HNI
#Good morning, everyone.
I'll share a brief assessment of the fourth quarter, and then turn the call over to <UNK> <UNK>, who will review some of the specific financial details.
And then I'll come back on and share some thoughts on our outlook.
And then <UNK> and I will open it up for questions.
So to start, our fourth quarter played out as expected.
We stabilized our supplies-driven business and made strong progress working through our operational transformations.
We delivered solid organic sales growth and are excited about our market momentum.
I'd like to take a moment to reflect on the year.
2017 was a year of transition.
We confronted multiple challenges, some planned, some not.
We dealt with rapid and significant changes in our markets.
We took on large-scale transformations involving our operational network, fulfillment models, business portfolio and our enterprise system.
In short, we responded to our challenges, made investments and adjust our business to better deliver long-term profitable growth.
I feel good about where we're headed.
We're nearing the end of our transitions.
The investments we made put us in a position to drive new levels of productivity and take advantage of improving market demand.
Our most significant investment has been our Business System Transformation initiative, we call it BST.
I'm pleased to report we have successfully switched over to our new ERP platform earlier this month.
This new platform is a key enabler for long-term value creation.
And I'd specifically like to take a moment to thank the numerous numbers who have been involved in this project for their significant effort, dedication and success in helping us achieve this key milestone.
Our supplies-driven business is still in transition, but stabilizing.
We have a clear vision for how this business move forward and we're building out strategic capabilities.
This includes a focused effort around dramatically lowering the effort required to buy office furniture and making the whole process more convenient and easier for sellers and customers.
During the quarter, we made the difficult decision to close our Paoli business.
This decision was part of our continued efforts to drive portfolio efficiency and simplification.
We will continue to serve these market requirements through product offerings from the broader family of HNI brands.
I'm excited about our future.
Our office furniture businesses have momentum in the market and delivered 8% organic sales growth in the second half of the year.
Our hearth business continues to perform very well, with solid growth and record profitability.
I'll now turn the call over to <UNK> <UNK>, our Chief Financial Officer, to review some financial details for the fourth quarter, and then I'll return to discuss our views on 2018.
<UNK>.
Thanks, Stan.
For the fourth quarter, consolidated organic net sales grew 3.7% versus the prior year.
When including the impact of acquisitions and divestitures, sales increased 0.5%.
In the office furniture segment, sales increased 3.2% organically or minus 1% in total.
Within the office furniture segment, organic sales in our supplies-driven business were flat or minus 4%, including the impacts of divestitures.
Sales in our contract and international businesses increased 7% organically or plus 2% in total.
In the hearth segment, sales increased 5.1%; new construction sales increased 6%; sales of retail products, including wood, gas and pellet products, increased 4%.
Non-GAAP net income per diluted share was $0.47 compared to $0.82 in the fourth quarter of 2016.
As expected, the earnings decline was primarily due to lower profitability in our supplies-driven business, which mainly resulted from increased strategic investments, higher input costs and unfavorable business and product mix.
Okay, I'd like to take a moment to provide some color around some several nonrecurring items we recorded in the fourth quarter.
You can follow this in our GAAP to non-GAAP reconciliation contained in our press release and also in the earnings presentation posted on our website.
The biggest of these items was the impact of the recent tax legislation, which drove a positive $44.8 million revaluation of our deferred tax liabilities.
We had $20.9 million of impairment charges and a $4.8 million loss on disposal of assets, both of which were primarily driven by our decision to close the Paoli brand.
We incurred restructuring and transaction cost of $9.8 million related to the final stages of our structural cost-reduction initiatives.
And we recorded a $10.3 million valuation allowance on a long-term note receivable.
The net impact of these items was a $0.30 benefits to earnings per share which we excluded from our fourth quarter and full year non-GAAP results.
Stan.
So 2018 will be a return to profitable growth.
We will conclude our operational transitions and deliver record benefits from core productivity improvements and structural cost reductions.
Our profitability will improve over the course of the year.
The supplies-driven market will continue to be dynamic, we're seeing a stabilization in the wholesale channel.
