HNI's CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: HNI Corporation (HNI)

HNI Corporation (NYSE:HNI)

Q4 2011 Earnings Call

February 8, 2012, 11:00 a.m. ET

Executives

Derek Schmidt - Treasurer and VP, Corporate Finance

Stan Askren - Chairman, President and CEO

Kurt Tjaden - VP and CFO

Analysts

Budd Bugatch (Chad) – Raymond James

Matt McCall - BB&T Capital Markets

Leah Villalobos – Longbow Research

Todd Schwartzman - Sidoti & Co.

Operator

Good morning. My name is Amanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the HNI Corporation Fourth Quarter and year-end Fiscal 2011 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. Schmidt, you may begin your conference call.

Derek Schmidt

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss fourth quarter and full-year 2011 results, which were announced yesterday after the market closed. My name is Derek Schmidt, Vice President of 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 today on the line for HNI Corporation are Kurt Tjaden, Vice President and Chief Financial Officer, 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 the HNI Corporation website. The corporation assumes no obligation to update any forward-looking statements made during this call.

I now have the pleasure of turning the call over to Stan Askren. Stan?

Stan Askren

Thank you, Derek. I’ll start out by wishing everybody a good morning. Pleased with our performance in 2011, it was a strong year of profitable growth for HNI Corporation. Our strategic investments and market initiatives delivered solid 8% top line growth. Outstanding execution across all businesses resulted in a 40% improvement in operating income.

Very strong working capital performance drove strong operating cash flow in excess of $131 million. We accelerated our growth investments, strengthened our competitive position, and made significant progress on our long-term strategies.

Growth and profit improvement in the fourth quarter was solid, and we ended the year with strong momentum. Sales in our Office Furniture, Contract and international businesses remain strong with 7% with top line growth.

Our Supply driven business grew 3%, small business confidence is improving, and our strong brands are well positioned for profitable growth. Our Hearth business executed well and exceeded expectations. Remodel and retrofit sales increased 8% on stronger remodeling activity. The new construction channel was up 6%, as homebuilders sentiment continued to improve.

I’ll turn the call over to Kurt, to review the specific financial data for the fourth quarter.

Kurt Tjaden

Thank you, Stan. For the fourth quarter 2011, consolidated net sales increased 7.3% to $500 million, or 5.5% on an organic basis. Sales for the Office Furniture segment increased 7.4% to $402 million, or 5.2% on an organic basis. Net sales for the Hearth Products segment increased 7.1% to $98 million.

Consolidated gross margins increased to 35.6% compared to 35.2% in the prior year quarter due to higher volume and improved price realization, which was partially offset by increased material cost.

As a percent of net sales, total selling and administrative expenses, including restructuring and impairment charges, improved 1.4 percentage points due to higher volume and lower restructuring and impairment charges, partially offset by increased fuel costs, higher incentive-based compensation, and acquisition-related cost.

We ended the year with $73 million of cash, and operating activities generated $134 million of cash during 2011, up 42% from last year.

Stan?

Stan Askren

Looking forward, we enter 2012 with strong momentum, and we’re on track to deliver sales growth and profit improvement in all businesses.

Our strategy remains focused. We’re investing in our core North American businesses to capture new growth opportunities, and aggressively pursuing attractive prospects and key vertical and fast growing international markets.

I’m pleased to announce that we successfully completed the acquisition of Sagus International, last quarter. HNI is now the industry leader in the K-12 education furniture market. In the short-term growth in this business, we’ll likely be restrained by reduced state and local government funding. However, we are excited about the long-term value creation prospect this investment offers our shareholders.

Our office furniture contract brands continue to compete well in their markets. Year-over-year growth rates within the contract channel are expected to ease against strong prior year comparisons. Improved corporate spending is projected to drive moderate single-digit growth in the channel.

Our international business remains a significant growth opportunity, particularly in China where we are well positioned to outperform the market. Growth in our supply driven channels is expected to improve as small business comp strengthens, our investments in branding, product development and selling capabilities is projected to drive solid growth.

In our Hearth segment, we anticipate sales growth to be relatively modest compared to strong 2011 results. Top line growth in the new construction channel is expected to rebound modestly, single-family starts, and housing permits improve.

In the remodel-retrofit business, demand should benefit from stronger remodeling trends, but overall channel growth is expected to be modest compared to the exceptionally strong performance of our alternative fuel products of last year.

With the Hearth industry’s strongest brands, best products, and superior manufacturing and distribution capabilities, we remain well positioned for continued strong profitable growth. Across all businesses, we’re aggressively investing for future growth. I’m excited about our new product and platform initiatives across all businesses in 2012. They’re innovative and highly relevant to the changing needs of the marketplace.

