HNI
#Good morning, everyone.
As usual, <UNK> and I will share the assessment of the first quarter 2017 and then provide some thoughts on the outlook for the second quarter and then full year, and then we'll open up to questions.
Results were slightly better than we expected.
Now we have a bunch of information to share with you.
I would say we have lots of numbers, maybe too much numbers, but we'll roll this through and then see where the questions are.
Our businesses continue to compete well and generated sales at the high end of our anticipated range.
As expected, the demand environment started slowly then improved throughout the quarter.
We're pleased with the positive customer response to recent investments in new products and selling capabilities.
We delivered another quarter of strong operational performance, providing further margin improvement.
This now marks a long string of year-over-year increases in non-GAAP gross profit margin.
Our margin improvement is a result of a very deliberate process.
We're focusing our businesses on areas that drive the most value.
The strategic streamlining makes our organization stronger and more capable to aggressively pursue profitable growth and serve our very important customers.
In addition, we continue to significantly invest across our businesses, increase capabilities, business process simplification and manufacturing process efficiencies, all contribute to our position as the best cost producer.
This allows us to deliver greater value to our customers driving both growth and future profitability.
We are a stronger company due to these efforts.
We're well positioned with a strong platform to grow the business.
We continue to remain focused on the long term and are confident in our ability to double our earnings every 3 to 5 years.
I'll now turn the call over to <UNK> for some specifics on the quarter, and then he'll roll through a bunch of numbers for you.
Thanks, Stan.
For the first quarter, non-GAAP net income per diluted share was $0.26 compared to $0.31 in the first quarter of 2016.
Consolidated net sales decreased 2.9% organically and decreased 4.7% in total when including the impacts of acquisitions and divestitures.
In the office furniture segment, sales decreased 4.9% organically and declined 7.1% in total.
Within our office furniture segment, sales in our supplies-driven business decreased approximately 6% organically, or minus 7% including the impacts of acquisitions and divestitures.
Sales in our North American contract business decreased 1% organically, or minus 4% in total.
And sales in our international business decreased 20%.
Looking at our hearth segment, sales increased 3.5%.
Within the hearth segment, new construction sales increased 3%.
Sales of retail wood and gas products increased 2%, while sales of pellet appliances increased $2 million or approximately 26%.
HNI non-GAAP consolidated gross profit margin increased 60 basis points to 38%.
Labor and material productivity gains and the favorable impact of divestitures were partially offset by lower volume.
Stan.
We're seeing improvement in our markets, although conditions remain choppy.
In the second quarter, we are forecasting solid organic growth led by our contract business, which we expect to increase 12% to 15%.
Activity levels, project funnel and in-house orders provide confidence in our sales projections.
In our supplies-driven business, we're expecting organic sales to be up 1% to 4%.
Total organic office furniture sales are expected to be up 5% to 8%.
Within our hearth business, we expect sales growth of 1% to 4%.
New construction sales are expected to be up 3% to 6% as growth in single-family starts continue.
Sales in our retail wood and gas business are projected to be down 2% to 5% due to seasonal timing and mix.
Sales of our pellet appliance businesses are forecasted to be up more than 40% or $1 million to $2 million.
In total, we expect HNI consolidated organic sales to be up 4% to 7% for the second quarter.
<UNK>.
I'll give some additional information on our second quarter outlook.
The growth rates Stan just referred to were all organic.
When including the impacts of acquisitions and divestitures, we expect total consolidated sales growth to be flat to plus 3% in the second quarter.
We also expect total sales for the office furniture segment in the second quarter to be flat to up 3%.
Non-GAAP gross profit margin is expected to be similar to the prior year when it was 39.9%.
Non-GAAP SG&A, as a percentage of net sales, is also expected to be similar to the prior year when it was 30.6%.
Our estimate of non-GAAP earnings per diluted share for the second quarter is in the range of $0.65 to $0.72.
For the full year 2017, our outlook for net sales remains unchanged.
We expect consolidated organic sales to grow 3% to 6%.
Office furniture organic sales are forecasted to be up 3% to 6%.
Sales in our hearth business are expected to be up 2% to 5%.
Including the impacts of acquisitions and divestitures, total consolidated sales are forecasted in the range of minus 1% to plus 2%.
Total office furniture sales are expected to be relatively flat to the prior year.
Our current best estimate of non-GAAP earnings per diluted share for the full year 2017 is now in the range of $2.80 to $3.10.
Stan.
Okay.
Let me wrap this up then.
Simply, our strategies are working, and we remain focused on creating long-term shareholder value.
We're well positioned to deliver profitable growth and enhance our already strong market position.
So with those comments complete from <UNK> and myself, we'll now open it up to questions.
No, I'd say, Budd, that we're seeing pretty good activity on the project side.
And particularly, architecture wall is a benefit for the quarter, and we're feeling pretty good about the funnel in the back half from the project side.
Yes, we are ---+ yes, exactly.
It is profitable business for us.
We're the industry leader in this as well.
I mean, we have significant share in pellet appliances.
We've got good know-how.
We have great intellectual property, and we have very efficient operations.
It fits into our other core part business, and so we're able to sort of accordion that up and down as needed and maintain our cost structure and keep it profitable regardless of what the volume is.
No, we didn't have a lot in the first quarter.
Inflation was about $2 million in the first quarter.
And as you would recall, Budd, we index steel so that it tends to lag going up and tends to lag going down, and so we are ---+ it's bounced up.
Steel has bounced up significantly.
Now you also know that steel is much less of a input cost as it needs to be, so ---+ or as it used to be, excuse me.
But we tend to lag, and that's why it was not as much first quarter as it ---+ you might think.
