HNI
#Good morning, everyone.
We'll share our assessment of the first quarter 2016, provide some thoughts on our outlook for second-quarter and full-year 2016, and then as usual, we'll open the call up for questions.
Non-GAAP earnings per share increased 48% on a sales decrease of 4%.
It was a great start to the year, with profits exceeding our expectations.
We are managing the business well and we delivered another quarter of strong operational performance driven by productivity improvements, structural costs takeout, and strong returns from previous investments.
Now, I'd like to make a point here: this is not profit performance just from short-term cost cutting.
This is about managing the business for the long term through a focus on productivity and working to facilitate flow through our businesses and investing in projects that we think are going to drive long-term growth and long-term profitability improvement.
Operating margin decreased in both our office furniture and hearth segments while we continue to invest for long-term profitable growth.
Sales results for the quarter were as expected.
Office furniture sales were down 5%.
On an organic basis, office furniture sales were down 6% against very strong prior-year comparisons of 14% growth in the first quarter of 2015.
Sales in the supply driven channel were down 6% or down 8% on an organic basis.
Sales in our other office furniture businesses were down 4%.
Hearth sales decreased 2%.
Strong momentum continued in new construction, with sales increasing 10%.
Warm weather and the low-energy costs continue to negatively impact sales of pellet appliances, which declined 35%.
During the quarter, we also met a significant milestone in our business systems transformation.
We had the successful transition of one of our small office furniture companies to our new enterprise system.
We are projecting ---+ I want to remind you that this business system transformation is a broad-based transformation on how we work.
It's a natural extension of our rapid continuous improvement culture with substantial process simplification has already occurred that eliminates waste from our combined total business.
While we're only in the middle innings of our implementation timeline, we are in fact seeing the financial benefits of BST, this business system transformation, across our businesses.
Overall, I'm very pleased with our first-quarter results.
Thank you, <UNK>.
So a couple additional highlights for the first quarter include non-GAAP consolidated gross margin improved 190 basis points versus the prior year to 37.4%.
These results were driven by strong operational and material productivity and better price realization, which were partially offset by lower volume.
Non-GAAP selling and administrative expenses were down versus the prior year due to broad-based cost reductions, partially offset by strategic investments and incentive-based compensation.
During the quarter, we completed the acquisition of a small office furniture business.
This acquisition will contribute approximately $30 million of sales and $2 million of profit in 2016.
So as we look to the second quarter 2016, we anticipate consolidated sales to be down 4% to 7%.
Office furniture sales are expected to be down 4% to 8%.
Supplies-driven office furniture sales are projected to be up 2% to down 2%, or down 1% to 5% organically.
Sales in our remaining office furniture businesses are forecast to be down 9% to 13% against very strong prior-year comparisons in a challenged China market.
Hearth sales are expected to be flat to down 4%; new construction channel sales expected to be strong again, up 10% to 14%.
And we are projecting retail pellet sales to be down 26% to 30% and retail non-pellet sales to be down 10% to 14%.
Non-GAAP gross profit margin is expected to increase significantly over the prior year, consistent with our recent quarterly improvements.
Non-GAAP SG&A is expected to be comparable to the second-quarter 2015 amount of $167 million.
And our estimate of non-GAAP earnings per diluted share for the second quarter is in the range of $0.54 to $0.59.
So let me shift to the full-year 2016.
For the full year, we expect consolidated sales to be down 2% to 4%.
We are forecasting office furniture sales to be down 2% to 5%, and sales in our hearth business are expected to be flat to down 3%.
We are narrowing and increasing our estimated range of our full-year earnings per share guidance.
Our current best estimate of non-GAAP earnings per diluted share for the full year is now in the range of $2.40 to $2.70.
<UNK>.
All right.
Thank you, <UNK>.
So I'll summarize here: our businesses are strong, agile, and well positioned for the future.
Our brands are competing well in their respective markets.
Despite this uncertain economic environment, I'm confident in our ability to continue to drive long-term profitable growth.
So with those comments complete from <UNK> and myself, we'll now open it up to questions.
Well, I think, <UNK>, as we look out and talk to our dealers and talk to our dealer sales folks, and we look at pipeline activity and just sort of gauge overall sentiment, I am feeling more optimistic about the second half than I was the last time we talked to you.
If you look at our outlook ---+ in fact, we're showing the second half is going to be up slightly, and so feeling better.
It's early, though.
I think there's lots of choppiness in our markets still.
And we are seeing the upturn or I would say my sentiment is improving in both the supply-driven side as well as the contract side.
The answer is it's probably too early to really comment on the order pattern uptick.
So it's more about sentiment, just being in the market.
Our executive group in the market talking to people we think are the closest to the customers and feeling more positive.
Related to something else is the answer.
Those structural cost savings are still out there as we projected earlier.
As I indicated pretty emphatically in my opening comments, we are seeing broad-based productivity improvement.
The operations and the distribution and the front end are executing very well.
We're seeing the savings and it's in lots of places from our business system transformation initiative.