Overall, we're expecting growth from our supplies-driven business, both in top line and profit.
We continue to hold a unique competitive advantage which no other manufacturer can match.
Our brands, products, fulfillment capabilities provide unparalleled value to our resellers and to our customers.
Our contract-driven businesses have strong momentum which we expect to carry through 2018.
We're winning across multiple fronts, strengthening distribution, expanding our product offering and deepening our relationships with key influencers.
The hearth business continues to deliver record results.
We remain optimistic about growth in the hearth business as single-family new home construction remains strong and the remodel/retrofit market expands.
We remain a strong company with leading market positions and the financial capacity to aggressively pursue profitable growth for our shareholders.
I anticipate 2018 to be a good year for HNI.
With that, I'll have <UNK> provide some details on our outlook.
Okay.
Let's start with the first quarter.
We feel good about 2018, but the first quarter profit will be a low point for the year.
We are projecting strong organic growth of 5% to 8%, but this will be more than offset by several factors.
First, we'll have $9 million of incremental costs related to our BST project in the form of amortization, support and switchover costs.
Second, we're seeing a continuation of the unfavorable business mix we experienced over the second half of 2017.
When combined with inflation, we expect a negative $10 million to $12 million price/cost gap.
Third, expect to see higher SG&A expenses of $6 million to $8 million, primarily driven by investments, including our direct fulfillment initiative.
Additionally, the benefits from our transformations will not yet be fully realized.
We expect these trends to reverse as we move through the year.
We expect consolidated first quarter organic sales to be up 5% to 8% or up 2% to 5% when including the effects of divestitures and the closure of the Paoli brand.
Office furniture sales are expected to be up 6% to 9% (Sic-see presentation slide - 6% to 10%) organically or up 2% to 6% in total.
Sales in our supplies-driven business are projected to be up 7% to 10%.
We're forecasting sales in our contract office furniture businesses to be up 7% to 10% organically or down 2% to up 1% in total.
We expect hearth sales to be up 1% to 4%.
Within the hearth segment, new construction sales are forecasted to be up 2% to 5%.
We are projecting retail hearth sales to be flat to up 3%.
Non-GAAP gross profit margin is expected to be similar to our fourth quarter result of 36.1% of net sales.
Non-GAAP SG&A, which includes freight and distribution expense, is expected to be just below our fourth quarter level and be approximately $174 million.
The impacts of the recently enacted tax legislation are included in our estimate.
We expect our tax rate will be approximately 19% to 20% in the first quarter and 23.5% for the full year.
Our estimate of non-GAAP earnings per diluted share for the first quarter is in the range of $0.01 to $0.06.
So now let's shift gears and talk about the full year.
We expect to see improved earnings.
We estimate non-GAAP earnings per diluted share will be in the range of $2.40 to $2.80.
This is based on a 5% to 8% consolidated organic sales growth or 1% to 4% in total.
We're expecting our office furniture businesses to deliver organic growth of 4% to 8%, with our hearth business up 3% to 6%.
The impacts from the recently enacted tax legislation are included in our estimate.
For the full year, the impact of the tax legislation will reduce our estimated effective tax rate to 23.5%.
We expect full year free cash flow to be in the range of $100 million to $120 million, which includes estimated capital expenditures of $75 million to $85 million.
Stan.
Okay.
Thank you, <UNK>.
With those comments complete, we'll now open it up to questions.
Matt, for the full year 2018, we're expecting to reach record-level gross profit margins in the 39% kind of range.
And that's really driven by 2 major factors: The growth that we're expecting, the leverage from that; as well as structural costs and net productivity improvements.
We are expecting SG&A to the up a little bit over prior year.
Including freight and distribution expenses, it should run in the kind of 32% of net sales range.
We're performing well there, Matt.
So you may be right.
But there's all sorts of ---+ it's location by ---+ or regional sort of differences.
There's dealer inventory, et cetera.
So our best guess right now is flat.
But we like cold weather a lot.
We like it to get cold, warm, cold because it takes 2 events to really rock the consumer off their procrastination to get them moving on buying a hearth appliance.
So you could be right.
