Q2 2020 HNI Corp Earnings Call
Good morning, My name is Jason and I will be oracle's lunch operator today.
I would like to welcome everyone to be H.M.I. Corporation's second quarter fiscal 2020 results conference call.
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Thank you.
Good morning, My name is Matt Mccall on Vice President Investor Relations and corporate development for each <unk> Corporation.
Thank you for joining us to discuss our second quarter fiscal 2020 results with me today, our Jeff Oranger, 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, but they're not strictly historical facts are forward looking statements, which are subject to known and unknown risk actual results could differ materially.
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 warm sure Jeff Thanks, Matt.
Good morning, everyone.
Let me start by saying our members did a great job of managing through challenging second quarter conditions.
We aggressively managed costs in dray productivity offsetting much of the impact from lower volumes.
We kept our focus on our customers and also played off that's generating and seizing market opportunities where we could.
Labour through this experience, we had developed new and better ways to operate our businesses that will benefit benefit us in the future.
[noise], we delivered solid profitability in the second quarter.
Our cost containment efforts combined with the topline benefits from our diversified revenue streams, the breadth of our price points, our channel reach and our ability to quickly pivot all contributed to the better than expected results.
Well, we told you in the first quarter call that we expected a loss in the second quarter. The combination of these items helped us deliver a quarterly profit.
Nave or given our solid results in the second quarter, our year to date earnings per share.
Actually up slightly versus the first half of 2018.
This is a great accomplishment given the many headwinds we are facing it demonstrates again, what do you need what did unique about each night.
Last quarter, we told you we had two priorities when it comes through our pandemic response first is the health and wellbeing of all agency members.
Second is the success used to successfully navigate the pandemic into short term by supporting cash flow and maintaining our strong balance sheet, while remaining focused on our long term strategies.
So far we have successfully navigated both priorities.
We quickly adjusted our facilities and were able to operate safely and effectively to serve our customers.
In addition, as we began returning to our offices, we implemented multiple safety measures to ensure a safe process for all members our members safety remains Paramount.
We also further strengthened our balance sheet.
We generated free cash flow in excess of prior year levels and significantly lowered our already modest debt levels.
We have the financial strength and cost structure to successfully whether this crisis and yet any aftershocks for a prolonged period.
Given our financial strength and demonstrated ability to flex costs, we are making two changes.
First we are restoring salaries to their pre pandemic levels.
60 to 90 days earlier than initially anticipated.
If you recall, we implemented temporary salary reductions as part of our balanced approach to pandemic.
Our members Overdelivered on multiple fronts in the second quarter.
I break grateful for their efforts and happy that we were able to restore salary levels about a quarter earlier than originally anticipated.
Second we are accelerating our investment levels.
I would like to note that these actions are a direct result of our financial position in the efforts of our members.
It is not an indication that the crisis is over and we acknowledge our markets continue to be dynamic that notwithstanding we see opportunities in our using our strong financial position to invest.
I will now share some thoughts on the demand picture across our businesses, what we experienced in Q2, what we're experiencing currently and how we view the future.
First our Q2 your year over year order activity here is what we have been seeing recently.
Orders in domestic workplace furnishings, excluding our E commerce business were down 36% in Q2.
Over the past five weeks they are down 33%.
We are generally seeing a seasonal uptick in orders, but our year over year declines have remained relatively constant enter inline with what we have experienced in previous recessions.
Ecommerce orders were up 114% in Q2.
87% over the past five weeks.
We are confident this business will still delivered strong growth both in the near and long term.
Residential building products orders were up 2% in Q2, and we continue to see positive growth rates over the past five weeks.
We believe the secular trends discussed last quarter, which I will detail again in a moment are providing consistent tailwinds.
We are keeping an eye on land and labor shortages for builders, which could slow down production. However, indications are encouraging thus far.
Again.
Revenue streams price point breadth and channel reach our unique agent.
And our recent growth rates reflect these benefits.
Yeah, as we discussed last quarter, we are seeing several positive trends that should provide near term and post pandemic revenue support.
You know workplace Farnesene segment, we see the potential for multiple supportive secular trends.
First increased office for floor plate resets as organ eight organizations work to adjust to the new social distancing environment.