We continue to invest in opportunities for significant and transform of cost improvement. We remain relentless in a pursuit of lean opportunities and structural cost reduction. We are leveraging our RCI culture and disciplined to champion both process improvements throughout the company, and we’re investing in the comprehensive business system transformation.

We are investing in our core and building strong businesses to perform over the long-term. Kurt, will now provide the financial outlook for the first quarter and full-year 2012.

Kurt Tjaden

So the first quarter 2012, we anticipate overall sales to be up 10% to 13%. Office furniture sales are expected to be up 12% to 15%, including sales from acquisitions or up 7% to 10% organically. Organic sales in the supplies driven channel are expected to be up 7% to 9%. The sales in the rest of our office furniture businesses are expected to increase 8% to 10%.

Hearth sales are expected to be flat to up 4%. Gross profit margin is expected to decrease marginally versus first quarter 2011 when it was 34% excluding restructuring and transition charges.

SG&A as a percentage of sales, excluding restructuring and transition charges, is expected to be slightly lower than fourth quarter 2011, when it was 33.4%.

Net interest expense is projected to be $2.6 million and the effective tax rate is projected to be approximately 36% during the first quarter.

For the year, we are expecting capital expenditures to be $50 to $55 million, and we project full-year 2012 depreciation and amortization to be approximately in line with 2011.

Our estimate of non-GAAP earnings per diluted share for the first quarter is in the range a $0.05 loss to breakeven. And for the full-year 2012, we are reaffirming our estimate of non-GAAP earnings per diluted share in a range to a $1.30 to $1.50, consistent with the outlook provided last quarter.

That summarizes our outlook for the first quarter and full-year, I’ll now turn it back to Stan.

Stan Askren

Thank you, Kurt. I’m encouraged by the on-going recovering in our economy and remain optimistic about our markets and growth prospects. We will continue to aggressively invest for future growth while pursuing opportunities for structural and operating cost reductions.

Our businesses are strong, competitive and agile and we’re well positioned for long-term profitable growth. 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 at Raymond James. Your line is open.

Budd Bugatch (Chad) – Raymond James

Good morning, Stan, Kurt, Derek, this is actually Chad filling in for Budd.

Stan Askren

Good morning, Chad.

Budd Bugatch (Chad) – Raymond James

Good morning. Congratulations on the strong performance in the quarter.

Stan Askren

Thanks.

Budd Bugatch (Chad) – Raymond James

A couple things, I guess, Stan, as I look at the upside relative to your original revenue guidance, it looks like it came pretty significantly from Hearth. What drove the surprise there versus your internal expectations? And then I guess as we look forward to the guidance for Q1, it looks like you’re guiding for the growth rate to slow sequentially, though I think the comparison’s a little bit easier than it was in Q4. Just kind of help us understand the dynamics there.

Stan Askren

Okay, I’m going to need you to ask that second question here after I answer the first one. So Hearth was a key driver for us. Sentiment in new construction was stronger than we anticipated. We saw strong growth in the remodel retrofit channel around things other than alternative fuels. So gas, the gas category grew nicely there. I think overall, that part of the economy is improving. And that business executed very, very well. We continue to be pleased with how they performed. The moves that we made during the downturn are paying off and we’re seeing strong market momentum and strong operational cost performance.

Budd Bugatch (Chad) – Raymond James

Okay.

Stan Askren

Restate that second part for me.

Budd Bugatch (Chad) – Raymond James

Yes. The second part is, you’re guiding Hearth to zero to 4% growth, which slows versus what you delivered in Q4 and I think the prior year comparison actually gets easier for you in Q1, at least in terms of the revenue growth. What’s driving that dynamic; is it’s seasonality or is something else going on?

Stan Askren

Well, there’s several factors moving that business. So one is new construction, we think is going to improve modestly. Second, the remodel retrofit activity should improve modestly. The big change is the alternative fuel. Warm weather drives lower sell alternative fuel, as you’d imagine if you’re sitting there watch the meter run on your fuel oil meter or you’re sitting there chilled or there’s a power outage due to an ice storm, that drives you to thinking about alternative fuel appliances or alternative heat.

When it’s warm, that changes that whole dynamic, so you, I’m sure are watching and experiencing what we are, which is a much warmer winter and that will carry over on the first quarter, first half of 2012.

Budd Bugatch (Chad) – Raymond James

Okay. That definitely makes sense. I guess, switching over to the office side, your guidance for Q1, 7 to 10% organic growth with 8 to 10% on the rest of the business, ex supply driven, that obviously looks very strong relative to sort of the trends that we’re seeing from [inaudible], some of the trends that we’ve heard from some of your primary competitors. What’s driving the growth rate that you’re expecting there? And I guess, the second part, I don’t want to hit you with too many two-part questions today, but the big macro worries everybody’s focused on is government project business and Europe. Could you remind us of what your exposure to those two areas is, please?

