HNI Corporation
Q1 2015 Earnings Call Transcript

Published: 23 Apr 2015

[Operator:]

Good morning. My name is Sally, and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation First Quarter Fiscal 2015 Results Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. Thank you. Mr. McGough, you may begin your conference.

[Matthew McGough:]

Good morning. Thank you for joining us for the HNI Corporation conference call to discuss first quarter fiscal 2015 results announced yesterday after market close. Copies of our financial news release and earnings presentation, including non-GAAP reconciliations have been posted on our website, www.hnicorp.com. 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, which are subject to known and unknown risks. Actual results could differ materially from expected results. The earnings presentation posted on the HNI Corporation 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.

[Stan Askren:]

Good morning, everyone. We’ll share an assessment of the first quarter 2015 provide some thoughts and outlook for second quarter and full year of 2015, as well. We’ll then open the call up for questions. We had a great start to the year. Consolidated sales were up 16%, we delivered strong earnings results as projected, we’ll continue with significant investments for long-term profit growth. Our office furniture businesses outperform the market with double-digit top line growth. Our supply-driven business sales were up 15%, sales on the remaining office furniture businesses increased 13%, led by 15% growth in our North American contract business. This is the third consecutive quarter on North American contract businesses delivered double digit sales growth. Our hearth sales increased 24% including the Vermont Castings Group acquisition or 3% organically. Strong growth continued in new construction sales with organic growth of 18%. And as expected, organic remodel-retrofit, sales were down due to very challenging year-over-year biofuel product sales comparisons. I'm very pleased with our first quarter results and our momentum heading into the second quarter. I’ll turn it over to Kurt Tjaden.

[Kurt Tjaden:]

Thank you, Stan. Additional financial highlights for the first quarter include consolidated gross margins increased 35.2%, compared to 34.3% in the prior year quarter due to volume, increased price realization and strong operational performance. As a percent of net sales, total selling and administrative expenses excluding restructuring charges and gain on prior year sale of assets increased 10 basis points. The benefit of higher volume was more than offset by higher freight costs, investments in strategic initiatives, higher incentive base compensation and the impact of the acquisition. We recognize $1.5 million of restructuring and transition cost in the quarter in connection with previously announced manufacturing facility closures. In 2014, we recognized an $8.4 million gain on the sale of the vacated facility. Stan

[Stan Askren:]

Our outlook for the second quarter, we expect to again deliver strong sales and earnings growth in the second quarter. Our office furniture market momentum is strong and we project continued growth across all channels. In hearth business, we anticipate continued strong growth in new construction sales, remodel-retrofit sales will again be lower due to the challenging year-over-year bio-fuel product sales comparisons. I'll say again we have great momentum and are well positioned to continue deliver strong results. Kurt?

[Kurt Tjaden:]

So, financial outlook for the second quarter and the full year, for the second quarter of 2015 we anticipate overall sales growth to be 12% to 16%, or 8% to 12% organically. Office furniture sales were expected to increase 8% to 12%, sales in the supplies-driven channel are forecasted to increase 5% to 9% and sales in the rest of our office furniture businesses are projected to increase 11% to 15%. Hearth sales are expected to be up 35% to 39% or up 8% to 12% on an organic basis. Gross profit margin excluding restructuring and transition cost is forecasted to modestly improve versus second quarter of 2014 when it was 36.3%. Non-GAAP SG&A as percentage of sales, excluding restructuring impairments and gain on sale of assets is expected to be similar to second quarter 2014 when it was 30.5%. The effective tax rate is projected to be approximately 35% for the full year, capital expenditures for the full year forecasted to be a $110 million to a $115 million and our estimated range for non-GAAP earnings per diluted shares from the second quarter is $0.47 to $0.52. For the full year, we are raising the low-end of our estimated guidance, $0.05; our new estimated range for non-GAAP earnings per diluted share is $2.50 to $2.65. Stan?

[Stan Askren:]

Okay, in conclusion, we entered the second quarter with continued strong momentum across our businesses, and we are well positioned to grow sales and significant increase profits in 2015. With those comments complete, Kurt and I will now open it up for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Matt McCall with BB&T Capital Markets. Your line is open.

