Q4 2019 Earnings Call
At this time I would like to welcome everyone to the each and I Corporation fourth quarter and year end fiscal 2019 resolved.
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After the speaker's remarks, there will be a question and answer session.
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As a reminder, today's conference calls is being recorded.
Thank you Mr. Mccall's you may begin your conference.
Thank you Tiffany.
Good morning, My name is not Mcallen, Vice President Investor Relations in corporate development for each night Corporation.
Thank you for join us to discuss our fourth quarter fiscal 2019 results.
Here with me are Jeff Oranger, Chairman, President and CEO.
Marshall Bridges, senior Vice President and CFO.
Copies of our financial news release earnings presentation, and non-GAAP reconciliations are posted on our website.
Statements made during this call that are not strictly historical facts are forward looking statements, which are subject to known and unknown risk.
Actual results could differ materially.
The earnings presentation posted on our website includes additional factors that could affect actual results. The corporation assumes no obligation to update any forward looking statements made during the call.
I'm now pleased to turn the call over to Jeff Orange, Jeff exam.
Good morning, everyone, we will share our assessment of fourth quarter, giving you detail around what met or exceeded our expectations and what did not play out as we had anticipated.
Well then provide some thoughts on our outlook for 2020 finally, we will open up the call for your questions.
Our teams delivered a strong fourth quarter.
We generated a best topline growth rate of the year and expanded operating margins, despite choppy demand and tariff challenges.
Our annual productivity and cost savings initiatives continued to gain momentum and drive improved profitability.
Overall, our results show the performance our organization can drive and I'm optimistic about what we can accomplish in the future.
We grew fourth quarter non-GAAP earnings per share by 16% year over year and we came in at the high end of our guidance range.
I'd like to highlight the following three items they came in as or better than expected first we delivered strong cost and expense control gross margin and ask DNA as a percent of sales were both better than we had expected.
Our fourth quarter EBITDA margin was the best in over 15 years.
Our teams delivered strong margin improvement and we expect solid gross margin expansion in 2020.
Second contract furniture revenue grow grew in line with our outlook.
The broader commercial furnishing furnishings environment remains solid.
We are investing heavily in areas that will drive future growth and improved margins.
And we are forecasting continued furniture segment growth in 2020.
But also expect conditions will remain choppy.
Third free cash flow was strong and better than expected in 2019, we generated $153 million the free cash flow compared to our initial plan of $130 million to $140 million.
We returned $136 million to investors do share buyback and dividends and weve reduced our debt levels by $75 million, representing a 30% improvement.
Our balance sheet is in excellent shape and along with our free cash flow expectations. It provides capacity to support our strategic growth initiatives in 2020 and beyond.
There were two items in the quarter. They did not play out as we had anticipated neither of which the rail our longer term view first.
Revenue in the hard segment fell short of projections.
Our new residential construction business ramped up more slowly than expected.
However, we are encouraged by the improvement in single family home construction and have multiple initiatives under way to drive growth in 2020.
Second growth in our supplies driven office furniture business was below expectations.
That said supplies did grow 9% year over year in the quarter, which was a significant improvement compared to the first three quarters of 2018.
We had forecasted more growth or shortfall was driven by lower than expected ecommerce holiday sales.
It's important to know that ecommerce was up 50% compared to the prior year quarter and we continue to see song we continue to see strong growth in 2020.
As we looked at 2020, we expect solid profit growth.
We will achieve this while significantly increasing our investments in strategic growth initiatives, which will drive sustained revenue growth margin expansion and free cash flow generation over the next three to five years.
I'll now turn the call over to Marshall to provide more details about our 2019 year and results in our guidance for 2020 Marshall. Thanks, Jess fourth quarter consolidated organic sales increased 3.9% versus the prior year to $616 million.
Including the impacts of closures and divestitures sales were up 3%.
In the office furniture segment organic fourth quarter sales increased 5.9% year over year within the office furniture segment supplies driven revenue increased 9% contract sales were up 3% organically and we generated strong profit growth in office furniture with fourth quarter non-GAAP operating.
Income of 39% versus the prior year.
Parts product segment sales decreased 1% year over year within the harsh segment, new residential construction revenue was down 1%.
Sales of remodel and retrofit products also declined 1% year over year.
We also showed strong profit improvement in the horse segment hearth non-GAAP operating profit increased 9% versus the prior year quarter.