Stan Askren

Sure. Let me take a whack at this, Chad. We are feeling good solid momentum in Office Furniture in both the supply side of the business and in the contract international side. Supplies are seeing improved small business confidence. We feel good about our market position, the investments that we’ve made in the past and how they’re going to pay off in that category. Our contract businesses continue to see solid pipeline activities, solid business order activity and so although it’s likely to – the industry is likely to cool off a bit, we think there’s still strong growth there as we look forward.

And then finally, our international experience, or exposure is primarily around China and Asia. We expect that to continue to be strong. You read in the paper that China GDP is going to come down from 9.5 to 8.5 or 8.9, still, very strong growth. Those businesses, our businesses there are performing very well and so that’s going to continue I think to buoy our sales.

Our exposure to government is, we’ve had significant growth in both Federal and State and Local. We think that State and Local is going to slow more than Federal. Federal is going to slow, but again, we think we’re well-positioned and should continue to do well in those segments.

Budd Bugatch (Chad) – Raymond James

Last question for me. As I work through some of the math on your guidance for Q1, looking at the contribution margins and then compare that to the full year, you know, for Q1 on a double-digit increase in sales, I actually get about, at the mid-point, maybe 1.5 million or so reduction in operating income. But then as I look at the full-year guidance, it seems to imply sort of more of a normative 25 to 30% kind of contribution margin. So what are some of the moving parts that are affecting Q1 and then how do you get from not a whole lot of incremental profit in Q1 to the assumption for the full year?

Kurt Tjaden

Yeah, Chad, this is Kurt. So you know, consistent kind of with past experience, it can be really choppy between the quarters. So what we have rolling in terms of mix of our business and that, as you know, given our diversity will cut across multiple elements, whether that’s channels, customers, geographies. We’ll certainly have a key impact on that. You know, Stan talked – we had education, which exacerbates that even a little more this year with that addition and you know, those really get to be the key drivers on that.

Stan Askren

So in other words, Chad, is we have lots of factors or variables that move around. It has to do with mix, spending, op and material price gap, all sorts of things. And what we are reporting is first quarter is going to be a little bit less, but we don’t really manage for the quarter, we manage for the year and we maintain the same level of sort of optimism about the year and the first quarter moves around a little bit differently, you know, than some of the other quarters based on all those factors that Kurt just talked about.

Budd Bugatch (Chad) – Raymond James

Got you. Thanks, guys, for talking my questions and good luck to you on the balance of the year.

Stan Askren

Thanks, Chad.

Operator

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

Matt McCall - BB&T Capital Markets

Thanks, good morning, everybody.

Stan Askren

Good morning, Matt.

Matt McCall - BB&T Capital Markets

I’m going to follow up on a couple of the previous questions. The first one, Stan, I didn’t hear – I think he asked what’s your exposure to some of those end markets. If I asked you, State and Local, Federal, then lump in public education both K through 12 and higher ed, what are we talking about there as a percent of total? I think that’s where they growth rate kind of pops out at me, if those are expected to slow, you know, 8 to 10% looks pretty darn good.

Stan Askren

Yes, government is approximately 15 to 20% of our combined office furniture business, Matt. We don’t – I don’t think we’ve broken out the government – excuse me, the education, but – and some of those are intertwined as well. Certainly, we expect the government this year to be less of a contributor to our growth. We still expect to do good business there and quite frankly, outperform the market. So what that means is we expect an even better growth or strong growth in the office side and the commercial side of our businesses.

Matt McCall - BB&T Capital Markets

Okay. And so back to – I guess switching over to the contribution margin side, looking at Q4 specifically, if my math’s right and I’m not always, it was a negative contribution margin in Hearth despite that strength. Was it, I know you said the quarter-to-quarter thing, you’re not managing to quarters. I’m just trying to understand specifically is it a mix issue, is it a price-cost issue? What impact did Hearth incremental profit in Q4?

Kurt Tjaden

So, Matt, this is Kurt. You know, part of that incremental margin, as you look through the year in 2010 and look for the year at really strong performance, so it’s choppy and the fourth quarter is a great example. If you go back to the fourth quarter 2010, we had some really strong performance and some kind of one-time events that accelerated that. I think if you looked at core leverage on that business for the year and the quarter, we – I think the year is more indicative of where that business is leveraging.

Matt McCall - BB&T Capital Markets

Okay, all right. And then one final one and then I have a clarification. You mentioned some of the successes you’re having with the investments you’ve made and specifically I’m curious about the supply chain. It sounds like you see optimism improve, but do you think that the market’s growing as much as you are, or do you think there’s a share gain? Are you gaining some share in that business based on – it sounds like that was what you were implying.

And then the final question I have was just, can you repeat that gross margin guidance, I missed that?

