Q1 2020 Earnings Call
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Good morning, My name is Sheryl and I will be your conference operator today I'd like to welcome everyone to be H. One eight corporation first quarter fiscal 2020 results conference call all lines have been placed on it to prevent any background.
After the speaker's remarks, there will be a question and answer session.
He would like to ask a question. During this time simply press Star then begins I want to find your telephone keypad. If you have already done. So please press the pound fine now then press star one again to answer your question I guess [laughter], if he would like to withdraw your question press the pound.
As a reminder, today's conference call is being recorded. Thank you Mr. Mcauley you may begin your conference.
Thank you Sheryl good morning.
And as Matt Mccall on Vice President Investor Relations and corporate development for each you know I Corporation. Thank you for joining us to discuss our first quarter fiscal 2020 results.
With me today, or Jeff larger chairman, President and CEO, and 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 to historical facts are forward looking statements, which are subject to known and unknown risk.
Actual results could differ materially the earnings presentation posted on the web site.
Includes additional factors that could affect actual results.
The Corporation assumes no obligation to update any forward looking statements made during the call.
Now I'm pleased to turn call over to Jeff larger Jeff.
Thanks, Matt Good morning, everyone.
Our members delivered strong first quarter operating results and we will come back to that in a moment.
I went to start with an update on the ongoing cobot 19 pandemic.
We are experiencing what we are assuming and how we are currently responding.
Oh front the two most important points I would like to emphasize.
At first we need prioritize the health and wellbeing of all age nine members during this pandemic.
Second we will successfully navigate this pandemic.
With respect to my first point the age it I culture again is rising to the occasion.
Our members are coming together to support our communities and doing what is necessary to move the business forward.
To help protect our teams we have aggressively implemented measures consistent with CDC guidelines across our organization.
We have reorganized our production facilities to provide appropriate social distancing.
We have increased the frequency in depth of facility cleaning.
All members able to work remotely are currently doing so well.
With these measures in place we're currently operating in our major facilities.
Additionally, we are utilizing our facilities in Iowa, New York in North Carolina to produce personal protective equipment.
These efforts include the manufacturer of washable clock face masks.
Face masks coverings and protective gowns for use by health care professionals and the public in general.
We are donating these critical supplies to our first responders health care systems and hospitals in our communities.
Let's talk about my second point, how will we successfully navigate this pandemic.
We have a strong balance sheet and have liquidity and cash flow to maintain our business and meet our obligations for a prolonged period.
With the sudden global economic shock, while the sudden globe global economic shock has been felt across the majority of our businesses and geographies. We're responding accordingly, and our teams are focused on three objectives.
Number one we are adjusting to the current operating environment and staying vigilant in our short term scenario planning.
Number two we are maintaining our long term strategic focus.
And number three we are focused on emerging from this period with our business poised to hit the ground running.
Let me detail some of the actions we have taken to date to reduce cost and support our free cash flow.
First we temporarily reduced salaries of across the board base salaries were reduced by 10% for all exempt salaried employees and by 15% for all executives.
My salary was reduced by 25%.
We plan to real evaluate these measures in six months.
Second our board of directors elected to reduce by 25% both their cash retainers for the next six months and their annual equity Award.
Third to better match step staffing levels with demand activity various groups and our members have been furloughed.
We are supporting our furloughed members by covering all health and dental insurance premiums during the furloughed period, both the company in member portions.
These furloughs are being continuously reevaluated as conditions evolve.
Fourth we suspended our share repurchase activity.
As a point of reference in recent years buybacks have averaged approximately 55 million annually.
Finally, we reduced our capital expenditure budget for 2020 from approximately 65 million to 35 million.
Our planned growth investment spending for 2020 is being maintained at a reduced level of approximately 50%.
In total we currently anticipate 60 to 65 million of cost improvement during 2020 as compared to 2019.
With the full run rate expected by mid Q2.
In addition from a cash flow perspective savings associated with our buyback suspension and our capex reductions will add to our liquidity buffer.