Overall fourth quarter gross profit margin expanded 50 basis points year over year to 38% non-GAAP operating profit grew 12% versus the prior year quarter and non-GAAP operating margin in the fourth quarter expanded 80 basis points to 10.5% of net sales.
Non-GAAP net income per diluted share was $1.12 cents, representing a 16% increase versus the 97 cents reported in the fourth quarter of 2018.
Below the line, we benefited from reduced debt levels and continued share buyback activity as expected.
This drove approximately three cents of our total 15 cents of non-GAAP EPS growth versus the prior year.
Okay, let's shift toward 2020 outlook.
For 2020, we are forecasting the following.
Revenue of $2.30 billion to $2.35 billion that represents total year over year gross 2.5% to 4.5%.
We're also forecasting diluted earnings per share to be in the range of $2.60 to $2.90.
From a segment perspective in 2020, we expect revenue in office furniture to be at 2% to 4% at heart products to be up in the 4% to 6% range.
That gross margin to expand 70 to 90 basis points versus the 37.1% we generated in 2019.
Operating margin expansion is expected to be up less as we ramp up our growth investments.
One comment on seasonality is your model in the year, we expect our quarterly earnings progression in 2020, the follow the pattern we've seen over the last two years.
That means we'll generate most of our profit in the second half and have minimal first quarter earnings.
Finally, a quick note on the krona virus, we are expecting the current a virus to negatively impact us. The situation is obviously dynamic but based on what we currently no. We estimate accretive virus will reduce sales in the PRC, Hong Kong and lower consolidated 2020 sales growth by approximately one percentage point.
Does.
That impact is included in our guidance and we'll update you as a situation develops and evolves.
We also have exposure to China on the cost of goods lines through our global supply chain at this point, we're not expecting significant impact there.
Yes, Thanks Marshall.
To summarize we had a strong finish to 2019, demonstrating the results our organization can drive.
We expect solid profit growth in 2020, while significantly increasing our investments to drive sustained revenue growth margin expansion and free cash flow generation over the next three to five years.
Our teams continue to manage well.
I'd like to thank all of our Eightnine member owners for their continued commitment and dedication.
With those comments complete I'll open it up for questions.
As a reminder, ladies and gentlemen to ask a question at this time. Please press star one on your telephone keypad.
Our first question comes from the line of Greg Burns with Sidoti Your line is open.
A bit of mixed results among the peer group.
Pretty solid quarter.
Both sides of the office furniture business, but maybe just give us your view on.
On the macro.
Are you seeing any changes in the demand environment.
Contract side of the business and.
If you could give us maybe a little bit of color on.
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Quarter growth rates are order patterns and how to shaping up.
In the early part of this year. Thanks.
Yeah sure Greg.
On the macro kind of demand environment, you know in the office side. The cyclical drivers you know our mix there I'd say, they're better than they were six months ago. You know, we kind of had that slow patch. It started out pretty good January through May we had kind of a negative you know slow patch in.
Late summer and that we saw it kind of from up as we as we exited the year I mean, you look at the major drivers we tend to look at CEO confidence it was down but it's recovering.
Office worker unemployment is growing it supports kinda our outlook for 2020.
Interestingly enough small business.
Where we have a disproportionate exposure was what's kind of flattish in 2019.
And then.
The office continues to grow office construction you know, there's there's still activity there small business confidence is still at historically high levels. So overall kind of it I'm at a macro level. We you know, it's kinda firmed up it.
For us a bit.
I would expect the demand patterns to be solid in you know I still think there's going to be some choppiness out there just given all the all the different occurrence kind of falling back and forth.
Okay. Thanks.
The 2020.
Obviously still projecting some.
Operating leverage, but maybe a little bit less so than we saw in 19.
You mentioned.
Putting some money to work.
Various growth initiatives can you give us a little bit more color on what exactly those are aware.
On your money to work.
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Large larger ones in particular that we should be focused.
Yes, that's you know we are.
If you go back a couple of years, Greg We went through this ERP implementation and you know despite the fact, they didn't went well and we we came through that it was still disruptive and so we've we're now through that and we're starting to see the benefits number one and that we're going to start to add to though so world.
We're looking at three areas, primarily if I I keep at high level. One is office furniture in general you know, we're ramping up across the board you know across the board the furniture business.
The new product pipe is is strong we're accelerating that dealer engagement activities branding sales coverage E. Com, we continue to invest in so that there's a lot going on kind of soup to nuts on the office furniture side, and then of the hearth business. You know we've got growth initiatives, we're investing in pretty heavy.