[Matt McCall:]

Thanks, good morning everybody. So let’s start with contract I mean that the outperformance there is noteworthy, can you point anything standard that you’re having particular or success that is it a product category is it a certain segment of the market? How you are able to do so much better than the industry.

[Stan Askren:]

Its broad-based, Matt, there is nothing particularly to call out, except to say, its broad-based.

[Matt McCall:]

And you may – is that broad-based product, is that broad-based customer, or is that broad-based end market, products – project size I mean it’s a kind of all those?

[Stan Askren:]

Yes sir.

[Matt McCall:]

Okay. I don’t want much there. Kurt, your incremental margin is up I know it’s been impacted by Vermont Castings. But can you talk about what it was on an organic basis, how we should look at it both on organic basis and with Vermont for the rest of the year?

[Kurt Tjaden:]

Yes, so our outlook for that Matt is basically on change, you ought to expect core hearth leverage for the year to be well north of that 35% number that we’ve talked in the past. And if you put Vermont Castings in there all in, it will thus be a kind mid-teens. So that outlook is consistent with what had talked on prior calls.

[Matt McCall:]

So for – you talked about that 30%, 35% you’re saying well in excess of 35%, is that correct?

[Kurt Tjaden:]

No, I would say it’s 35% is still the right number it could be but I think still 35 is the right place.

[Matt McCall:]

Okay. I thought I heard a well in excess than this, so that may be not. So you talked about the couple of things that impacted margins free investments in initiatives and in incentives. Can you talk about each one of those buckets and then how we should we look at those items throughout the remainder of this year.

[Stan Askren:]

Sure, I’ll take a card out [ph] Matt higher freight costs clearly carrier capacity west coast port disruption plays an impact we’d expect that to see that continue investments in strategic initiative, we talked about that, we have attractive investment opportunities that have great pay back, those I would expect to see continue. Higher incentive-based comp is a combination of as our earnings increase we payout more profit sharing to our members and the other impact in the quarter is fair market value on deferred stocks. So as I stock price goes up that has an impact and acquisition will roll off in the fourth quarter. So I would say relatively balanced for the quarter between them, but those particularly on the investments and the strategic initiatives those are the things that are deriving the top line and we’d expect to see derive a kind of incremental margin in leverage that we’ve talked about for the year.

[Matt McCall:]

And when you said balance across those is that on dollar basis and if so what was the total dollar impact of those items in a quarter?

[Kurt Tjaden:]

Yes, I say dollar basis relatively balanced you’re kind of 2 to 3 plus million per on each of them for the quarter.

[Matt McCall:]

Okay. And then final one I have is really on price cost can you remind of the price benefit you had on year-over-year basis and how much of that was offset or helped by inflation or deflation?

[Stan Askren:]

I’ll answer, so pricing has been positive, we put pricing across all of our businesses thus for this year it’s average, call it 3% type pricing. And commodity inflation modest, again, as we talk kind of 2% to 3% inflation not a lot of that in the first quarter, but would expect that relationship to be positive for the full year outlook.

[Matt McCall:]

Okay. So for the quarter you had a net benefit?

[Kurt Tjaden:]

Yes.

[Stan Askren:]

Well, I remind you Matt, we have people cost going up; we’ve free cost going up, et cetera. So Kurt’s answered your question is correct, price to materials is an advantage, but if you look overall it’s not an advantage.

[Matt McCall:]

So they basically met each other out?

[Stan Askren:]

Close enough.

[Matt McCall:]

Okay, close enough. Alright, thank you guys.

[Operator:]

Your next question comes from the line of Budd Bugatch with Raymond James. Your line is open.

[Budd Bugatch:]

Good morning, Stan. Good morning, Kurt, good morning, Matt. Couple of questions helps maybe educate me. What was different in – what surprised you in the quarter, what came in differently than what you might have expected when you gave guidance or going into quarter was there anything that surprised or though that you would like help us understand?