Again. These measures are part of our balanced approach to address the impact of the pandemic and are aimed at supporting our members and our free cash flow in 2020, as we navigate through these uncharted waters.
I will now share some thoughts on the business in demand picture, what we're experiencing and currently assuming.
While the extent of the pressure from the crisis is still uncertain. We believe several data points indicate we will see near term slowdown in our businesses. The first data point is our recent order activity not surprisingly our orders over the last four weeks trending down.
Domestic office furniture orders are down 35% versus prior year period.
That rate does not include ecommerce, which continues to show strong growth in fact, our E. Commerce orders are up 120% versus the prior year levels in large part due to an acute spike in demand for home office products.
Orders for a hearth business during the same period are down 20%.
The second data point to consider is our experience in China.
Our furniture business in China faced pressure from the pandemic in Q1.
Although China is a very different market compared to the U.S. Our experience there may provide insight into the trend we can see domestically.
Demand drop quickly as measures to counteract the pandemic were implemented approximately eight weeks later, we started to see volume trends recover as businesses began to reopen.
While we were still well below normal levels the trend has improved.
The third data points to look at is what happened to our markets in previous recessions we.
We're not saying the current downturn will play out that the same way as this one is certainly unique.
But looking at history gives more data points to consider in each of the last two downturns the commercial furniture industry volume declined a little over 30%.
Building products in housing were hit hard in the last recession, we're not expecting that level of severity. This time.
Compared to the great recession construction levels are lower inventories are tighter and there is not an overhang of homes held by speculative buyers in subprime borrowers.
Based on these data points, we anticipate and we are and we are seeing a significant near term slowdown in our businesses right. Now we do not have good visibility on the depth and duration of the decline we have run and are prepared for a variety of scenarios.
Despite these near term pressures, we see the potential for the post crisis environment to positively impact our business segments in a couple of different ways.
In our furniture segment in addition to incremental demand tied to work from home trends.
Office floor plates will most likely seachange to accommodate less dense configurations that better support social distancing.
In fact in the last few weeks, we've already seen companies reconsider their plan layouts.
In addition, our architectural products platform is also well positioned for this trend.
A diverse product lineup can quickly create physical separation with minimal construction time, while maintaining natural light.
You know hard product segment, we we may see increasing benefit from a shift away from dense multifamily construction toward more single family homes.
This would be a positive demand driver for hearth product segment.
In addition, we believe the extended period of shelter in place could drive elevated remodel spending as consumers look to spend more money, where they are spending more time.
I'll now turn the call over to Marshall to discuss our first quarter results, our current financial position and more color on the stress test. We have performed in recent weeks I will then come back and highlight key elements of our long term strategic framework Marshall.
Thanks, Jeff.
Our members delivered a strong first quarter consolidated non-GAAP net income per diluted share was 21 cents, which represented a substantial increase versus the two cents reported in the first quarter of 2019.
First quarter consolidated organic sales decreased 2.5% versus the prior year to $469 million, including the benefit of acquisitions sales were down 2.2%.
In the office furniture segment first quarter sales decreased 4.3% year over year.
We again generated strong profit growth in office furniture, with first quarter non-GAAP operating income improving $4 million.
Sales in our hearth product segment increased 2.6% year over year organically.
Or 3.5% when including acquisitions within the hearth segment, new residential construction revenue grew 3.2% organically and sales remodel and retrofit products increased 1.9% year over year.
We also showed strong profit improvement in the horse segment hearth non-GAAP operating profit increased 17% versus the prior year quarter.
For each not overall first quarter gross profit margin expanded 220 basis points year over year to 37.6%.
Non-GAAP operating profit grew 279% versus the prior year and non-GAAP operating margin in the first quarter expanded 220 basis points to 3.0% of net sales.
Our non-GAAP results exclude $37.7 million and charges related to intangible impairments and onetime items related to the coated 19 crisis.
So overall, our first quarter results demonstrate the strength of our operating platform, our annual productivity and cost saving efforts again drove improved profitability.
Let's now talk about our liquidity in debt levels at the end of the first quarter, we had $230 million in total debt representing a gross leverage ratio of 1.0.
