HNI Corporation's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 5.14 | About: HNI Corporation (HNI)

HNI Corporation (NYSE:HNI)

Q4 2013 Earnings Call

February 5, 2014 11:00 AM ET

Executives

Matthew McGough – VP, Corporate Finance

Stan Askren – Chairman, CEO and President

Kurt Tjaden – VP and CFO

Analysts

Budd Bugatch – Raymond James

Matt McCall – BB&T Capital Markets

Peter Lisnic – Robert W. Baird

Josh Borstein – Longbow Research

Todd Schwartzman – Sidoti & Company

Operator

Good morning. My name is Rob and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation Fourth Quarter and Year-End 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 is being recorded.

Thank you. Mr. Matt McGough, you may begin your conference.

Matthew McGough

Good morning and thank you for joining us today for the HNI Corporation conference call to discuss fourth quarter and full year 2013 results, which were announced yesterday after the market closed. My name is Matthew McGough, 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 up 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 can differ materially from expected results. Additional information concerning factors that could affect actual results can be found in the conference call presentation posted to the HNI Corporation 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 Askren

Good morning everyone. Kurt and I’ll share our sentiment of fourth quarter, 2013 and then provide some thoughts on our outlook for the first quarter and the full year 2014. We’ll then open the call up for questions. For the year, while I’m pleased with our strong performance in 2013, we delivered top-line growth, achieved strong profit improvement in outstanding cash generation all the while maintaining our investment strategies for long-term profitable growth. We increased net income 30% on a 2.8% sales increase, organic growth in our office furniture businesses exceeded 1%, despite a 27% decline in our federal government business. Our hearth business delivered outstanding sales and profit growth in both the new construction and remodel/retrofit channels. Operating profit improved 76% on 18% sales growth. Sales in the new construction channel remain strong, with 26% growth driven by our leading market position and healthy market recovery. Remodel/retrofit sales increased 13%. For the fourth quarter, we delivered top-line organic growth as strong profit improvement. Organic growth in the office furniture business was approximately 1%, despite a 40% decline in the federal government business. Our supply driven business organic growth exceeded 3%. Our hearth business continues to deliver excellent performance. Our new construction business was up 21%, remodel/retrofit sales improved 17%.

I’ll now turn the call over to Kurt to cover fourth quarter 2013.

Kurt Tjaden

Thank you, Stan. So for the fourth quarter 2013, consolidated net sales increased 2.6% to $541 million or 4.1% on an organic basis. Sales for the office furniture segment decreased 1.3% to $417 million or 0.7% increase on an organic basis. Net sales for the hearth product segment increased 18.1% to $124 million. Consolidated gross margins increased to 35.7% compared to 35.2% in the prior year quarter, due to higher volume and better price realization, partially offset by new product ramp up and operation reconfiguration costs. As a percent of sales, selling and administrative expenses including restructuring and impairment charges, were 28.7% or 0.8 percentage points lower than prior year quarter. Benefit from sales leverage was partially offset by investments in growth initiatives and increased incentive-based compensation. We ended the year with $65 million in cash. Operating activities generated $165 million of cash during 2013 compared to $145 million last year. Stan?

Stan Askren

All right. Thank you, Kurt. We entered 2014 financially strong and competitively well positioned to deliver continued sales growth and profit improvement. Our outlook remains consistent with our October guidance. We expect to deliver double-digit profit improvements for the year in a low growth environment. We anticipate business activity will improve during the year and we anticipate sales growth to be low single-digit for the full year. We expect sales growth to be 1% to 5% in the first quarter given modest economic growth and continued reduction in government spending. Our supply channel is expected to be down low-to-mid single digits. The start of the year has been impacted by the slow economic growth and severe weather. Our business is performing well versus the market, due to our investments in branding, product development and selling capabilities. The contract channel is expected to be up mid-to-high single digits, despite the decline in federal government spending. Our office furniture contract brands are competing well in their markets. In the hearth business, we anticipate sales growth to be in the mid-to-high teens for the first quarter. We are well positioned for a strong profitable growth with the industry’s strongest brands, best products and superior manufacturing and distribution capabilities.

