, will that be all volume driven or is there any lingering benefits remaining from prior restructuring activities that might give you a little lift there?

[Stan Askren:]

Yeah. If the leverages is going to come from volume and the cost reset that we have implemented through that very challenging period there, that business, that team of members and management is a very capable group that is constantly focused on eliminating non-value-add waste through our longstanding RCI improvement process, plus any time the industry goes down as much I think these guys have done a very nice job of resetting cost and they are going to feel the volume leverage on the way back up just do the capacity been consumed.

[Todd Schwartzman:]

Okay. You gave the delta for both to build the new construction and remodel/retrofit, but what was the mix of each channel as a percentage of total of hearth sales for the quarter and what was that year ago?

[Stan Askren:]

Yeah. It's shifting obviously, it's right now, it's about 50% of remodel/retrofit, full year 55 remodel/retrofit, 45 new construction. It is shifting significant towards the new construction, last year it was probably 65-35.

[Todd Schwartzman:]

Okay. Thanks that helps. Last question I think as far as part of the prepared comments you have said you are on track I think for solid sales for the year for both segments. With regard to office furniture, would you characterize 3% to 4% growth as solid for this year?

[Stan Askren:]

Yeah, in this environment, we would say that would be solid cut.

[Todd Schwartzman:]

Okay. Great, that’s all I have got. Thanks guys.

[Stan Askren:]

Thank you.

[Operator:]

(Operator Instructions) Next we have a question from Josh Borstein with Longbow Research. Your line is open.

[Josh Borstein:]

Hi, Stan. Hi, Kurt. Hi, Derek. Thanks for taking my questions here. You brought up the lower end of your guidance, what's change since the fourth quarter to give you some more confidence in your outlook?

[Stan Askren:]

We have one quarter behind us.

[Josh Borstein:]

Okay. I know the tone in 4Q is a little more sober, much more upbeat this quarter, what’s change, what's different and what's different now than before?

[Stan Askren:]

Yeah, I mean clearly, we think fourth quarter we were -- the last year when you talked we were in the budget sequestration thing and there was lots of uncertainty. Since then as we prepare our thoughts and our best estimate as to what’s going to transpire going forward, we are seeing business activity come up. So when I say activity, I mean as we talk to our sales force, as we talk to our dealers, our channel partners, our resellers, as we look at our bid activity, virtually all of our businesses are seen increased activity. And so as we sort of apply our best judgment as to what’s going on, we see more positive momentum, some of that is pent-up demand for fourth quarter but it also feels like the economy and the market is wanting the kind of move forward and I would say a slow but steady fashion. Certainly we are always subject to some sort of external shock of impact, but to us it feels like we are making solid steady movement forward in our markets.

[Josh Borstein:]

Okay, thank. That is helpful. And then on the decline that you saw in the international business, can you discuss what you saw in the quarter, what your outlook is for the next quarter with that piece of the business?

[Stan Askren:]

Yeah. And keep in mind, our primary exposure in international these days is in Asia. So we saw China certainly our markets in China, Hong Kong and Mainland China fourth quarter went through a slowdown in manufacturing and a different Chinese New Year, timing of Chinese New Year was earlier. We saw a deceleration there. Again as we apply our judgment based on discussions with the people leading these companies, what they would say is the pipeline is firming up in Asia and we believe going forward we are going to see sort of a stabilization and growth there for the year. Now same time you know absent some external shock like Avian flu or something like that.

[Josh Borstein:]

On the hearth side you said you would realize some price increases. I know last quarter you had mentioned that you know you are the market share leader; it’s still very difficult to push through pricing in hearth. Can you just discuss some of the dynamics that you've seen in that business right now that enabled you to realize some pricing.

[Stan Askren:]

It’s very modest pricing Josh, so we are talking about 2% and so a lot of that is pricing around the edges I would say, around the hearth business, the stove business. New construction business is very challenging, some of that comes through features and pricing options etcetera. So I would say the pricing environment is still relatively challenging there and 2% isn't exactly peg in the needle from my perspective.

[Josh Borstein:]

Okay, more price increases is centered around innovation, you know is that where you tend to realize most of your price increase.

[Stan Askren:]

That's a big part of it Josh.

[Josh Borstein:]

Okay and then just last one on the federal government, not to beat a dead horse here but can you talk about what you are hearing from your federal government clients, are they telling you that the declines are attributable to budget cuts, are they telling you the money is there but they are just being told not to spend it right now.

[Stan Askren:]

What we are being told is, there's huge uncertainty, is probably the best way of describing it. As to what the money is going to be and where it’s going to come from; clearly they are in a mode of sort of reduction and pulling their wings in a bit. So I think it’s more about the money not there rather than the money there and we can't spend it at this point but that's a very general say because the range is across the board depending on which segment and even the federal government we are talking about.

[Operator:]

There are no further questions at this time. I will turn the call back over to the presenters.

[Stan Askren:]

Well, thank you very much for taking the time to tune in. We appreciate your interest in HNI and we look forward to talking with you in the future. Have a good day.

[Operator:]

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