Really as well homebuyer education connecting to home by buyers during their home buying process.
Insert awareness, we were existing home buyers were doing direct outreach programs to existing homeowners for for replacements and in regional builders. We you were targeting there's a lot of regional build is out there as well we've got we've got some growth initiatives that are targeted right at them as well.
And then finally, the third bucket is basically our digital assets.
And capabilities and that's really focusing on customer experiences improving the process you know in the sales process and those those would be leveraged across both businesses.
Okay and then.
Yes, maybe from a continuous.
So cost improvement.
I guess your target I.
I think it was 10 to 15 million maybe in the back half of.
It looks like you've got most of that as we look into 20 Twond Germanys explicit.
Cost saving goals.
To share with us or is it just kind of just general blocking and tackling taking costs out of business.
Yeah, Greg It is general activity sort of the what what drove our benefit in 29 team will continue on to 2020, but is significant when you add it all up we're expecting $20 million to $25 million a benefit from our annual productivity and cost savings efforts.
In the year.
Okay. Thanks.
And then the.
Your outlook for the.
The office segment next year I guess.
Industries looking for about 2% growth so it looks like you're looking for a little bit of.
A little bit of growth on top of that.
It sounds like you had some easier comps from the early earlier part of this year. So maybe you could just kinda give.
Give us your view on your office furniture segment. This year, maybe China is a little bit of attractor why that.
Not strong.
The stronger outlook.
Hi.
Looking for about 3% at the midpoint versus the industry versus.
What I thought maybe some easier comps for you from the earlier part of this year.
Yeah, good we're expecting better growth in 2020 and office furniture than we saw in 2019. So I think thats. The first point secondly, you know the market has firmed up but it's not as strong as it was sort of the middle of the year, we saw some really high growth rates, particularly in contract.
We do expect to start slowly our funnel and our pre order activity supports growth, but it's not going to start off Super strong, we're feeling pretty good it but that 2% to 4% growth rate guidance. We gave for the year for office furniture and that includes some good ecommerce growth and I'm not sure the market I think thats at or above market.
[noise] I'm not sure the markets stronger than that right now from our perspective.
Okay. Thanks, and just lastly in terms of the seasonality in the fourth quarter.
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Just quantify what minimal profitability means are you looking for.
About the same level last year.
Maybe a little bit better.
You can help us kind of quantify what minimal.
Yeah, I think minimal if you looked the last two years in the first quarter. You know we were we were had minimal profit you know we were two cents last year.
Certainly going to try to exceed that but it's not going to be a a sea change from what we saw last couple of years.
Okay. Thank you.
Your next question comes from the line of Stephen Ramsey with Thompson Research Group. Your line is open.
Morning, guys.
But I would start with heart.
Just strong outlook, there starts and permits being strong.
You know I, just given where new construction is and the outlook.
In the mid single digit range.
How much of that is just catching the wave of strong environment, how much of it is the investments you're making to.
Further penetrate.
Repair.
A model replacement demand.
New builders that regional builders.
Yes.
I'd say, it's some of both I think the the new construction is definitely a driver. We we tend to lag permits 90 days I think we're seeing some of that stretch out a little bit more that's kinda I think what we saw in the fourth quarter labor shortages things like that so were lagging maybe a little bit more than normal.
But that's that's that's a big piece of it but our growth initiatives do come online you know some early days some or are just getting rolling but belt they'll they'll provide us some tailwind here in the back half.
Got it.
On the replacement side of things is is this.
And all that.
Or a negative contributor in the numbers you're putting out.
It is basically new constructions growing better than your guide repair and replacement is Oh.
Offset.
Yes for hard you know, we're expecting to grow 4% to 6% for the year I would say that the new construction side would be at the higher end of that and the remodel retrofit side to be the lower end of that.
Great.
On office.
For 2020.
Can you, maybe even broadly talk to you supplies or contract driving better growth in in on E Commerce.
That is that a bigger driver for.
Supply is more than contractor vice versa.
Yeah I'd say.
The E Com business platform is probably a bigger driver on the supply side for sure.
And that's that's just where that business is that.
And just thinking for 2020 broadly as is.
Wise or contract the better.
Growth driver.
Yes, Stephen I think that you know our view that splitting the office furniture business into these two.
You know two category supplies and contract is a is a little bit two simple of a way of describing our business or extend to try to move away from describing that way what I would tell you. A is that we are you expect to see more.