Our strategies remain unchanged. We’re investing in our core North American businesses to capture key growth opportunities, and aggressively pursue attractive prospects and key vertical in growing international markets. We continue our new product investments to expand current product offerings and new platform initiatives to satisfy the changing needs of the marketplace. We are investing in manufacturing capabilities to line with the changing needs of the marketplace, to comfortably position ourselves in high growth and profitable segments and deliver consistent flawless execution for our customers. We are expanding the power of our unique Split and Focus business model through investments in solid capabilities, branding and customer loyalty initiatives. And finally, we continue to make good progress on our business system transformation initiative. We’re leveraging our RCI culture to champ-in [ph] significant process improvement throughout the company as part of this effort.

I’ll turn the call over to Kurt to provide the financial outlook for the first quarter and full year 2014.

Kurt Tjaden

Thank you, Stan. So for the first quarter 2014, we anticipate overall sales growth to be 1% to 5% or 3% to 7%, on an organic basis. Office furniture sales are expected to be flat to up 4% organically, or down to 2% or up 2% including the impact of divestitures. Organic sales on the supplies driven channel are expected to be down 2% to 6%. Organic sales from rest of our office furniture businesses are expected to be up 5% to 9%. And finally, hearth sales are expected to be up 15% to 19%. Gross profit margin is expected to be similar to the first quarter of 2013, when it was 33.4% and SG&A as a percentage of sales excluding restructuring and transition charges is expected to be slightly lower than first quarter 2013 by almost 32.7%. Net interest expense is projected to be $2.2 million and the effective tax rate for the full year is projected to be approximately 35%. For the year, we are expecting capital expenditures to be $90 million to $95 million. And we project full year 2014 depreciation and amortization to be $50 million to $52 million. Our estimated non-GAAP earnings per diluted share for the first quarter is in the range of $0.07 to $0.12 a share, and for the full year 2014, we are updating our estimate of non-GAAP earnings per diluted share to be in the range of $1.60 to $1.80. Stan?

Stan Askren

All right. Thank you, Kurt. So I’ll close here. I remain positive about our momentum and our ability to continue to grow sales and increase profits in 2014. We continue to invest for long-term profit growth. We remain confident that our investments are delivering shareholder value. Our strategies remain unchanged. Our businesses are strong, competitive and well positioned in the markets. So with those comments complete, we’ll now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Budd Bugatch from Raymond James. Your line is open.

Budd Bugatch – Raymond James

Good morning, Stan. Good morning, Kurt. Good morning, Matt. I guess terrific performance and certainly in hearth for the fourth quarter at I think 18.5%, can you talk a little bit about how that looks going forward? How should we expect the operating margin to continue?

Kurt Tjaden

Budd you should expect as we expect that it will continue to expand. We’ve said for sometime that we expect to continue to drive positive leverage on our growth in these businesses. So if you go back, this hearth story is a great story. It goes back 20-some years that we really started on this journey of really building a very strong enterprise in the industry. And so, we put this business together, we made a lot of acquisitions, a lot of investments. We hit the recession, we think we made a lot of right moves there. The leadership team there, all of the members did a great job of responding and resetting cost structure, maintaining the critical capacity and also investing in the right plans through that downturn. And so now if it comes back up, we’re in a great shape to continue to reap the benefits of that pain and all that great work done by the team. And so, we have I think sufficient capacity, we have I think the right sort of management processes that we should continue to see those margins expand. And as we’ve said for some time, we should generate much better profit on lower sales on the way up than we had when we started the recession. So long answer to I think an important question.

Budd Bugatch – Raymond James

Just to make sure I understand expand from the 18.5% Stan or expand from where it was year-over-year?

Stan Askren

Expand well year-over-year certainly Budd is what we’re talking about. You get some funny variation based on mix and volume and events so quarters can jump around, but certainly year-over-year we should continue to see that expand.