So as you recall, that BST is not just an Oracle implementation, it's really an understand, simplify, standardize, and then flow.
And so we have 100 to 150people working full time on that.
And we're seeing the benefits in the business even before we roll to an Oracle implementation.
And then final point is as you have noted in the past, we've invested significant capital back into the business that we've indicated has a relatively quick, like 12- to 24-month, payback and we are seeing those results flow through to the operations.
So I'll go back: we're really seeing broad-based productivity improvements across the business, and the structural stuff is still out there.
This improvement is not due to that; that's yet to come.
We bought a small company that is more of a catalog-based, click-to-buy business heavily focused in seating.
It was a nice little acquisition that came on our screen.
It's called OFM.
They fit in nicely; it tucks in.
It's not a huge deal for us, but it's a nice little profit contributor to the overall Corporation.
Yes, pretty much.
You know, and it's jumping around.
We, as we've indicated to you before, look at permits.
And permits ---+ I don't have in front of me.
It seems like last month were up 20%, 21%.
The previous month were up 18%.
So we're pretty ---+ we continue to be pretty bullish on new construction.
And I would say that our outlook is based on these recent two months is improving.
I don't think we've moved on our numbers big.
Yes, we want to see [on joint] improvement.
But I would say again, if I give you how I'm feeling, I feel better about them than I have in the past.
That's correct.
That is the way to read that, <UNK>.
You have that correct.
Well, China is down ---+ you know, is going to be down significantly more than North American contract.
But as you recall, that business is still, relative to North American contract, smaller.
So the mix would be ---+ China would be down more, but it's not ---+ it's a much smaller part of the mix.
It would've been close to that, <UNK>.
North America contract ---+ hang on here is second.
A little bit less.
Yes, that's right.
(laughter)
We'll look here, <UNK>.
Just keep going.
Yes, it starts to ease a bit in third quarter, but really it's fourth quarter when everything kind of anniversaries and settles down.
It's still interesting to see where pellet ends up.
It may go down a bit more in fourth quarter depending on this weather and alternative fuel costs.
You know, one thing I always have to mention, <UNK> ---+ I'll use your question the platform.
As it is, it's still a profitable business for us.
We have a significant market share.
It's just facing a huge headwind on fuel costs and on weather.
Again, it comes back to the homeowner and how hard they are getting kicked in the head on their bill.
So the colder it is, the more they're running their furnace.
And you know, the higher the alternative is LP or fuel oil.
So it's a combination thereof.
And it depends on which is spiked and which has not.
I would guess, if I had answer your question, that costs of the fuel is probably the biggest issue and weather would be second.
So I'll echo <UNK>'s earlier comments, <UNK>.
As you look at second half of the year, you'd start to see those comps turn modestly positive.
So based on where we sit today, third quarter we'd start to see that turn.
Pretty early yet, <UNK>, is what I would respond there.
And as far as our sales for second quarter, that's ---+ we're still delivering that which was ordered in this softer period.
So it's still relatively early on the order book and I would say it's really more about how I'm feeling about the sentiment.
As you know, and I know you know this, it's really for us, it's a very choppy sort of environment out there around size of orders, around geographic sort of movement, around walls versus other stuff.
So lots of moving complex pieces.
Thanks, <UNK>.
Yes, <UNK>, it would be in both segments.
And it's a relatively small number: 2% to 3% price increase.
It's really just an annual cycle of price increases to offset costs, people costs, et cetera.
So it's actually a much smaller number than we've historically been able to gather over the years.
Yes.
And for us, we are broadly diversified between these different segments and these different companies and these different product categories and different geography.
I would say it's broad-based.
Certainly, we're feeling the downstroke from energy.
The other segments were not broken out as much.
I would say the large projects are probably less.
Smaller business would be relatively more stable than the large projects.
I don't know, <UNK>.
Anything else.
No, I think you got it.
Okay.
I would say at this stage, <UNK>, our call is more around productivity improvement, operational improvement than it is market.
Our comment ---+ the comment in that press release was meant that really signal that the sentiment, my personal sentiment and our collective sentiment as senior management team, is improving.
But we have not factored those numbers into our outlook in a significant way ---+ or any way, really, is what I would say.
Yes, that's great question.
New products, we classify new products as significant new SKUs introduced in the last, let's say, three years, I guess.
That level is running about 25%.
That's higher than we have run in the previous decade, but is consistent with what we've been running in the last several years.
It's a very important part of our story going forward.
We continue to find lots of new opportunities for new products.
And as you know, <UNK>, each of our operating companies run and eat in different segments.
And so if you walk through and look at each of the companies, they are all working significant new product launches.
And so I think the pipeline is strong or stronger than ever.
And I think it's a very important contributor to our ongoing profitable growth initiatives.
All right.
Thanks, <UNK>.
Yes, one thing.
We understand it's <UNK> <UNK>'s birthday today and we want to wish <UNK> happy birthday.
And with that, we appreciate your interest in HNI and we appreciate your focus on trying to understand our business and we look forward to speaking with you in the future.
We hope everybody has a great day.
Take care, bye-bye.