[Stan Askren:]

Yes, I mean, Budd first of all – I think we came in as we projected. So we came in the midpoint of our guidance with the overall glide path for us was right on. So A) we weren’t surprised at the overall results just to be clear. Now, what was different than we thought, on the downside was biomass was softer than we thought we had it down, we didn’t have it down as much as it ended up down, that’s the function of weather. Last year as we recall we had a huge biomass bump, because it was very, very cold, seems like it was cold this year but not as cold as last year and so the biomass would’ve been the softer than anticipated.

[Budd Bugatch:]

Okay and profitability heard I was fine to get to your mid teens excluding Vermont Castings and to make sure we are calculating the contribution margin properly. We get just on the wrong numbers of 4% contribution margin year-over-year. And then if I tried to do with sequentially I think I get to a 30 plus percent. So which is at the more relevant sequentially since Vermont Castings was in the fourth quarter.

[Stan Askren:]

You’re talking for the second rather for the full year?

[Budd Bugatch:]

I’m talking for the first quarter looking at the contribution margin. Year-over-year in hearth I get them like 3.7% looking at the…

[Stan Askren:]

Yes.

[Budd Bugatch:]

Just on the wrong numbers. But that doesn’t include Vermont Castings in debates. So I’m trying to understand, you said mid teens without Vermont Castings.

[Stan Askren:]

Yes, that would be a full year number both Budd when I talk mid teens, but for first quarter your numbers would be about in the ballpark.

[Budd Bugatch:]

So okay, so maybe help us, help educate us as to how that plays out of over the year, because that’s a fairly wide standard deviation or variance from the average of year or so anyway to do it or it’s just...

[Stan Askren:]

Yes, what the way I think about it is with any acquisition as we integrate, as we come up on the lean that will bring to bear you’ll see that acceleration on leverage on Vermont Castings through the year. The other piece recalls as you come into the back half of the year you’ve got a higher volume than you do in the first half. So the benefit will be greater. But it’s really just growing into that acquisition, as we kind of come up on that one year anniversary and realize the benefits of the investments we’re making to transform that business.

[Budd Bugatch:]

Okay and is it on track as you wanted it to be?

[Stan Askren:]

Yes, it is. Well, I mean…

[Kurt Tjaden:]

Go ahead.

[Budd Bugatch:]

I mean it was operating fairly well when you bought it as I recall it’s been the leadership there done a pretty good job.

[Matthew McGough:]

Well, yes. The leaders have done a nice job. But, I think we were clear, it is a transformation opportunity. The value creation opportunity is to bring that business up to par with the rest of our hearth business, all frontend, backend sales growth and cost. And so I don’t recall the margins exactly on that but they were a – may be a third of what our core business is and so the opportunity for us as Kurt is saying is to apply our resources, know how, lean thinking, manufacturing, frontend capability alongside that management team and bring them up to where the rest of our business is at.

[Budd Bugatch:]

Okay, alright. Just a couple of other ones if I could? The – thank you for that. The freight costs, that’s primarily due to the shortage of drivers or you said something about, I think, the West Coast Port strike, or Port disruption. How did that impact you?

[Stan Askren:]

Kurt – the answer to your question is yes. It is primarily carrier capacity which is being driven by driver capacity. So that’s the real take away. Kurt mentioned, port slowdown, that has a modest effect in the first quarter, we’re not going to lay anything off on that. We felt it more keenly in the fourth quarter last year we worked it through, we get paid kind of sort all that outset. So it has an impact but I wouldn’t dial in on that and whatever residual effect, is still there, we work through, I would say.

[Budd Bugatch:]

Okay and can you – did you quantify the freight increment that you saw?

[Stan Askren:]

Yes, I think Kurt took a shot of that of $2 million or $3 million something like. Budd.

[Budd Bugatch:]

Does that continues each quarter for the next until we – when we do we anniversary that?

[Stan Askren:]

Well I think it continues. I think the whole freight thing as you know is very dynamic. I think, supply demand has to kind of reach an equilibrium and it’s not clear to me that the driver situation has been resolved and it’s got to be resolved. So well that continue, I think, it will in the foreseeable future. One is that plateau I don’t know.

