HNI Corporation
Q4 2014 Earnings Call Transcript

Published: 12 Feb 2015

[Operator:]

Good morning. My name is Mike, and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation Fourth Quarter and Full Year Fiscal 2014 Results Conference Call. [Operator Instructions] Mr. McGough, you may begin your conference.

[Matthew McGough:]

Good morning. I'm Matthew McGough, Vice President, Corporate Finance. Thank you for joining us for the HNI Corporation conference call to discuss fourth quarter and full year 2014 results announced yesterday after market close. Copies of our financial news release and earnings presentation including non-GAAP reconciliations have been posted to our website, www.hnicorp.com. Measures to non-GAAP financial performance for fourth quarter and fiscal year 2014 discussed during this call other than organic growth exclude restructuring, goodwill impairment, transition cost and gain on sale of vacated facilities. Joining me today from HNI Corporation are Stan Askren, Chairman, President and CEO; and Kurt Tjaden, Vice President and CFO. Statements made 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. The earnings presentation posted on the HNI 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'm pleased to turn the call over to Stan Askren.

[Stanley Askren:]

Good morning. As usual we’ll share a brief assessment of 2014, provide an update on our outlook for 2015 and then we’ll open the call up for questions. We had a strong finish to a great year in 2014; our first quarter is evidence of very strong momentum with consolidated sales up 15% on an organic basis and non-GAAP profit up 30%. On an organic sales were up approximately 13% with our supply driven sales up approximately 8%. Hearth sales were up 23% on an organic basis. For the year we delivered strong sales in non-GAAP [indiscernible] continuing to make significant long-term investments. Our results were broad based across operating companies, brands, product categories and markets. Our office furniture businesses had a strong year with accelerating momentum, full year non-GAAP operating profit improved 21% on a 4% organic sales growth, we’re encouraged with North American contract organic sales growth of approximately 10% for the year. We had another exceptional year to our hearth business which delivered record operating profits, sales were very strong across all channels, full year operating profit improved 63%, on 22% organic sales growth. I’m very pleased with our 2014 results and our momentum heading into 2015. Kurt?

[Kurt Tjaden:]

Thank you, Stan. Additional financial highlights for the fourth quarter include non-GAAP consolidated gross margins were consistent with prior year at 35.7%, higher volume and better price realization were offset by unfavorable mix and strategic investments in operations. As a percent of sales selling and administrative expenses decreased 50 basis points due to higher volume partially offset by increased incentive based compensation, freight cost due to carrier capacity constraints, strategic investments and the impact of acquisition. We recorded $24.5 million of restructuring and impairment charges in transition costs. These charges included goodwill and intangible impairment charges of $20.5 million related to a small office furniture business and $4 million of restructuring and transition costs in connection with closures announced earlier this year with $2.7 million included in cost of sales. We further strengthened our balance sheet ending the year at 1.2x debt to EBITDA leverage and core working capital was again a source of cash. Stan?

[Stanley Askren:]

Alright, thank you, Kurt. So, looking forward we’re driving towards strong sales growth and a significant profit improvement again for 2015. We expect double digit profit improvement across our office furniture businesses driven by strong top line growth, strong operational performance and returns on strategic investments. Our supply driven business is expected to be up low-to-mid single digits for the year, our other office furniture businesses are expected to be up mid to high single digits for 2015. In our hearth business, we project strong growth in new construction sales, remodel retrofit sales will be lower due to very strong year-over-year comparisons from biofuel product sales. Our Vermont Castings integration is on track. We continue to identify investment opportunities in all aspects of the business which generate very attractive financial returns for our shareholders. We have great momentum across our businesses, we’re well positioned to continue to outperform the market.

[Kurt Tjaden:]

So, financial outlook for the first quarter and full year 2015. For the first quarter 2015, we anticipate overall sales growth to be 17% to 21% or 13% to 17% on an organic basis. Office furniture sales are expected to be up 13% to 17% with similar growth in both the supplies-driven and contract channels. Hearth sales are expected to be up 31% to 35% or 10% to 14% organically. Gross profit margin is expected to be slightly higher than the first quarter 2014 and SG&A as a percentage of sales excluding restructuring, transition charges and gain on sales of vacated facility is expected to be slightly lower than first quarter 2014. The full year 2015 effective tax rate is projected to be approximately 35% and we expect capital expenditure levels to be similar to 2014. Our estimated non-GAAP earnings per diluted share is in the range of $0.18 to $0.23 for the first quarter and in the range of $2.45 to $2.65 for the full year. Stan?