Budd Bugatch – Raymond James

Okay. That makes sense to me. All right. Second question is I think I heard a change in direction on the office side in terms of expectations for the quarter. You said that the specified side was going to be up in the first quarter and the supplies driven channel will be down and mostly because of weather. Can you may be go back over that and…

Stan Askren

Yeah just a signal on a quarterly basis it’s really been probably down to – Supplies channel has been more impacted I think by weather. We think the overall climate is no but the overall business environment is core is the same but due to weather and kind of the transaction nature of that business, it’s down more than probably we told you last time. We still think for the year it’s going to be where we told you before. Now, the contract side is more lumpy due to large winds, federal government, products etcetera so we do see that up more first quarter. I think we told you last quarter interesting enough, actually government is going to be up little bit on that side because we got some large project shipments. So, for the quarter going to move around a little bit, for the year, basically the same as we told you last time we talked to you.

Budd Bugatch – Raymond James

Okay. And finally for me, can you go over what the divestiture impact is quarter-by-quarter? When do we anniversary that curve how much is it in the first and second, third quarters?

Kurt Tjaden

We need to monitor it as we work out. So we’ll start again to anniversary that on the back half of the year. Almost all of that is in the first half of the year about $18 million if take them out for the first six months of 2014.

Budd Bugatch – Raymond James

So basically 9 million in the first quarter and 9 million in the second or how do we split it?

Kurt Tjaden

Pretty close almost. I think your 9 is a probably a reasonable place.

Budd Bugatch – Raymond James

Okay thank you very much. Good luck on the year.

Kurt Tjaden

Thanks, Budd.

Operator

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

Matt McCall – BB&T Capital Markets

Thank you. Good morning everybody. So it sound like the expectation for Q1 gross margin curve looks for no change, year-over-year yet you’re forecasting a little bit of organic growth. Can you talk about what’s limiting any gross margin expansion given that you are talking about growth?

Kurt Tjaden

Yeah, I think it’s coming from the noise of the numbers Matt. It’s pretty similar from may be a little better on the margin side, but as Stan talked lumpiness on project, he talked about Fed gov being up which from a profitability perspective it can be a negative impact. So, I think those are probably the things that are moving around, but I call it noise as opposed to large movements that you look out particularly for the balance of the year.

Matt McCall – BB&T Capital Markets

Okay. And then I noticed that and excuse me if I missed it before but your CapEx outlook 90 million to 95 million. The history in my model I don’t see anything that high. Can you remind us where that’s being aimed? And then, you talked in the past that some of that growth investment and how it’s dragged – may be put a little bit of a drag on margins clearly didn’t show up last year, but what’s the expectation for OpEx investments in addition to CapEx investments?

Stan Askren

All right so you have two questions Matt I’ll take a shot at and let Kurt. Jump to your first question was CapEx and have we raised the answer is yes we are seeing more CapEx spending next year. We see tremendous opportunities to invest shareholders’ money and get some really great returns around new product, around productivity efficiency. And so we’re going to continue to invest that money and we think that is really the sort of the gasoline that keeps the journey going in out years. Number one. Number two, you asked about OpEx investments. So we continue to invest incremental dollars around sort of expanding the business, new branding selling models, products. We are investing some money in these plus initiatives around K-12, around international and then walls and we’re investing money in business system transformation. So, we see that kind of run in similar to last year. Again, we believe that’s the energy that’s going to continue to carry us on our journey for a long-term profitable growth. And I don’t think you should expect anything any major departure from what we’ve already told you. Kurt, do you want to.

Kurt Tjaden

No, I think the only add on CapEx I’ll remind Matt we’re in the midst of business system transformation and as we come into the next important phase in 2015, that is clearly having an impact on 2014 capital expenditures.

Matt McCall – BB&T Capital Markets

Okay and thank you both. Last question I had Stan, you talked about expectations for business activity to improve as the year progress. Can you just talk about some of the items, whether it’d be order trend or just macro trends in general? What are some of the things that are behind that confidence that the year is going to show improvement?