Second increased demand for architectural products platform, which can quickly create physical separation with minimal construction time, while maintaining natural light.
And third.
More demand tied to work from home.
And from increased smaller satellite office locations Eightnine is uniquely positioned to benefit from these trends given the value orientation of many of our brands.
Generally these trends and take some time to gain momentum most of them will require a broader and more meaningful returns to the office than we're currently seeing.
Customers, a generally assessing their options right now and are still in a mode of figuring out next steps.
These trends won't be enough to offset near term cyclical pressure, especially with the new growth and cobot cases nationally.
However, eight tonight, particularly well positioned to take advantage of the secular opportunities as they develop.
And our residential building products segment.
The positive order trends reflect our strong competitive position in the market and specifically with large national builders.
In addition trends side, the de urbanization elevated nesting and work from home trends record low mortgage rates low housing inventory.
All support positive demand patterns and should provide cyclical and secular support going forward.
We are excited about the cyclical strength.
Secular secular opportunities and company specific initiatives within our residential building products segment.
I'll now turn the call over to Marshall to discuss our second quarter results and our current financial position I will then come back and give some concluding thoughts Marshall.
Thanks, Jeff consolidated non-GAAP net income per diluted share with 20 cents that was down from the 38 cents. We reported in the second quarter 2019 second quarter consolidated organic sales decreased 21.2% versus the prior year.
Including the benefit of acquisitions sales were down 20.6%.
Consolidated non-GAAP operating income declined $9.4 million versus prior year on the sales decline of 109 million, which means our deleverage rates or decremental margin was 8.6%.
That's well below our targeted range of 25%, which includes the benefits of cost actions.
Given the circumstances, our members did a great job of the limiting the impact of declining volume.
In the workplace furnishing segment first quarter sales decreased 24.8% year over year. Despite the topline pressure, we were able to generate $7.8 million of non-GAAP operating income in the segment.
Well that is down from the $19.7 million in the prior year quarter. The decremental margin was only 11%.
Sales in our residential building products segment decreased 8.6% year over year organically and 6.1% when including acquisitions.
Within the segment, new residential construction revenue declined 5% organically and sales of remodel and retrofit products were down 15% year over year.
Despite the year over year sales pressure in Q2, we delivered higher operating profit and expanded operating margin versus the prior year operating profit totaled $14.4 million compared due to 13.4 million in the prior year period.
Operating margin was 13.1% up from 11.5% in the second quarter of 2019.
For each not overall second quarter gross profit margin was 36.1%.
This is down 50 basis points year over year, primarily due to volume.
Our second quarter non-GAAP tax rate was 32.5%. This was abnormally high driven by changes to our full year earnings outlook, we expect the tax rate to return to more normalized levels moving forward.
I should note that the only difference between second quarter, GAAP and non-GAAP EPS was tax non-GAAP EPS excludes the tax impact from onetime charges that we recorded in the first quarter of 2020.
So overall, our second quarter results again demonstrated the strength of our operating platform.
Okay, let's shift and now talk about our liquidity and debt levels.
At the end of the second quarter, we had $183 million in total debt, which was down $47 million from the first quarter and was 103 million lower than the prior year quarter.
Our gross leverage or gross debt to EBITDA ratio was 0.8.
This remains well below the 3.5 times gross leverage covenant in our existing loan agreements.
From a net debt perspective, our leverage ratio of 0.7 is down from zero point, it last quarter and 1.2 in Q2 last year.
Our teams have done a nice job of managing the balance sheet and generating cash flow free cash flow for the second quarter was $54 million more than double the 23 million we generated in the second quarter of 2019.
Given our low leverage ratio free cash flow levels and ability to quickly adapt our cost structure, we expect to maintain our strong financial flexibility in a variety of scenarios. This means we will remain well within our debt covenants, we expect to reduce year in net debt below last years level and we project free cash.
Cash flow will be significantly above our 52 million dollar dividend.
So as we look forward to the rest of the year. The pandemic has limited our visibility and our ability to provide sales and earnings guidance.
However, we will share a few thoughts and what we expect first as I just covered we do feel confident in our ability to generate strong free cash flow and maintain our strong balance sheet under a variety of scenarios.