Growth in what we formerly called supplies to the ecommerce as Jeff noted and the contract business is where our international businesses, it's going to be impacted by the krona virus a bit so we're expecting to be a little bit lower there, but again I think those those general categories are a bit too simplistic, they're really describe the breadth of what we're doing these days.
Got you own.
That's a de expenses good job holding those well below sales growth.
Much of that was just slower E commerce trends in the quarter or is that.
The result of past investments that you're making bearing fruit and just how that may play out in 2020.
Yeah, the big driver there Steven is our productivity efforts, we had a good we had good quarter good year on driving productivity in freight distribution in our core business.
Excellent and.
Margin expansion for 2020 could gross margins.
We'll expand even if you came in below your sales guidance range.
Certainly not haven't volume will make it harder, but we would fully expected expand gross margins and I think the big driver of that will be this productivity. We mentioned earlier that we expect to drive in 2020 of $20 million to $25 million.
Excellent and I guess lastly for me.
Yeah, we're hearing from the various parts of.
The field the channel the inflation overall is pretty nominal right now is that what you're seeing.
In in either hearth or.
Office contract side of thing.
Yes, I think if you look at material inflation, we are seeing a pretty nominal maybe even slightly favorable, but we still see pressure on wages in health care and benefits and so for us we're expecting a little bit input cost pressure and 2020, but it's much less than we saw in 2019.
Great color. Thank you.
Again to ask a question that is star one of your telephone keypad.
Your next question comes from the line of Rubin Gardiner with benchmark. Your line is open.
Thank you good morning, guys.
Good morning.
So let maybe let's start with the yes, DNA investments just a couple of follow ups. One can you can you quantify what are your spending or what the incremental investment as.
This year and then secondly, our these new investments the way to think about it but that's kind of the new run rate for fresh DNA or these one time and you might have a you know a bit a leverage that kicks in in 2021.
Yeah.
The amount if you look across the US gene is roughly 18 million on an incremental basis Rubin and I would say they would lever.
You know.
I have exact timing on that but you know they would probably start to lever in 2021, depending on the investment.
Okay. So it's not necessarily new it's not necessarily new run rate, but some of that some of <unk> will go into the run rate, but all the others will will lever.
Got it and then so you've got 20 to 25 million and productivity.
Offset by the $18 million, an incremental what's what's your price cost outlook for this year is that expected to be a tailwind or and then I guess are there any other puts and takes on the margin front aside from those two factors and volume leverage.
Yeah, we've been on the price cost front were expected to be favorable in the range of $5 million to $10 million on a year.
That's mainly carryover from what we saw in 2019, you know the price realizations give me a lot less than we saw in the as I said earlier the input costs are also less.
So we still expect to be slightly favorable there.
The rest of the rest of the drivers I think are our or smaller, but we do have some headwinds in the has seen a front that involve variable comp and things like that.
Which is probably the only missing piece of the puzzle that we haven't already talked about.
Okay, Perfect and then last one for me a couple strong years of a free cash flow generation can you talk to me about.
I guess.
The puts and takes on the free cash flow front and in 2020, specifically.
Working capital you had a look like a little tailwind and 19 as.
As neutral kind of what the way to think about 2020 and then.
Now that your balance sheet as you know you're approaching no net debt what what are the plans for uses of cash are there.
Acquisition targets on the building product side or and office that you could you could take a look at thought just talk to me about what what the uses of cash our thanks guys.
So let's take the first part of that question first you know as it relates to working capital we did a nice job of free up some working capital out of the core business in 2019, which helped us generate did $163 million or free cash flow. We did in 2019, we're expecting free cash so it'd be a little bit less than 20.
20 in the $130 million to $140 million range in the difference between the two is really working capital timing I'm not sure. We expect at the same working capital benefit that we saw in 19 versus 20 [noise].
The.
The but still healthy cash flow.
And on the M&A question I mean, you're right. We have we have dry powder, we have a strong position the balance sheet and you know candle, we're always looking for value creation opportunities.
You know both on the hard side and the office furniture side.
We look at you know capability enhancements products and so that's that's an active process that's ongoing and.
Obviously, when we see something we'll we'll pursue it.
There are no further questions in queue at this time I turn the conference back over to our presenters.
Oh, thank thank you everybody and thank you for joining us today on the call and thank you for your continued interest in a agent I Corporation every day.
This concludes today's conference call you may now disconnect.
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