Yes, Budd.
We have a ---+ we still have some charges yet to come in the second quarter.
We're looking at about a little over $9 million of non-GAAP adjustments.
That's pretax.
And then in the third and the fourth quarter, we have a little over $8 million in the third and between $3 million and $4 million in the fourth.
They look at that as accelerated depreciation and the typical stuff.
Yes, there's quite a bit of transition cost in there.
Yes, it's the same as you're seeing and not a bit much, et cetera.
And again, I'll just sort of rephrase what I said to Budd.
We don't ---+ it's really nice growth, and I'm excited about it.
But don't ---+ we're not calling in our chits that we're like outperforming everybody.
This ---+ anybody that's tracked contract business world for any time frame should know that claiming share gain is a canard and claiming share loss or praying about share loss in the short term and midterm is a waste of time.
So ---+ and you know that's kind of how I think about this.
So we have nice performance.
A lot of it has to do with where you're positioned and what's going on, et cetera.
So it's not a whole lot more than I think, just timing and mix and where we're positioned, et cetera.
Some of that's coming from new product, but it's a lot of just day-to-day, grinded out company-by-company stuff.
Yes.
Yes, no, it's ---+ when we're talking about contract and outlook, it's contract in a big sense of international and North America.
We have not quantified that, Matt.
Because again, it's typical of our sort of overall continuous improvement sort of mentality.
So it goes all the way from very finite pruning product line, even options on product lines to pruning categories, to consolidating, to some cases, pruning customers.
And then the big one that we talked about last time was we pruned some businesses out of the whole system as well, so it's very broad based.
It's consistent with our sort of daily improvement, rapid, continuous improvement sort of culture and way of thinking.
Yes, no, Matt, the reason we lowered the top end of the range $0.05 had to do with inflation coming in at the top end of our expected range, and we're also seeing a greater opportunity to invest in the business.
And as a result, we're seeing less upside for 2017.
It's a good question, Matt.
It's harder to get pricing these days, I think, right now.
So the answer is not really supporting it specifically.
If it is, it'd be more like 2018 before we would see that.
The inflation isn't crazy.
It's just ---+ I think it's modest inflation.
And so because of that ---+ it's harder to get price, I think, to cover that.
You had said last quarter that you had expected sales to improve throughout the year.
We certainly saw that in Q1.
Was that improvement choppy.
Or was it consistent throughout the quarter.
And did you see this trend in both office and hearth.
And then finally, with this improvement, to what degree is this really more company-specific efforts that you're yielding profits from.
Or is it more post-election animal spirits being better.
Yes, those are great questions, <UNK>, as usual.
I think the improvement we\
Okay.
Helpful.
And one of the things that we are starting to hear from our ---+ this is more on the contractor base, is that you're seeing more bids that are bigger and their backlogs.
And this is something that's really started to change over the past, say, 4 to 6 months.
What visibility do you have with your business to either support or debunk that observation from large national contractors.
Okay.
We're talking about building products, <UNK>.
No, we're talking about guys that are building football stadiums to office buildings to hospitals and schools.
Yes.
I would say we are ---+ because of where we compete, we tend to be really more in the small type of bids and the medium type of bids and not as tuned in maybe to the mega bid sort of stuff.
That said, our ---+ right now, we're in a period of seeing some good large- and medium-sized project business, but I wouldn't say that we would support or deny that premise that you stated there.
Okay.
Of the asset that you announced divesting last quarter, you're able to distinguish on the top line the impact.
But what was the profitability or maybe margin impact of taking that asset out of the picture.
So <UNK>, there's more than just the one asset that we have divested, but the one being the big one.
So for the year, our divestitures will lower top line by approximately $100 million and will increase EBIT by approximately $3 million, so it's definitely accretive.
So the other divestitures, <UNK>, that <UNK> is referring to would be, periodically, we will free up or we will divest contract dealers that we brought in-house to help, and then we typically will help straighten those up.
And then typically, we'll sell those back to the local entrepreneurial talent.
And so that's part of what <UNK> is referring to in addition to this other big business we divested.
Well, yes, your definition of underperformance is always in a shackle bag, and so, Greg, these businesses are choppy, volatile.
International for us is 5% of the total HNI sales.
Based on where you're positioned, et cetera, you're going to see different orders.
So a significant portion of our business in Mexico and the Mid East, which has been rather volatile, and then China and India moves around depending on what projects we win and what's going on there.
So what makes it better.
Well, it's just day to day, grinding it out and hitting the right mix and timing of the business.
Well, we are one of the leaders in China.
China is very much a regional business, and it's about investing in selling capabilities and product.
There's no big silver bullet here.
It's just driving the business forward.
We like what's going on in China.
We like how we're positioned in China.
China is a important business for us, and it's just day-to-day management, keep the ball rolling, so to speak.
And Greg, just to note, we are expecting some acceleration there in the second half since ---+ kind of 15% to 20% growth rates international for the back half of the year.
Yes.
I think your comments are right on.
Small business sentiment is improving.
It's not improving as much as contract.
It's a very ---+ as you know, we are the market leader in that segment.
It's a very volatile segment due to sort of the changing supplies nature.
We have several large customers that, sometimes, the results get moved around based on how they inventory and stock.
I think there's a lot more to play out there.
We are well positioned.
We're broadly diversified.
And I think we've got a ---+ it's a significant profit generator for us and will be in the future.
So again, it's more of invest wisely in product and the selling capabilities and serve those customers as efficiently, as effective as we can.
And as that market improves, we will improve likewise.
Well, thank you very much for tuning in to the HNI first quarter earnings call.
We look forward to talking to you all in the future, and have a great day.