Second we expect third quarter sales and profit to track ahead of second quarter 2020 levels, primarily due to seasonality.
Third we continue to believe 25% is the appropriate de leverage or detrimental margin estimate over time.
That's higher than what we just achieved in the second quarter, we're expecting the impact of salary restorations investment acceleration and less favorable business mix to pressure decrementals in the second half.
As a result, we expect decrementals being the range of 20% for the full year 2020.
I'll now turn the call back over to Jeff.
Thanks, Marshall in the quarters, leading up to the pandemic investments made in recent years. We're delivering returns you can see evidence in our recent revenue margin and cash flow trends.
Then this past quarter demonstrated more of what is great about agent.
Not only where we're able to quickly adjust their cost structure to support cash flow and our balance sheet as our Q2 results indicate.
But we also took initiative additional actions during the pandemic that will be additive to our pre cobot strategic momentum and support our profitable growth strategic framework.
Our members remain optimistic nimble and thoughtful and our pandemic driven successes will help our business is going forward.
We'll now open up the call for your questions.
Hi, This is Tom if he would like to ask your question. Please press star one the number one on your telephone keypad.
New pause for just a moment second barbecue announced here.
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Your first question comes from the line Rubin Gardiner from the benchmark Your line is open.
Thank you good morning, everybody.
Morning.
Moving.
Starting with the to the two changes that could you.
Made off and on the compensation returning to pretty conservative level than a an acceleration in your investments can you just talk about.
What gives you the confidence to do that it sounds like maybe some of the pressures in the traditional office are still there may be there awhile as it is it the growth in the E Commerce and the building products segment, that's giving you the most.
Confidence to restore things or.
Is there is there more to it than that.
Well, yes, I think Rubens. Good question I think we're you know we believe are we see our balance sheet strong.
Cash flow is strong the businesses are performing well given given the environment and so our members have had worked hard and we don't have as Marshall just went through the projections.
We see it as as a we have we have confidence in all the businesses actually workplace furnishings residential building E com kind of across all our platforms. In so we we felt strongly that you know we should pull that investment forward and.
And our members and we're confident it's the right move and we're confident we can maintain that.
And can Tim if I missed it sorry, I'm, having connection issues, but can you talk about what.
Since you're accelerating where where the.
Investment.
Going where where and when I guess, we'll see it show up there. These savings initiatives are they growth isn't the combination of the too.
Yes, it's kind of across the business Rubin, we're accelerating everything from operational productivity investments E commerce capability, new product digital marketing.
They're all initiatives that we still had in play we're just putting more more behind them.
Okay on the building products side.
Margins were obviously very strong in the quarter.
Can you talk about the puts and takes going forward on the margin front and then I think in your last release, you talked about an expectation that you might.
See revenue declines in that business.
With your orders now returning to positive growth is it too soon to expect that revenue growth can return as early as the.
Third quarter or any other.
Thanks to think about there.
Yes Rubin, it's a it's a good question the the outlook for residential building products and we were seeing order growth in the second quarter and we've seen it be positive here more recently as well.
There are concerns around I'm, just sort of supply constraints land labor availability, but demand is there so I'm not.
Outlook for that for residential building products is positive, but there could be a pause or maybe you know not rapid acceleration is in the near term.
Yes, Rouven this Jeff I think the other thing that.
You know the remodel retro dealers are reporting consumer online traffic's up double digits in store traffic actually now above pre cobot levels.
And with more motivated buyers. So what we believe we're seeing a lot of the nesting motivated buyers who have been kind of penned in and decided to remodel and we're also seeing people who can't find a new move up home because of the low supply.
Instead, they're remodeling so we've kind of got to phenomenon going on there both positive demand drivers on the remodel side.
Great. That's that's very helpful last one for me I think is.
The decremental margin.
Is it fair to assume that the delta between the performance in the second quarter and.
Your targeted levels was most of that from the pullback in investments and the comp productions and that's why.
You will return back to the more normal range or was there was there any mix elements within the businesses that help from a margin front and that in the second quarter. That's for me congrats on the quarter and good luck navigating through the rest of the here.