[Stanley Askren:]

Okay, thank you Kurt. I’m going to wrap this up and will open it up for questions. Our businesses are strong and well positioned. We entered the first quarter with very strong momentum and remain confident on our ability to significantly grow sales and profits in 2015. So now we’ll open it up for questions. [Operator Instructions] The first question is from Budd Bugatch with Raymond James.

[Budd Bugatch:]

Good morning Stan, good morning Kurt, good morning Matt. Congratulations on a very solid year and good outlook for 2015. So, can we drill down on a couple of areas, first let’s drill down on supplies in office furniture and tell us what you see and how it maps with what we’re seeing in the economy and maybe the outlook for not only the first quarter, but the year itself?

[Stanley Askren:]

I think Budd, we see supply beginning to accelerate. As you look at fourth quarter versus the year and the reason for acceleration is we step back and look at activity levels and that comes in a variety of measures depending on the business just sort of our assessment role and momentum. And the momentum in the supplies channel is picking up. I think small business is coming online beginning to show signs of more confidence, I think there’s some kind of demand there and that I think our supplies position and our supplies resellers or partners are taking more than their fair share of what’s available there. So, nothing exactly specific, but overall momentum is improving, accelerated the last part of the year and we’re projecting that to continue into 2015.

[Budd Bugatch:]

Okay. You’re breaking up a little bit, I don’t know if it’s just my phone or not, but the connection is not, doesn’t seem to be perfect or I think it normally is, I just mention that to you. Couple of other questions on that supplies situation, the recent announcement between staples and office depot, I know that there is not a great deal of business done in the stores, but there is through their business units, what outlook does that give to you, does it present any challenges or opportunities or both?

[Stanley Askren:]

So, what I would say to that Budd is you’re correct. They both are very - both groups are very important customers of ours. We’ve significant position with both of them. We value the relationships with both of them, the play is not big time retail for us, it’s really what they call the contract side or the sale side, the feet on the street side. And we’re in a good position if it goes through to benefit I think, if it doesn’t go through we plan to continue to work hard to earn their business and help them grow their business with us. And that’s probably the extent of what I can comment at this stage.

[Budd Bugatch:]

Okay. And supplies contract of percentages in office now, is it still around 50

[Stanley Askren:]

It’s about 50

[Budd Bugatch:]

Okay. And my last area of inquiry is on hearth. I would have expected given the price of energy for hearth to really be challenged on the biofuel side, so maybe you can give us the linkage of why that may not be case, may not be the case and there actually may still be growth in 2015 and that side of the business?

[Stanley Askren:]

Yes, excellent opportunity to come. The biofuel is a significant opportunity for us, has been a significant growth area, it’s driven by a couple of factors. It’s driven by the cost of fuel, both fuel oil and LP, liquid propane is the other big factor there. It’s primarily an alternative heat source versus an aesthetic opportunity. And so, as fuel oil or alternative energized, excuse me, core energy prices, fuel oil and LP go up, people seek alternatives to reduce their costs. It’s also often an alternative heat source for an alternative space. So, in the event there is cold weather people will seek out biofuel to be placed in a basement or in other room or whatever could provide heat source. And the third thing is that often it’s a source of emergency heat. So, if there is a power outage, ice storm, a big snow storm and people are feeling threatened about their heat source, the power goes out a lot of times that will drive an appliance sale as a backup for the family. And so, what drives that is fuel prices and then cold weather and then natural sort of storms and disasters like that. And the final point is, there is a longer tail on this because people do know that this stuff comes and goes and even now fuel prices may go down this year, they still remember last year and they’re kind of in the mode of moving on and making an acquisition and they’ll go ahead and the buy appliance or they remember last year when they were without heat and they look over at their family and they’re shivering and they say, never again and so they pursue that. And then, the final point Budd is, there is a retailer dealer involved in this that will buy inventory and move inventory through and so, the fly will sort of expand the contracts accordingly.

[Budd Bugatch:]

And just to remind me, I think again, the split between these two sub segments and I view this as up segment, but I’m not smart enough to figure out something else. Between these and hearth is also about 50

[Kurt Tjaden:]

This morning it still 40

[Budd Bugatch:]

And total as you pass those at 31 to 35 for the first quarter, 10 to 14 organic or however you want to say it, how do we look at the pieces of that for growth?

[Stanley Askren:]

Directionally consistent with what I said, I think we would expect to see new construction up, retail solid and alternative fuel or biofuel tied up flattish to down slightly.

[Budd Bugatch:]

Okay. It could be down that’s what I was trying to get to. Okay, thank you very much guys. Great quarter, great year and good luck on this one.

[Stanley Askren:]

Appreciate it.