This is well below the 3.5 times gross leverage covenant in our existing loan agreements.
Our first debt maturity is not until 2023.
Liquidity as measured by the combination of cash and available capacity on our lending facilities totaled more than $350 million at quarter end.
This is equal to approximately two years of recent free cash flow levels.
Okay, let's shift the covering some of the scenario analysis, we've done let's start with emphasizing that we're not providing sales and earnings guidance that said, we have evaluated our earnings cash flow and balance sheet under various scenarios.
The scenarios indicate the following first we would be able to manage to a 25% de leverage or decremental margin with our cost actions.
Second we would generate free cash flow at or above our current dividend level.
Third year in debt levels would be similar or slightly above last year's ending balance and finally, we would remain well within our debt covenants.
They also indicate we should expect a sizable earnings loss in the second quarter.
In our scenarios, we do remain solidly profitable on a non-GAAP basis for the year and we'll manage costs accordingly.
In addition to these scenarios, we thought we'd share the results of our stress test where remodeled the limits of our current capital structure.
What it showed as we can support nearly $270 million in debt with zero cash earnings.
This is due in part to the $77 million in annual depreciation and amortization we incur.
Please note the stress test is not an outlook or scenario, we're not providing color around what circumstances might drive us to this condition isnt solely to illustrate the financial flexibility of our business model.
With that I'll now turn the call back over to Jeff Jeff. Thanks, Marshall in my letter to shareholders recently published in agent I Annual report I introduced our three strategic priorities.
While agent eyes unique member owner culture remains our foundation, our corporate wide focus and members efforts going forward are centered on the following three pillars.
First we will be laser focused on the customer.
Customer journeys in our markets are changing and the impacts of the pandemic will create more change.
Capitalize on these changes and identify and take advantage of the new market dynamics, we're investing in new tools and capabilities in the areas of data analytics digital assets branding ecommerce and expanded market coverage.
Second we're simplifying the buying process buying office furniture, and hark products can be complicated and time consuming.
There are large numbers of options and configurations to sort through complicated installations to coordinate and tight timelines to manage.
And navigating the process can take multiple in person interactions.
Summers today are less willing to go through that kind of process and they are upping their expectations, we're focused on transforming the experience to reduce their effort.
Third we will leverage our lean heritage.
Hi, guys longstanding and well established culture of rapid continuous improvement and our recent results demonstrate our capability to leverage that lean heritage.
We are doubling our efforts here in order to unlock our tool set in support of our first two pillars that I just referenced.
Again, while our near term focus is on our members health safety and and our overall cash flow our strategic framework will help drive significant improvements over the long term.
Later this year as the pandemic driven economy economic uncertainty moderates plan a rollout a more detailed version of our framework.
We'll now open up the call for your questions.
The question.
Star ones from the telephones.
The first question.
Hopefully citigroup. Please go ahead your line is open.
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Good morning.
I guess, the let's start with heart.
Maybe here a little bit more on the M&A activity was that started prior to cold and or was it in response to coal that clear.
That were weak and shore up.
Rating with you guys coming in and then I guess financial side on the 9 billion with the acquisition. Moreover passes that all the tests that will be deployed or were there more network.
On the tax will be laid out.
Yes. Thanks.
The M&A activity on the hardest side that we were you referenced was started before.
The co bid.
Pandemic yet.
And.
On the cash side of things Marshall comment Stephen that that is what we anticipate and that does this acquisition some small distributors and.
It does add added about $1 million revenue to the quarter. We expect it to add some are in the neighborhood of $9 million to $12 million revenue for the full year.
Excellent and then.
Mr specific numbers on heart growth.
Maybe use those in Indian share more on why three ended the quarter win per loan.
Yes.
Hearth hearth, new construction was up.
3.2% organically in the quarter and that really get strengthened as we move to the quarter. If you look at sort of mid February to mid March before the crisis hit it was running in the high single digits around 7%. The orders were running there and I think that indicates the strength of the the new construction market prior to the crisis.
Okay.
Great and then I guess.