Stan Askren

Yeah, I guess Matt what we’re seeing in our activities we talk to the different segments underlying everything there is I think more confidence in from corporations. We believe small business conferences improving albeit slowly. And I think just the void some of the stuff we had last year around sequester budgets, payroll tax improvement or increases etcetera just bodes for a better economy. We think – I think the economy has seen bit of a headwind[ph] around this weather. We believe that is dampening a lot of the activity in office furniture here just around people purchasing and buying and giving off their projects we think when that goes away, we’re going to continue to see good growth. Our pipeline activity, regardless of the company or where it’s at, appears to be healthy. We’re hearing from our customers, our resellers, our selling partners similar sort of story. So, I don’t see a dramatic acceleration, but I think we’re going to have 2013 plus a bit of a bulk – a bit of a tailwind in office furniture. And then talking about hearth, I think that story continues to be positive. I think there is some skeptics in the economic indicators these days around start up and permits and all of that stuff, but we think we’ve done one related. We think affordability, household formations, consumer confidence it is there and we’ll continue. I think there is a lot of runway yet to go on the housing recovery.

Matt McCall – BB&T Capital Markets

Very helpful. Thank you, Stan.

Operator

Your next question comes from the line of Peter Lisnic from Robert W. Baird. Your line is open.

Peter Lisnic – Robert W. Baird

Good morning, gentlemen. Stan, I just wanted to go back to the hearth margin question. If we look at the incremental that you’ve been putting up in that business and where you’re at just from an absolute margin perspective that 18.5% that you booked in the quarter. How should we think about incrementals as we go forward? I know you mentioned expanding margins year-over-year, but we’re at record highs. Do we think about at some point, we might need capacity or some other costs in there to may be depress incremental somewhat from the 40% that you booked in ‘13? Just a little bit more color on where the profitability of that business can really go?

Stan Askren

Yeah great question, Pete. The answer is you should think about 30% to 35% leverage I think for some period. Quite frankly, I’m not sure of the capacity. We have ample capacity in that business to continue to grow. As we chain through the recession, we were very strategic about what capacity we’re retaining and what capacity we took offline. And so we prepared, I think with this scenario so we have another 40% to 50% capacity I think available. Now, there will be some capacity constraints in specific lines etcetera, but we’re not talking about major new investments need to happen to bring that online. And so it’s a very competitive business. We’re going to continue to meet the competition. There is ample opportunity for front end investments to make sure we’re delivering better value to our end customers and to our distribution. So a lot of that’s will be get paid to the day and day out. So that’s what I cycle back to – I’d use 30% to 35% as a good benchmark here for the foreseeable future.

Peter Lisnic – Robert W. Baird

Okay perfect. And then as you look at the growth in that business, you gave us a number for the first quarter. I’m just wondering, can you give us a little color on what the growth might look like by remodel versus new construction or fall ‘14 I’m just wondering if there is any initiatives that or any trends there that might make you post some stronger growth comps in remodel versus new or vice versa?

Stan Askren

So let me take a shot at that. We continue to believe that new starts, new construction, single family starts and multifamily starts are going to continue to grow at health rates lower than 2013, but still excellent rates. So that should be a real knife tailing force. Remodel/retrofit really breaks down into two categories for us. So there is a remodel/retrofit around I’m going to add finish off my basement or I’m going to add a room or I’m going to redo a room is one category. I think if you look at the numbers, the industry again as people become more confident about home prices, they begin to feel better about the economy, I think you’re going to see remodel/retrofit accelerate. I think that’s kind of a mid-to-high single digits sort of number and we’re well positioned there. Then the other side of this that we’re feeling positive benefit right now as we speak is, really around this hearth heating stove, this utility appliance that is to provide heat to a room more than just ambience.