[Operator:]

Your next question is from Matt McCall with BB&T Capital Markets.

[Matt McCall:]

Thank you. Good morning everybody. So, let me fill in a couple of blanks here, Budd got a few of them, but what was the - so you said supply curve was up 8% in the quarter. What was contract up, to be high teens?

[Stanley Askren:]

North to 20% North American contract, overall yes up north to 20%, Matt.

[Matt McCall:]

And you’re assuming mid to high single digits there for the year, right? Upcoming?

[Stanley Askren:]

For the contract side?

[Matt McCall:]

Yes sir.

[Stanley Askren:]

Yes. For the full year that's correct.

[Matt McCall:]

Okay and then what was the projection for hearth for 2015, I didn’t get that?

[Stanley Askren:]

I think, we said kind of mid teenish organically, low to mid teens. Organic, yes organic single digits for the year Matt, sorry was between quarters. So, mid single digit for the year or mid teens for the quarter.

[Matt McCall:]

Okay. So, if I look at hearth’s incremental obviously it looks like Vermont had an impact there year-over-year incremental was a little bit lower than it has been, how should we think about the incremental margin as we look at 2015, are we going to see three more quarters as Vermont Castings gets included until we anniversary it or what’s the assumption for the full year?

[Stanley Askren:]

Yes, so you should expect core hearth business to continue to lever in that mid 30s plus as it has Matt. But, if you look at the impact to Vermont Castings, we said that was kind of $0.05 to $0.10 of share, so that is being significantly less than kind of our core leverage. And until we get to the end of the fourth quarter, we would expect to see lower overall leverage on the hearth business for 2015.

[Matt McCall:]

Overall, okay. So, when I look at the hearth business, we look back to last four years the results have actually exceeded the guidance in seven of eight quarters you were in-line in that eighth quarter. Can you explain the visibility and kind of your ability to forecast there? What you’re using and how comfortable are you to mid single digits for next year going to continue this trend of outperforming?

[Stanley Askren:]

Matt, this is Stan, we to be candid with you, in the quarterly basis how good is our visibility on that, it moves around a lot. My gosh, it depends on oil prices and it depends on new construction, it depends on weather, etcetera. So, sometimes we get it right and sometimes we don't. And I think in general, we should get it right but we don't live and die based on these quarterly projections. We have been very clear to our shareholders that we are running this business for the long term. We owe shareholders the best view of what we know with a little bit of conservative that is what I would say. So, if anybody would have told me that biofuel was going to be up 40%-50% this year I would have said I don't think so. It’s up, why is it up, well because of oil and weather etcetera. So, these things it's a volatile economy, volatile industry, etcetera. And I quite frankly don't get too excited if we miss it on a quarter and then hit above next quarter or whatever. It's all about the long term for us. So, how do I feel about next year, based on what I am looking at we’ve given you our best shot for the year based on what I am looking at today, I know we are giving our best shot for the quarter. It’s likely, we are going overtime comment about where we sit, but sometimes it's over, sometimes it's under.

[Matt McCall:]

Right. And it's not a quarterly comment, I was really trying to understand what goes into your forecast because it has been so good/conservative, but maybe I see some of the components new, what are your single family start assumptions. Can you talk about the growth rate there or some of the components to go into your outlook?

[Stanley Askren:]

Yes, I mean, we look at all of the stuff Matt. We go through and look at economics and we do - we kind of do a roll-up, we look at all the different people who are forecasting a single family start and who are forecasting a remodel retrofit, forecasting bad oil prices and fuel oil prices and LP prices and we factor that back and all that stuff and we roll that up. So, we don't break out what we think single family starts are. I think Kurt said, we think hearth would be led by new construction which is driven by single family starts and take what you are looking at from all the different sources out in the market. We kind of pick a midpoint based on how we are going to do relative to the market, take a look at the remodel retrofit, pick a midpoint, we make a projection on where we think that’s going to be vis-à-vis market and that's how we roll it up.

[Matt McCall:]

Okay. So, you took the outlook up about nickel and was that more - was that improved optimism or increased optimism around the top line or was there some margin delta that actually helped you become more confident in where you used to be this year?

[Stanley Askren:]

It's both Matt. We are quarter end very strong results, fourth quarter I think we are guiding or communicating very strong results for the first quarter 2015 and so we are just adding that to the number and again we are looking to long term and so let’s begin to move this up and I think we owe the shareholders the best view of what we know and I would say I’m more positive today about 2015 than I was the last time I communicated with shareholders.

[Matt McCall:]

Okay that’s good. And then finally, the CapEx outlook I think Kurt you said flat year-over-year, I had a little bit of step down, it might be an error in my model, but is there something that changed there or if there is nothing to change where is the spending aim can you remind us of?