Two.
On the SEC, yes, first on dealers Helen dealer health.
Currently.
And our collections of receivables fine from from dealers for for any recent recently completed sale.
Yes dealer health. So far you know has been has been good. We're you know we havent seen really any fallout.
Obviously, we're in constant contact and we have high levels of engagement with our dealer partners. Both on the the office side and on the heart side and.
They have been able to navigate these things in the past and so far we have we're monitoring their health, but you know we havent, we haven't seen any any real stress yet.
Great and as we think about the future of office format.
Less density as you guys discussed.
You know.
How quickly do you know as were pondering. This teens early would you expect that to roll out I guess for her.
They pick up maybe later Q2 early Q3, whatever that speculative timeline goals those orders.
They go ahead and.
Back in that less dense less densified office format or is that going to happen one year two years down the road.
Yes. Good question I think it probably is.
There'll be some short term impacts from people, who want to do some quick hits on on screening and retrofitting a little bit of what they have and then obviously people who are in development of projects and then there will be I think it'll it'll continue to catch steam as you as you go further out.
And people have.
More options available to them. Then then just short term.
A quick Reconfigurations and then that will become more of a planning paradigm. You know the has more permanency to it you know probably in 12 months or so.
Great and last question for me on Capex, I don't know, if I follow that well, but.
The growth investment percentage of the previous plan.
Can you maybe explain that again in.
The growth areas of Capex.
What areas typically are focusing on or deemphasizing.
Peter.
Yes in terms of.
Capex in gross you know roughly speaking maybe a quarter of that $65 million. We previously plan to spend was for maintenance and the rest is for growth and capabilities. So now it's roughly half right because weve reduced it from 65 to approximately $35 million this year.
You know what what was caught a is broad based theres not a single large item there.
Okay, great. Thank you guys.
Your next question from Greg Burns.
Please go ahead your line is open.
So morning, I guess, you mentioned that your major manufacturing facilities are online, but what capacity.
Currently running.
But as a percent of your past.
Yes, I mean, it's got all over the board.
We have.
We've taken down capacity in response to order incoming but.
You know, we can ramp back up pretty quickly we're running in the anywhere in the 50 to.
60% capacity right now Greg.
Okay.
And.
You mentioned.
Just a little bit.
Okay.
Okay.
Hi.
Please.
Okay.
Yeah.
Yes, you know that we had mentioned Greg you may have missed it you know the four week average on office for instance is running down about 35% and on the harvest side four week average run down about 20.
The funnel has its really been push haven't really seen much cancellation, we've seen push out of the second quarter.
We ended the third or into the fourth but we haven't really seen cancellations.
Alright, and then I guess.
My next question I was going to ask.
The hearth the hearth business.
Last recession was obviously a housing recession. So I don't know thats kind of indicative of what's happening with time, Robert but generally is the hearth business.
More or less cyclical than the office business, maybe vice versa.
It just depends.
Greatly on what drives that recession, Greg if you go back to the other one reassessing our hearth business actually increased profit profitability during that recession, we had very minor impact on housing in that timeframe and as you mentioned you know we just housing starts declined like 80% from peak to trough in the last recession. So.
There is it's a really wide range of outcomes. There I don't know that it's inherently more or less cyclical in office, but we but office has been little more consistent the last two recessions as Jeff noted in his comments.
And then I don't know.
Line, some cost savings initiatives.
A number what do you expect.
Thanks.
We did a there's probably two points here. The first one is just to reiterate the numbers that we expect to generate about $60 million to $65 million a cost improvement in response to the pandemic. The second point is that you know because of those actions and whatever else we can.
Fine to offset the pressures, we expect to deleverage at about 25%. So if we lose the dollar sales we drop operating profit about 25 cents.
Okay.
And.
Did you mention maybe a timeframe on.
When you might achieve that 60 to 65 million.
Yeah, it's it's ramping up pretty quick we expect to be in full run rate mid second quarter.
Yes.
Your next question comes from Rueben Garner the benchmark company. Please go ahead, Sir your line is open.