Yes, thanks, your but yet the there's really three drivers of what the decrement margins will be a little higher in the second half than we saw in the second quarter and you hit two of them.
That return of the salary restoration and the acceleration investments. The third item is business mix, we are seeing a little bit unfavorable business mix in the second half compared to the second quarter.
Your next question comes from alone.
When he probably Thompson research group your line is okay.
Good morning.
Oh, I guess in workplace.
Can you maybe go through the drivers of maybe for a second setting aside E commerce, how has that shaped up where the actuals varied.
Versus expectation and then you discussed the pricing as a driver was this due to previously placed orders or pricing holding up fine.
It it environment.
So far Steven.
Racing has held up pretty well these are previously.
Implemented pricing actions that primarily relate to the tariff that it got put in place middle of next last year. So we're still anniversary ing those.
Yes, Stephen in on that on your question just in General I think the education segment, we had a relatively strong season for us probably a little above what we had anticipated core commercial customers or.
Kind of down in that same ranges.
Kind of across all verticals in that kind of low thirtys.
But but I'd say education was was a vertical that was whether it was strong for us stronger than we anticipated.
Great and then the education market benefit does that.
In Q3 years that does that test.
It's pretty marginal in Q3, Steven the that's a season, where you know it happens all at once and that order period is over and we shipped most of it.
Great and then kind of flipping to the E Commerce side, if I remember right. It was maybe the 5% to 10% of workplace sales.
In the past what what was it in Q2.
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And I guess kind of as we go forward with strong growth continuing.
It is E commerce.
A margin headwinds still are dilutive.
For that segment or is it scaling up.
In the mid term.
You know as it relates to its the mix of workplace furnishings on a trailing 12 month basis, Stephen it's about 7% of workplace.
And I actually.
Your other question about where where it's going at it is accretive.
Due to our profit it has a different sort of economic model. So there are different margins involved and we're still in sort of the gross sales yeah.
Yes, we were we were positive.
You know in the second quarter in business is going to be able to deliver but we're also investing a lot now to keep keep pushing the growth.
Great and then I guess.
Question on the residential side of the business.
It is there a headwind in the second half just from the lack of housing starts in.
In April and May.
You know that's a great question.
You know because April may permits were down about 18% year over year end, it's usually a 90 day lag now.
You know the flip side is permits were up 10% in June and.
There is a pretty healthy.
Backlog as well so.
No that's a and remodel as I commented earlier, you know remodel retro.
Is stronger than we will then we think are the so it could be but you know we think it's got to be fairly smooth given all the all the demand out there.
Great and last quick one for me on the acquisitions of distributors on the residential side can you discuss kind of the context.
Of making these and.
More strategic or up opportunistic.
In the challenging market or just any color there.
Yes.
Good question, we have a really strong owed distribution.
Network and it was we had an opportunity to to add to that and when we see those we take them. If we can if we can get the deal done so it adds to our.
No our ours our network, we've got a solid operating platform. That's that's that's profitable great service levels and it really enhances it just expands the network out in the operating platform out for that business. So we are always.
Okay to on the look out for opportunities to do that.
Excellent. Thanks.
Thank you.
Your next question comes from the line.
Burns from Sidoti Your line is open.
Morning.
Morning.
We've seen across space backlogs being elevated exiting the quarters given the production issues.
Over the quarter.
Backlog stand was it up notably.
Quarter.
Yes, Greg we were.
Pretty consistently operationally open during the second quarter. So we didn't really experienced any of those operational issues that you mentioned and our backlog is commensurate with the order and shipment activity that we've had theres nothing abnormal there.
Okay.
Great and then.
In your prepared remarks, you mentioned.
You mentioned, some some market opportunities that you're able to take advantage of this quarter what exactly.
Where those and then you also mentioned some new and better ways of operating could you maybe give us a little bit more color on those.
Yes, Greg.
What we have is we have a very agile nimble culture and you know we kind of when the off as we tipped up some rapid response product teams.
We tipped up.
Aggressive home and healthy workplace place programs, we picked up some ecommerce sites closed loop for some of our customers and we partnered with them due to deliver products through our E comm platform to their to their employees and so that's kind of what I'm, referring to we we just pivoted quickly.