[Kurt Tjaden:]

Yes, let me, so Matt. If we have a step down then we maybe mis-communicating that I believe we said that we expect this CapEx to kind of run in the similar rate for the next couple of years at least. So, the great news for shareholders is we are identifying some super return projects and investment opportunities in the core business and it's focused on a few areas primarily we are finding lots of productivity opportunities in the core business of transforming our core processes, investing in equipment and processes improvements there that drive cost, that's what’s going to drive our this leverage thing in the long term. We are identifying some great opportunities to invest in frontend tools and selling tools for the sales force around IT sort of systems. And then, we have talked to you a lot about our great opportunities to retool our business systems here and that's the significant investment as capital as well. So, we come back, I am very excited that we have all these great sort of high return relatively low risk opportunities to take CapEx in front of us versus just sending shareholders back money without driving the big return on it. So, this is great news for us.

[Matt McCall:]

Okay. Perfect. Thank you, Stan.

[Operator:]

The next question is from Todd Schwartzman with Sidoti & Company.

[Todd Schwartzman:]

Hi, good morning guys. I wanted to ask about the guidance for furniture for the quarter 1317 is nice growth although it's stacked against two years of first quarter decline but still some solid expectations there. I wanted to talk about the comparisons with prior year maybe by vertical and kind of remind us whether there is anything particularly tough or easy from year ago in terms of furniture deliveries?

[Stanley Askren:]

Todd, I go back, Kurt’s comment is broad based, it's across our businesses, it's across our operating income, it's across our brands, it's across of product categories and so I don't think we have anything specific to call out. I think we said it's going to both contract and supply driven, so good news.

[Todd Schwartzman:]

So year ago, in Q1 there was no vertical that saw inordinately large one off order or two or conversely decline based on perhaps prior year bump up?

[Stanley Askren:]

Nothing that I would call out specifically Todd, no.

[Todd Schwartzman:]

Okay. And you are not disclosing the year end furniture backlog, correct?

[Stanley Askren:]

We don't disclose backlog, no sir.

[Todd Schwartzman:]

Okay. On the gross margin for Q4, I just want to get a sense of what the factors there were on the mix front maybe X VCG?

[Kurt Tjaden:]

So, I will take that Todd. I would say nothing different than the past. It continues to complex thing and ends up being typically around product mix and plough in through there, but Vermont Castings was modestly accretive in the fourth quarter, but other than that from a mix perspective nothing of significant note.

[Todd Schwartzman:]

Do you guys think in terms of whether it's in units or dollars the mix within your furniture business of these so called collaborative type products versus some of the more legacy?

[Stanley Askren:]

You ask if there is any significance change in that those ratios Todd, is that the question.

[Todd Schwartzman:]

Well, I don't suppose there is an abrupt change from quarter-to-quarter, but is there a slow moving trend that's been on the way that maybe we should watch and think about for modeling on a long term basis?

[Stanley Askren:]

Nothing that we haven’t discussed in the past, I mean, certainly this move from archive or storage that we’ve gone through over the years has been significant, but regarding sort of the changing workplace and all that we don't - we are not looking at anything that I think shareholder should be aware of, it's going to change, all they think is about the business.

[Todd Schwartzman:]

Got it. And on hearth, I know that you have got and had relationships with a sizable number of the builders. But the growth or the organic growth 23% in Q4 alone for example whether it's alternative fuel products or traditional ones, have you taken on any new customers that’s helping to fuel that organic growth as well as the products themselves?

[Stanley Askren:]

Yes, so the organic new construction business was up very nicely for the year and also very nicely in the fourth quarter and that's really coming from our core customers. So, the answer to your question specifically we are out competing job for job, install for install and I think we are competing well. Has there any big change in our customer base, the answer is no.

[Todd Schwartzman:]

So, if you look at your top ten customers on the hearth side in 2014 versus 2009, would it look pretty similar?

[Stanley Askren:]

Yes.

[Todd Schwartzman:]

Okay, great. Thanks guys.

[Stanley Askren:]

Thank you, Todd.

[Operator:]

The next question is from Josh Borstein with Longbow Research.

[Josh Borstein:]

Hi Stan and Kurt, and Matt congrats on a nice year. Just a few questions for you, Stan I think the first in some of your remarks you made one comment about organic sales growth of 10%. I think maybe it was office, was there a comment like that?

[Stanley Askren:]

You are talking about which context Josh, sorry.

[Josh Borstein:]

I don't know. I just know it was in the opening remarks where you made expectations for organic growth and I think you said 10% in one of the -?