Thank you good morning, everybody.
Oh jeez, if I repeat anything I got kicked off for Matt. So maybe I'll start with a follow up 200 platform for the decremental margin at 25% what does that assume a from a mix of business standpoint from your different end market Tonight.
Office was down a little bit more than heart is that the assumption that's kind of baked into that scenario.
It is it is we've been its is sort of a commensurate with the order rates that were seeing currently.
It is basically an average blend of that.
Okay.
And then you referenced ecommerce.
Getting a spike in home office products I know you guys had been ramping capabilities. In recent years can you can you update us on what the near term and longer term opportunities are with the with the E. Commerce is it just home office that you saw a spike in here recently or is it is it boosting business on.
In the office space or I'm sorry.
Our commercial world as well.
Yes. Good question, we use the.
The business it targets small office and home office Thats. The platform. We're building out so we've seen nice nice growth in this long before the home office Spike Thats kind of additive to on top of what we've been experiencing.
You know, it's a business that is continue to ramp up we're in we're investing in it we're building out the platform and we really think it can be used.
To hit home office, and small office commercial.
Okay.
You referenced the coupons and there's a question about it already about.
The future lay out the office.
Kind of post code that can you.
I guess in your minds does does the post cobot World for office furniture. As this is this a net positive.
Potentially for the industry that that there's gonna have to be a reconfiguration and the way offices are set up and that leads to more business is working from home you know more of the headwind the not what just kind of how do you look at the world broadly, yes, I'm going out of this.
Yeah. That's good question now it's early days, but I would say, it's got to be a net positive.
Because you know very there it's a furniture event anytime you touch your space, It's a furniture event and I think as people figure out how they want to bring people back and in in you know the distancing that may be be required.
It's early days were in conversations with clients real time to to discuss that but it means there's activity. It means there's content on the floor plate.
And the home office piece of this candidly I think is is a positive as well for us in particular, given some of our assets in our brands that can service that business really well you know I think that people.
Well go full on into home office I mean, this has been a pretty forced March for people, it's been pretty pretty dramatic pretty emotional and I think it's got to its got to point to the fact that people like to to work together and get things done and but it's also pointed the fact that you can be.
Someone to fit efficient effective at home, so I think you're going to get.
Some upside on both fronts from our perspective, and we see that as a as a real opportunity going forward.
Are there are there any substantial investments that you think you'd have to make to service. You know these kind of changes or is it your existing kinda offering that just maybe is used in a different way going forward.
You know good question I think it's gonna be some of both I think we'll probably be looking at some different product types. A different finished materials things of that nature. So they'll but our architectural products group is is seen a lot of poll right now and I think that albeit an.
Asset that's gonna be.
Heavily utilized going forward as well and you know there'll be continued as we said we're going to continue to invest in making the process easier, which I think is going to help us on the home office front as well.
Okay, Great and then last last one for me.
The debt a four week trends I think it's the way you described <unk> office being down 35% hearth down 20% or have those then.
Trending lower had they you know where their worst at one point and they're starting to stabilize what's what's just or has that been relatively kind of in that range kind of since this whole started a month ago.
There's been some volatility to it reveals that in general they've been trending lower as you might expect.
Now what we what we saw inside and Jeff referenced systems that you know for the first eight weeks really after the crisis started there.
We did see orders trend lower than they bottom and started to trend more favorably still down versus prior year, but trend better and you know so far. That's you know consists of what we're seeing here.
[noise], Okay, great. Thanks, guys stay safe and good luck navigating through this.
Hey, Thanks appreciate it.
Yeah, So again.
Oh.
Okay again.
Our near term priorities are the health and safety of our members and the support of the company's cash flow.
We entered this unexpected period from a position of strength.
We will successfully navigate this pandemic stay vigilant and disciplined in our approach to balancing the near term with our focus on the long term opportunities in front of us and confident in our agent I members and their abilities to achieve our goals.
We look forward to speaking view again next quarter have a good day and stay safe. Thanks.
This concludes today's conference call. Thank you for your participation.
Okay.
Oh.
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