Our best guess at this point is flat.
Yes.
I think, Matt, we're really talking about new product introductions.
And you said it, the office is changing, moving from traditional products to more open, collaborative sort of spaces.
Casual soft seating is a major initiative for us.
We continue to expand our walls business, moving from traditional panel to more desking-type solutions, sit-stand solutions, more seating solutions at different value profiles, sort for from the entry-level value side in the supplies all the way up to the high end.
And so it's ---+ as you know, Matt, we're a pretty broad, pretty deep company.
And so you're seeing this virtually in all of the companies, all of the categories, all of the price points, just adapting and shifting to this new office.
Yes, Matt.
I think the first quarter is a period of investment there.
I think you're referring to the direct fulfillment.
And yes, there's still investment going on there in the first quarter, and we expect that to moderate as we move through the year as well as see some ramp up in volume.
But the volume is not something we have a clear view of right now that we're willing to share.
Yes.
Basically.
We see this as a growing part of the business.
We are ---+ just overall, the market is looking for better value, performance for price, looking for more convenience, looking for an easier selling process.
We're uniquely positioned, we've invested aggressively.
We have a long legacy of serving that market.
And as we have dealt with the wholesale channel shift, I think we've put in place more direct fulfillment models for our dealers and the large national supply dealers, and I think that will serve us well.
As that market continues to grow, I think we're in the unique competitive advantage, a unique position.
We don't really have anything to call out specifically there, <UNK>.
I think our ---+ the sales trends are solid for our legacy products.
Obviously, we're introducing new categories of products and expanding where we need to do.
But I don't think there's anything specific or unique to call out.
Well, the answer, Greg, is we ---+ like all smart businesspeople, we try to look at the portfolio.
And over the years, you make choices around brands and channels and portfolios and product categories.
And Paoli's been a great company for us.
We just felt like due to the changing office, due to sort of where they're positioned, where some of our other brands and product category's position, it was just best to go ahead and take that business another direction, to exit that business.
We have that coverage through other brands and through other channels.
And so we're always looking at our portfolio and thinking about where do we add.
Where do we delete.
Similar to you and your investment portfolio, we're always thinking about what's the future.
Is there a future here.
Is it generating return or not.
And then we move accordingly.
So we've gone through a period of cleaning up our corporate portfolio.
I think we're in really, really good shape right now for the near term, for the foreseeable future, around how we're positioned and what's in the portfolio and what's not, to answer you more specifically.
Yes, sure.
Greg.
The closure of the Paoli brand will add approximately $8 million of profit to 2018.
Yes.
I think, Greg, that's what we meant included in those comments about largely completing those transitions and the business stabilizing.
So the answer is yes.
We do feel good that we have a handle on those.
Now it's going to take a while to get through.
I think the 2018 results reflect that.
First quarter is going to be a low point, and then we're indicating that it's going to improve as we go through the year.
As <UNK> indicated, we should be at or near record gross profit levels, and that includes getting a handle on resolving these transition issues.
Yes.
<UNK>, our gross profit improvement is really driven by the volume leverage that we're expecting in the organic growth, and then that significant productivity and structural cost reduction that we're expecting in 2018.
So the business mix shift is not a major story there.
As it relates to inflation, we do expect to see some inflation, kind of maybe in the 3% range.
And we expect to offset that with price realization.
So we expect to have a minimal price/cost gap.
Well, I think as we indicated, we've reported some solid numbers in both segments of our office furniture business.
So we see supplies stabilizing.
We are excited about what we're seeing specifically in the dealer channel.
And I would say our wholesale sort of business has stabilized, and so we see positive trends there.
I think that's underlying sort of an overall economic ---+ more positive economic climate uptick.
And then second, we finished the year, the second half of 2017, very strong in the contract segment.
We continue ---+ we expect that momentum to continue, both large projects, the small projects and day-to-day business.
And so it's just kind of across the board, I would say.
And I think the ---+ we had positive momentum rolling into '18.
I think the more positive economic environment helps that.
Let's just hope that keeps happening.
All right.
Thank you so much for joining the call.
We'll talk to you soon.