[Budd Bugatch:]

Okay and my last question relates to corporate overhead, its equivalent, I think, in this quarter to what it was in first quarter or very similar, the right way to think about that now flat, how is that, is there something in there that needs to be accounted for?

[Stan Askren:]

Yes so you had as I talked for the quarter Budd you had a couple of things that plays through the. One on the strategic investment front we continue to have or a full run rate on BST, business systems transformation, initiatives. So there is some increment on that and the second part is that fair market value on stock and an incentive-based comp. So, I would expect a kind of 10%, 12% increase in corporate overhead for the full year.

[Budd Bugatch:]

And quarter-by-quarter just that way Kurt or?

[Kurt Tjaden:]

Yes hard to lay it in but projected with the stock price but I think flow went pretty evenly through the year.

[Budd Bugatch:]

Thank you. All right, thanks much, congratulations on a good quarter and good luck for the rest of the year.

[Stan Askren:]

Thanks Budd.

[Operator:]

Your next question comes from the line of Josh Borstein with Longbow Research. Your line is open.

[Josh Borstein:]

Hi, good afternoon everyone. Thanks for taking my questions here. Just on the last question that Budd asked on corporate expenses, just to make sure you understand, you said to anticipate 10% to 12% higher versus what the corporate expenses were last year?

[Matthew McGough:]

Correct.

[Josh Borstein:]

Okay.

[Matthew McGough:]

They were full year Josh.

[Josh Borstein:]

Got it, Okay. Thanks. And then just on the guidance you brought up the low end by $0.05, where do you see revenues for the full year? Are you still anticipating middle single digits in office and mid single digits in hearth?

[Stan Askren:]

Correct Josh, we do.

[Josh Borstein:]

Okay. And with 2Q guide, may be came in a little bit lower where The Street was, could you help us understand may be the flow of the year where The Street may be got it wrong a little bit as do you see the year a little more back half weighted in terms of earnings?

[Stan Askren:]

First, I’m not clear what The Street comes up with Josh? I'm glad you laughed at that. I don’t really know, but quite frankly I’ll make my speech here and then I’ll try to answer your question. We’re not terribly concerned about quarter-by-quarter, to be honest with you yet. The Street really focuses on quarter, we kind of take a longer view, we give we try to help The Street by giving quarterly guidance. But we’re not anticipating this quarter, the next quarter and trying to do that, that’s just a waste of our time and at least the bad investment decisions from more recent. So it does move around, we get you guys, you pay and figure that out. So where do I think The Street – my guess is we’re probably more backend loaded than The Street have, I don’t know Kurt what’s your view of that.

[Josh Borstein:]

I think its normal fluctuation and there was nothing of significant strong shift first half to second…

[Stan Askren:]

Well Josh to be honest with you, we – I ever changed my view of this business in fact of anything. I’m more positive than the last time we talked. The Street gives kind a some funny, takes on some funny signals on this. We delivered right in the midpoint of our guidance. We hit where we though we’re going to do. Feel really good about that. Still feel great about the year, big time increase for the year, strong top line, in office furniture. Really strong new construction in hearth, I mean we’re its single family starts around 4.5% and we’re up 18% on early construction business, we are doing really well there. I think that’s going to continue. And so the rest kind a comes down to sort of, its choppy from where we sit, we don’t worry too much about that I think, may be the street [ph] though I was going to be smoother, I don’t know.

[Josh Borstein:]

Yes, now I hear you and I agree everything you’re saying. From everything I’m hearing, you feel every bit is good about the business as you did last time, o all the indicators certainly seem positive from what I’m hearing.

[Stan Askren:]

You’re right.

[Josh Borstein:]

And you guys mentioned, you’ve been share and clearly the last three quarters and contract had been strong for you guys. Do you have any idea of who you’re taking share from and do you think it’s the big national players may be the smaller regional players?