We use our agile culture and sees today on some of those opportunities and they continue to point as those things continue on.
In a time like this you know we look for.
New and better ways to do business in some of the some of the things are long lived and we will continue on with those as we go.
Okay.
And then.
In terms of your ecommerce strategy can you just talked about.
How you're approaching that market to capture the work from home opportunity, whether it's I think it's mostly a wholesale play right now.
But do you have like.
The more direct to consumer.
End of web site.
In the pipeline, what's your strategy on E Commerce.
We're capitalizing on workable.
Yes, great. We've got cut all the above we have a robust platform that really right now goes through third party resellers.
More of a b to B b to C. But we have we have initiatives across the businesses across the brands that also help them do some direct and then also help our existing dealer base capitalize on the home office work trends. So we're we're kind of guide.
You know things in flight on all fronts.
Okay and then.
Maybe if the market does.
Shift more towards maybe a hybrid working model where work from home becomes.
More significant in the market, what or maybe some of the.
Bandages.
That.
I might have over others to capitalize on that and I'm thinking maybe.
Your distribution price points. So maybe you could just highlight some of the reasons why you think you might be successful if the market shifts in that direction.
Yes, we have we have great price plus we have broad you know revenue.
Distribution channels, we were already a strong competitor competitor in the small office space in video game space for the home. So we've got out we've got a good. Good started this in in our price points are our channels of distribution. We think are all going to be.
Allow us to take advantage of the work from home building. We see candidly is we think existing plays out we're hearing a lot about people are getting kind of burn out from were working at home and and as that develops.
A lot of people make maintain a more robust work from home office and working in the office as well so it's.
We think over time, that's going to be a positive for the industry and really play to our strengths as well.
Okay and then.
Lastly.
You mentioned, it's mostly conversations with clients, but what are what are you seeing.
And your your pipeline are you seeing.
Upticking cancellations orders being pushed out and then.
Then I guess the.
If you just maybe give us a little bit more color on those conversations are you seeing uptick in at least.
Conversations with your customers them showing interest in.
Emulating some kind of plan that they need to implement once things open up thanks.
Yes, Greg.
Couple of things there one we have not really seen cancellations uptick it's been minimal now not surprisingly we've seen project push.
And that's mostly driven on the fact that in some cases its labor availability on new new construction, either income or other workplace or the the residential building side, but it's mostly just customers delaying.
Taking a wait and see approach to return to the office. That's so that's that's resulted in some push and some delays.
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Your next question was.
Well.
Just around the Clos issues, you're having with customer Oh, yeah, sorry, yeah, I want to make sure I I'm, sorry, I forgot that yes, there's a lot of conversations going on in the exploration stage on on what what people need to do near term medium term a long term and you know the near term conversations around how to you return to the office safely.
The screening spacing partitions.
You know there's a lot the lot of conversations I wouldn't say, there's been a lot of movement. There yet it's still early it to for people to pull the trigger the kind of hurry up and then wait and decide and then to the obviously the upticks in infection rates and whatnot have not really have kind of slowed that down a bit as well.
But it's.
It's early on how that will play out Greg, but I think it net net it's got to create more furniture events and for us because there will be movement on the office front and there is also going to be more robust as I said earlier home office program. So I think thats going to get to be a positive demand driver over time the other thing.
I think that you know, we're starting to see a little bit of is just kind of the smaller markets are you know, becoming a little more active because they have less challenges with public transportation elevators and that kind of thing and we play we play well a lot of those markets with some of our businesses and so that's.
Thats been a real positive for us as well. So I think you know that they're they're becoming also early adopters to see you know for US. How this is going to play out so we'll get some good learnings there as well.
Okay, great. Thanks.
Thank you.
There are no further questions I'll turn the call over to Mr. longer for closing comments.
So thank you everybody that just a quick comment the near term environment definitely remains dynamic and uncertain, but we continue to feel confident in our ability to positive navigate whatever conditions we encounter.
Our recent moves to restore salary levels and accelerate investments reflect this confidence. So I just want to say again, thank you to all the agent numbers out there.
You know, we just great performance and.
I look forward to talk in the in the soon have a great day.
That concludes today's conference call you may now disconnect.
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