So there is an inverse relationship or there is a positive relationship is probably a better way of saying that, between a fuel oil builds up or LP prices go up, our sales of those alternative heat appliances goes up as well. And you’re watching the news and watching these prices as well so, we’re getting a nice bulk for people that are trying to offset the negative impact of rising LP and scarcity of fuel also will bring people to these appliances. And so, I think what we’re likely to see because of the cold winter in those situations, we’re likely to see the remainder of 2014 or the beginning of next heating season, likely to see a positive impact there. Now how much will depend on where those fuel prices settle out. And so that’s the rest of the story I guess you’ll have to wait and see.

Peter Lisnic – Robert W. Baird

Okay, all right. That makes sense. And then just a quick one Kurt, you basically got all the components for the cash flow for ‘14 except for me your working capital should we expect any sort of change in working capital efficiency plus or minus in ‘14 as we think about cash flow? And then if you want to kind of get into uses of cash given where the balance sheet is at just update us there that’d be great?

Kurt Tjaden

Yeah so, I think our working capital story continues Pete. If you go back over the last three years, we’ve generated over $50 million of cash from working capital on $300 million on the incremental sales. That’s a great story. So we’re never done as you know but at a minimum, it’s – we target to be working capital neutral but as we work out. Probably use of cash perspective second one, I think is unchanged and it goes back to the thing Stan talked about its continue to invest in our business, maintain modestly, increase our dividends, look for value in existing acquisitions and then for share repurchases it’s simply the continued offset solutions. So, I think that constancy remains on capital priorities. Did I get all your questions in there?

Peter Lisnic – Robert W. Baird

Yes, you did that was very helpful. I appreciate the time and help and nice job and execution.

Stan Askren

Thanks.

Operator

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

Josh Borstein – Longbow Research

Hey, everyone. Congratulations on the quarter. Just a few quick questions on GSA you said it was down 40%. I think in 4Q you said it’s going to be up some in 1Q a huge swing on a sequential basis. What are you seeing right now in that part of the business?

Kurt Tjaden

So the question is regarding Fed gov Josh to make sure and kind of the trend of fourth quarter into first quarter and our outlook for 2014?

Josh Borstein – Longbow Research

Yes exactly.

Stan Askren

Yes it’s really timing of large projects is the bottom line. We still believe government is going to be down 10% to 20% for the year.

Josh Borstein – Longbow Research

For the year 2014, you’re saying?

Kurt Tjaden

Yeah federal government is going to be down in 10 to 14 – for the 2014.

Josh Borstein – Longbow Research

Okay, okay. And what percentage of the business is GSA right now, the federal piece?

Kurt Tjaden

Federal is 4% to 5%.

Josh Borstein – Longbow Research

And that’s of consolidated business or was that just office furniture?

Stan Askren

Office.

Kurt Tjaden

Office furniture, Josh.

Josh Borstein – Longbow Research

Okay. Thanks for that. And then you talked about some weather issues I was just wondering if with Christmas and New Year’s both falling midweek this year, did that disrupt the number available order entry days or shipments in any significant way that might be lingering here in 1Q?

Stan Askren

I don’t think so Josh, it’s an interesting point, but not that we can see. And to be honest with you, we don’t give that sort of response that – So our general sense is just kind of the overall cold weather snow like 24 states are impacted by this weather well pretty broad spread and pretty longer lasting than normal.

Josh Borstein – Longbow Research

Okay, great. Thanks. And then just with the investments you touched upon may be making some investments in architectural walls and I know that’s a relatively new opportunity for office furniture companies. Can you talk a little bit about how significant a category that might be – if you have any metrics on the relative size that’s out there?

Stan Askren

Yeah, we think it’s significant category. I would estimate that walls category is north of 500 million and growing faster than virtually any other category in office furniture. So for us, it’s an important growth objective. We started this probably 24 months ago. We think we’ve got a nice start, we think we have the right product, we have the right intellectual property. We executed our version of our Split and Focus that the team was [inaudible] in that and we’re seeing nice progress there. There is a long way to go to get to where it needs to be, but we believe it will be an important part of our growth portfolio in the out years.