[Stan Askren:]

Yes well Josh we’re smiling here, we are really careful to claim when we are taking the share because that’s kind of a way to gain. If we don’t take it in the quarter then I got to come tell you that, I think, we are performing very well is where I’m at. And so where is – I think we are outperforming the market. Where is that coming from? Well typically in this business taking share in the short-term is really kind of challenging. So I think we are outperforming because a) the market is performing well, b) I think we’re in the right spots with the right customers and the right market. Third, I think it’s coming from a bunch of things frontend investments, backend investments, middle-end investments I just think are all of our companies are performing well. I mean, they’re all working the levers and it seems to be happening. And I think if you say who are we outperforming? That sort of gets close to your question. I’d say it’s probably coming a little bit from a lot. But we don’t because we’re so broadly diversified. It’s really even hard for us to tell, Josh. It just kind of comes and when it comes it feels great, when it doesn’t we go work all to levers to turn that around.

[Josh Borstein:]

And just speaking to that diversification that you guys have, have there been any shifts with any of the line say more HON, more Allsteel and that gives you any indication of may be some changes?

[Matthew McGough:]

Well, you know the answer is they’re big horses are all pulling nicely together they haven’t been big shifts. The thing I would say is the supply side of the business is coming back on line in a big way, I mean the numbers we gave you was the supply driven business sales were 15% and then incurred gave you that they’re going to be up 5% to 9% in the second quarter. That’s a nice improvement over where we’ve been post recession as you recall small business which tends to be – small business companies tends to be the bigger driver on this has been slow to come back on line. And we’re starting to see that this portion of the business come back on line and that’s really a great economic engine for the corporation. So I think that’s the good news and that’s also why I feel – continue to be a good about the outlook for the business.

[Josh Borstein:]

Is it your sense that the small business owner is just has greater confidence in the economy and may be is going forward with some projects that they were hesitant not before?

[Matthew McGough:]

Yes that’s our sense. I would say it’s been creeping back. I mean it’s been much lower than I think any of us thought it would come back but yes it feels like slowly the comp is just coming back, they are stepping forward. Some of the uncertainty is diminishing and there’s not just projects it’s also the day to day replacement sort of thing, as well.

[Josh Borstein:]

And just one, last one from me the operational performance you guys saw in office this quarter, a nice performance of 300 basis points to EBIT margins, contribution margin approaching 30%. Was that better than your internal expectations and what could we expect going forward in that segment?

[Matthew McGough:]

Yes, I think the answer to your question is what we expected and what you should expect going forward is the same, we have said that we should deliver for the year 25% to 30% organic – leverage on the organic portion of the business. And so we’re really programming that in and driving leaning into that number, and that’s what we are expecting, Josh.

[Josh Borstein:]

Great, thanks for taking my questions.

[Matthew McGough:]

Thank you.

[Operator:]

Your next question comes from the line of Todd Schwartzman with Sidoti & Company. Your line is open.

[Todd Schwartzman:]

Hi, good morning guys. Just wanted to follow-up on Josh’s question the op margin 5% for furniture for the quarter, what is the ceiling on that for the foreseeable future?

[Matthew McGough:]

That’s a great question Todd. I don’t know, we’ve said 25% to 30% margin this year and quite frankly we are investing in core sort of operation improvements and we’ve got more of that on the board planned and are executing. So I don’t know what’s the ceiling is yet, our objective is to continue to drive that up.

[Todd Schwartzman:]

And are there product categories that might be particularly helpful [indiscernible] kind of dovetails with the market share question. Where are you making the most in rows in the past 12 months?

[Stan Askren:]

Well, we’re working all the product categories, Todd. And again, we’re very broadly diversified in sort of market segments and product categories and et cetera. And our objective is to be working all of those. And so, I would say we’re seeing progress in all of those categories as well.

[Todd Schwartzman:]

Got it. You may have mentioned – I didn’t hear the beginning of the prepared remarks, but the biomass sales – what kind of – what was that on as a percentage of the total hearth sales for the quarter?

[Stan Askren:]

I think is your question what percentage is biomass of the total hearth business?

[Todd Schwartzman:]

Correct.

[Stan Askren:]

It’s like a third, Todd.