[Stanley Askren:]

Yes, yes, Josh I believe I mentioned that for the year 2014 North American contract organic sales grew 10% for the year which is significant growth given I think what was going on in the industry.

[Josh Borstein:]

I see, okay, for 2014, got it. And just in the press release you mentioned office furniture sales led a momentum some acceleration in 4Q with increases in both supplies and contract channels. What exactly are you seeing in that change, put more color to the increased momentum you are seeing is it share gains, the industry in general if it's coming from any particular end market?

[Stanley Askren:]

Yes, as you know Josh, we are always reluctant to jump on the share gain thing in the short term just because it's kind of a - it moves around. We are seeing broad base strength is how we would say that. Project activity is good. Day-to-day activity is good in both contract and supplies. We are seeing strength across most all of our businesses segment, price points categories, channels etcetera. So I think from where we sit, for where I sit, I would say the economy is improving. We are getting the benefit of that and then I think we are executing well and the investments that we made frontend, backend product across the board are very true.

[Josh Borstein:]

Would you characterize the momentum you’re seeing as a step change from recent trends, as the industry take another leg up, do you think?

[Stanley Askren:]

Certainly, we saw the later half but even fourth quarter and first quarter taking step function improvement in our business for the year. You have to go and look at the business stuff although it lags to see kind of the best indicator albeit not precise of what’s going on in the overall industry.

[Josh Borstein:]

The data, if you average the last few months kind of suggests that maybe what was the low to mid single digit environment is turning into more like a mid to high single digit environment is that kind of the feeling you are getting as well?

[Stanley Askren:]

Yes that’s consistent with what I think and I am seeing and feeling.

[Josh Borstein:]

Great and just the way that the quarter played out on the office furniture side, was there any acceleration or deceleration into quarter?

[Stanley Askren:]

I would say the later part of the quarter was accelerating.

[Josh Borstein:]

Okay. And on the revenue guide for 1Q much higher than consensus expectation is it just the sale side, is it us that got it wrong or is there more function of just this acceleration that you are seeing?

[Stanley Askren:]

I would never say to self it’s anything wrong. So, I would say it's just the acceleration we are seeing Josh.

[Josh Borstein:]

Alright. Fair enough. Thank you for that and in the hearth segment, the increased material cost that you referenced in the press release what is that exactly?

[Stanley Askren:]

We are looking at each other Josh, which means its general stuff, there is nothing there. We are seeing freight distribution was one of the - it’s not material but freight distribution as a cost went up, the industry is struggling with carrier capacity right now. Fuel oils are positive, but carrier capacity is an issue and I don't think there is anything else really specific on the material side to the cost. We would say materials are rather muted right now. And there is some specific categories driven around supply and demand more than input cost are going up.

[Josh Borstein:]

Okay. So the fluctuations in steel and all that all in the basket of commodities is looking pretty flattish for the year?

[Stanley Askren:]

Ample point, pretty good, sort of stuff, again it's more driven by supply and demand capacity that was adjusted during the recession. Glass is a good example, we use a lot of glass in hearth product as well as in office furniture and that capacity is changed, the cartooning world is changed a bit. So I would say it's - there is maybe a couple of points but it's rather muted as we sit here today. You know this better than anybody. It does change - can change dramatically based on sort of what’s going on with the global economy.

[Josh Borstein:]

Sure. Okay. And just the question on FX I think you guys don't have too much overseas exposure there and it goes around 10%, but if you can just remind us on the exposure that you have and what you anticipate for any FX headwinds?

[Stanley Askren:]

So, office furniture less than 8% of our sales overseas Josh and foreign exchange for us is really a non-event. So, would not expect to talk it now.

[Josh Borstein:]

And just lastly can you give us an update on what you are seeing in those businesses overseas right now in India and China?

[Stanley Askren:]

Yes, I would say India and China are relatively muted, still sorting through kind of their economic, macroeconomic sort of stories there. We are seeing China is improving some. We are feeling better about China as we go forward. Our India business is I would say, India is more flattish with some growth there, we are still working on the transformation of that business. So, the international businesses are relative to the North America businesses are not as strong, but I think they are still some growth we have there.

[Josh Borstein:]

Got it. Thanks again for taking my questions. Congrats and good luck on the year.

[Stanley Askren:]

Thanks Josh.

[Operator:]

That was our last question. I will turn the call back over to the presenters.

[Matthew McGough:]

Alright. Well, thank you so much for your interest in HNI and we appreciate your commitment to the company and we look forward to talking with you all in the future. Have a good day.

[Operator:]

This concludes today’s conference call, you may now disconnect.