Stan Askren

Do you want to go through gross margins?

Kurt Tjaden

Yes. Sure. So for first quarter, Matt, we expect gross margins to decrease marginally versus year over year. Last year was 34%. [Inaudible].

Matt McCall - BB&T Capital Markets

Okay, thank you.

Stan Askren

I’ll answer the question around market momentum. I’m always hesitant, Matt, to claim market share movement in this industry on a quarterly basis. That said, clearly, I think that we are performing well in the markets – in that segment of the market where we compete. We’ve been working at it very aggressively over the last couple of years investing in selling, branding, product, growing our distribution, programs, on and on you go. And I think we’re getting some traction in that. And so do I think we’re going to outperform the market, the answer is yes, I do. And I also think that the core market is improving slowly as new business confidence comes forward.

Matt McCall - BB&T Capital Markets

And would the expectation be focused mostly on supply there? Would you expect the greatest level of that performance to be in supplies, in Hearth, in contract, in international? Where would you – if you had to rank your expected outperformance?

Stan Askren

Well, I’d tell my team, we better outperform in every segment, Matt.

Matt McCall - BB&T Capital Markets

But if you had to tell your team which one?

Stan Askren

We should outperform the same in both.

Matt McCall - BB&T Capital Markets

Okay. All right. Thank you, all.

Stan Askren

You bet.

Operator

Your next question comes from the line of Leah Villalobos from Longbow Research. Your line is open.

Leah Villalobos – Longbow Research

Good morning. I was wondering if you could talk a little bit more about your CapEx budget for the year. It seems like there’s a bit of an increase there in where you’re investing in terms of capital.

Stan Askren

So we are – as we go forward, we are continuing to invest, Leah, in new products. As we’ve looked at the year and we’ve done our strategic thinking and planning, we find that there’s some investments, not so much in new facilities, but in improving the productivity and efficiency of our existing operations and then finally, we are investing in a major business systems transformation project. So if you go back to our, sort of the core of who we are, it’s about driving rapid continuous improvement, driving our internal business processes and our operational performance. As we step back and look to our business, we see significant opportunity for us to come together and link a lot of the great work that the team has done around internal business processes and driving a major business system transformation initiative.

Leah Villalobos – Longbow Research

And in terms of the segments, Office Furniture versus the Heath segment, is that just sort of like an overall investment corporate wide or is there more of an investment in one versus the other?

Stan Askren

Well, we don’t really break out our CapEx investment by those businesses, but I would say it’s overall.

Leah Villalobos – Longbow Research

Okay. And then if you could just give us an update in terms of, you’ve had Sagus now for a couple of months, how the integration is going and you know, if there’s been any surprises and how you look at that opportunity longer term?

Stan Askren

Well, we’re very early in that process, so I don’t think there’s anything new to report. It’s on track with what we expected, but we’ve got a lot of work to do to really capture the full benefit of that acquisition.

Leah Villalobos – Longbow Research

Okay. Thanks. Best of luck.

Stan Askren

Okay, thank you, Leah.

Operator

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

Todd Schwartzman - Sidoti & Co.

Hi, good morning, gentlemen. On the price realization for the fourth quarter, in which segment did you see the better realization and looking forward as well, what is your outlook there, where is the greater opportunity to take additional pricing in 2012?

Stan Askren

I would say, Todd, our prices utilization has been consistent across our businesses and you know, our pricing process continues to be the same, which is where we can get price, the market will accept price, then we will get it, but providing any more detail beyond that, I think would not be value add.

Todd Schwartzman - Sidoti & Co.

Okay. And on the international side, ex China, is there anything you’d want to highlight, strengths, weakness?

Stan Askren

No. I think our focus is primarily on China and I think that summarizes it well.

Todd Schwartzman - Sidoti & Co.

And roughly, how big is the China business now?

Stan Askren

Our international business is somewhere around – it’s a little bit less than 10%.

Todd Schwartzman - Sidoti & Co.

And as far as your guidance, the full-year guidance for ’12, at both the top end and the low end, what’s incorporated as far as your outlook for steel and other input costs?

Stan Askren

[Inaudible] and consistent with the markets. We’ve seen commodity prices stabilize. Year on year, we’d expect to see some commodity inflation in the first half of the year and we’ll see where it goes in the second half.

Todd Schwartzman - Sidoti & Co.

You don’t care to make any comment as far as the spread between that $1.30 and the $1.50?

Stan Askren

No, I think we’re comfortable with it in that range at this point.

Todd Schwartzman - Sidoti & Co.

Okay. Thanks a lot.

Stan Askren

All right, thanks, Todd.

Operator

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

Stan Askren

Thank you so much for your interest in HNI and we appreciate your time, we look forward to talking to you in the future. Have a good day.

Operator

This concludes today’s conference call. You m my now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!