[Todd Schwartzman:]

Okay. You’ve mentioned the strategic initiatives. I wonder if you can just kind of give some more color on that and also speak to whether there’s been any changes as far as your outlook for uses of cash?

[Stan Askren:]

Well, I’ll comment on the strategic initiatives and we’ll talk about the cash second. So again I – it sounds like I beating the same drum, broad based. So strategic initiatives are around the front end, strategic initiatives are around sort of the back end manufacturing, logistics distribution and then the middle, which is a big one we’re working on it right now our businesses and transformation. And so we’re working on all of these. And then each of the op companies, each of our brands, each of our business models are working this as well. And it’s really more of – it’s more of what we’ve been doing is what we see going forward as well. Uses of cash, same sort of priorities. A) We’re going to pay – A) We’re going to invest in the business and projects that we think can generate a strong return for shareholders. Second, we’re going to pay a strong and growing dividend. Third, we’re going to – when we see an acquisition that makes sense that we create value that creates economic profit we’re going to do it. And then finally, we’re going to buy stock back at least offset dilution and there may be opportunities that we buy a little bit more. Same sort of priorities as we’ve been working and I see that same sort of priorities as we go forward.

[Unidentified Analyst:]

Excellent, thank you very much.

[Stan Askren:]

Thank you, Todd.

[Operator:]

Your next question comes from the line of Matt McCall with BB&T Capital Markets. Your line is open.

[Matt McCall:]

Thanks, one more from me. Kurt I think you said, may be where you stand mid single digit growth is still the way to look at the full year and I'm specifically referencing furniture here. You had 14% Q1 you’re guiding the 10% in Q2, to get the mid single digits. And maybe that was industry comment, but that would imply pretty substantial slow down. Did I misunderstand it or there is something more we should be thinking about?

[Stan Askren:]

Without first half, Matt you got to take in the year-over-year comparison. So when you say slowdown I don’t what that means. Do we think the market is slowing down? No. Do I think there may be year-over-year comparison differences? Yes. So, don’t take my comments as anything other than, as I said, I mean Josh asked a good question, I talked about where the momentum is. Our view is the momentum [ph] of the market will continue and actually we’ll improve over where we’re at. The year-over-year comparison, I don’t know. Kurt and Matt can help you walk that through, but I don’t feel slow down. I don’t Kurt you have comment on that?

[Kurt Tjaden:]

Well I think you got it.

[Stan Askren:]

Okay.

[Matt McCall:]

Okay perfect. Thank you Stan.

[Stan Askren:]

You bet.

[Operator:]

Your next question comes from the line of Josh Borstein with Longbow Research. Your line is open.

[Josh Borstein:]

I just have a follow-up on the biomass hearth business, just trying to get a better sense for where it maybe going. It was down this quarter but you had mentioned, last year Europe against a very difficult [indiscernible], of whether that helped demand. And last quarter when you talked about it, you had also talked about this business having a long tail where people remember what energy prices were like before they went down and it slowed a kind of may be de-accelerates. So going forward did you see a bounce back in biomass or at least you don’t have declines that upward and has the magnitude not as great as this quarter?

[Stan Askren:]

The answer is it tends over a couple of years to kind of level out and so last year I’m looking at my team there biomasses is up 45% same period, so it [indiscernible]. This quarter it’s down something like 30% and so where it’s going to end up Josh? It’s going to end up somewhere in the middle there. It’s a tricky business, the forecast because it’s a seasonal product it’s a dealer retail product. And it’s driven by the cost of energy, namely fuel, oil and LP and it’s driven by weather. And so, we have and we’re the predominant player in that category, we have a very large share there and so the to answer to your question again is – it’s going to be somewhere between that that 45% to minus 30% level.

[Josh Borstein:]

Thanks for the help.

[Stan Askren:]

You’re welcome.

[Operator:]

There are no further questions at this time. Mr. Askren, I’ll turn the call back over to you.

[Stan Askren:]

Thank you. Well, we appreciate everybody’s interest in the HNI and we look forward to talking with you in the future. We hope you all have a good day. Thank you.

[Operator:]

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