Josh Borstein – Longbow Research

Great. Thanks for that. And then just final one for me, on the international business, can you just discuss a little bit what you saw on the quarter and may be your outlook on the next quarter here?

Stan Askren

Yeah, I mean certainly we experienced the same as many in the market. International slowed and we expect that it’s going to continue to be challenged certainly Mainland China has been challenged, Hong Kong important markets was along with any of slow of somewhat. So, we’ve had some great growth performance in past years. We’ve always thought this was going to be somewhat volatile just based on how the global economics works. So this is a bit of a – more of a flattish period. I expect next year is going to be – continue to be somewhat challenged but better than it was in 2013. And then I expect we’re going to get back to some really great growth years as we go. We don’t get too excited when it’s fantastic, we don’t get too concerned when it’s not as fantastic. It’s still we think is an important part of our again portfolio as we go forward.

Josh Borstein – Longbow Research

Great. Thanks for that and good luck.

Stan Askren

Thank you.

Operator

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

Todd Schwartzman – Sidoti & Company

Hi good morning folks. Question on the tax of government if you were to strip out GSA with respect to contract business, was that a high single digit towards the top-end of the total segment data that you spoke to? Was it like a high single digit improvement for the quarter?

Kurt Tjaden

We don’t split out that level Todd, but I think as Stan talked in his comments overall office furniture of low single digits when you check out the gov business.

Todd Schwartzman – Sidoti & Company

Okay. And on the guidance for furniture sales, I just want to make sure I got the numbers right. I think you said, you’re looking at supplies down 2% to 6% with contract up 5% to 9%? Is that accurate?

Kurt Tjaden

That’s accurate.

Todd Schwartzman – Sidoti & Company

Okay. And that’s on adjusted or reported basis?

Kurt Tjaden

You’re talking organic?

Todd Schwartzman – Sidoti & Company

Yes

Kurt Tjaden

Those are both organic report.

Todd Schwartzman – Sidoti & Company

Okay.

Kurt Tjaden

2% to 6% are for supplies, 5% to 9% are the rest of the business.

Todd Schwartzman – Sidoti & Company

And on an as reported basis, I think you gave those numbers as well I didn’t get them in time?

Kurt Tjaden

Yes, we said overall up 1% to 5%, or 3% to 7% on an organic.

Todd Schwartzman – Sidoti & Company

Okay, great. Thanks. Regarding the – on the hearth side, looking at the benefit in material costs that you had in Q4. To what extent is that ongoing in first quarter thus far?

Kurt Tjaden

You say benefit of material costs, we never really call that out. We really – the benefit the margin expansion is really around sort of cost structure leverage and we expect that to continue.

Todd Schwartzman – Sidoti & Company

Okay. So it’s not an absolute number then?

Kurt Tjaden

No.

Todd Schwartzman – Sidoti & Company

Okay. And on the international side emerging markets really nothing of consequence correct?

Stan Askren

Correct.

Todd Schwartzman – Sidoti & Company

Okay. One housekeeping question just looking at the CapEx that you reported for full year about 79 million looks like the September the nine months year-to-date was around 47 million. I’m just having some trouble reconciling that full year number if in fact, you spent 19 million in the fourth quarter?

Kurt Tjaden

Well, we would have ramped through the year Todd, and as Stan talked about whether that business system transformation initiative. We have several large projects around our laminate reconfiguration our facility down here so just a function of timing as [inaudible] during the year.

Todd Schwartzman – Sidoti & Company

So the full year number the 79 is correct?

Kurt Tjaden

It is correct.

Todd Schwartzman – Sidoti & Company

Okay. Okay, great. Okay that’s all I’ve got for now. I may just get back in the queue. Thanks a lot.

Stan Askren

Thanks, Todd.

Operator

And we have no further questions at this time.

Stan Askren

Okay. Thank you very much for joining us. We appreciate your interest in HNI. We look forward to talking to you in the future. Good day.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s conference call. You may now disconnect.

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