Q4 2020 HNI Corp Earnings Call
Good morning, My name is Chris and I'll be your conference operator today at this time I would like to welcome everyone to the H and Army Corp, fourth quarter and fiscal year 2020 conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question for Keith Thank you.
Mr. Mcfall, you may begin your conference.
Yeah.
Good morning, My name is Matt Mccall, and Vice President of Investor Relations and corporate development for H&R Corp.
Thank you for joining us to discuss our fourth quarter of fiscal 'twenty 'twenty results.
With me today are Jeff Lawrence <unk>, 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 historical facts are forward looking statements, which are subject to known and unknown risks actual results could differ.
Seriously.
The earnings presentation posted on our website includes additional factors that could affect actual results.
For the Corporation assumes no obligation to update any forward looking statements made during the call now I'm pleased to turn the call over to Jeff Lawrence Geoff Thanks, Matt Good morning, and thank you for joining us on.
And members finished the challenging year by delivering another solid quarter.
This past year remembers adapted stayed agile and kept the corporation's strong in the face of challenging conditions as they continue to demonstrate what is unique about <unk>.
A great example of our strong 2020 performance was our cash flow generation.
For the full year, we delivered $173 million of free cash flow, which was up $20 million of 13% from 2019.
As a result, while our debt levels at the end of Q4 were unchanged year over year, we were able to fund $58 million of acquisitions grow our cash balance of $64 million and paid $52 million and dividends in 2020.
I would like to point out we've never cut our dividend of <unk> continuously paid quarterly dividends of $19 55, and we maintained it last year.
We accomplished all of this while funding key investments and despite consistent top line pressure and our workplace furnishing segment through the final three quarters of the year.
As we look forward I'm optimistic about our enhanced competitive positions and ability to drive profit growth.
We have two differentiated business segments, well positioned to benefit from a recovery of the cycle secular trends and <unk> specific growth drivers.
We have diversified revenue streams and clear opportunities to drive revenue growth and shareholder value.
I would like to talk specifically about our residential building products segment for a moment.
We are the market leader and fireplace and hearth products, we generate operating margins and the high teens and we are capturing strong growth in both the new construction and remodeling markets.
While those markets have strong fundamentals.
We have the opportunity to drive even greater growth by better connecting with homeowners and homebuyers and this traditionally under marketed industry.
We have a truly unique vertically integrated business with unique opportunities to grow.
We also have outstanding opportunities and workplace furnishings.
We are well positioned for a wide range of market scenarios, given our price point, Brett product GAAP ecommerce access and range of fulfillment capabilities.
We will benefit from trends related to work from home the Densification and de urbanization.
And we have the opportunity to capture on our positioning and leverage our operational excellence heritage to expand margins and the workplace furnishing segment.
I will now cover some key highlights of the fourth quarter.
Marcia will then provide some color around our first quarter outlook I.
I will then conclude with some commentary on our ESG efforts.
Finally, we will open up the call for your questions.
Yeah.
I will start with three key highlights from the fourth quarter for.
First our residential building products segment delivered double digit revenue and profit growth.
We generated 18% year over year revenue growth and the fourth quarter or 16%, excluding the impact of acquisitions.
We also delivered 11% fourth quarter operating profit growth on a year over year basis with full year EBIT growth and this segment of 16%.
Remodel retrofit sales, which have been strong since the middle of 2020 were up 15% year over year and the fourth quarter.
We continue to compete well and take advantage of strong ongoing activity and this market.
New construction sales accelerated in the fourth quarter and were up 17% on an organic basis.
Our value propositions and supply chain strength are resonating with homebuyers and builders.
As a result of the accelerating new construction activity, our fourth quarter growth rates were higher than we experienced in the third quarter. We expect our strong results to continue orders grew at a high teens rate and the fourth quarter and further strengthened in December and January.
Our unique model and this business continues to provide a strong platform for growth.
Over the years, we have built a strong residential building products business by focusing on operational excellence and by delivering superior service with our regional distribution centers and a vertically integrated structure.
This has allowed us to cap the strong demand and grow profits by over $100 million and the last decade.
However, as I mentioned earlier we.
We see even more opportunity to drive growth.
And new construction two thirds of homebuyers see having the fireplace is a must have feature on our home, but less and 40% by one.
On the remodel retrofit side, we estimate the less than 3% of all remodeling projects involve a fireplace.
To take advantage of these opportunities we are driving a better connection with the homebuyer and homeowner and we are working hard to better understand and influence their home purchase for remodeling journey.
Some early highlights of this effort include.
We are investing and enhanced direct and digital marketing.
And as an example, one small promotion around fireplace inserts created over 8000 leads and new.
The quarter of which were converted to orders.
Our social media efforts of our offering fresh content and driving large numbers of new visitors to our websites.
We are also partnering with social Influencers and targeted media to drive overall awareness and demand.
These efforts have already driven hundreds of thousands of impressions and thousands of engagements.
And finally, we are launching visualization tools, including mobile enabled augmented reality applications to help the consumer imagine there are possibilities and make decisions.
By combining these new efforts with our unique model, we're competing better than ever and this space. We continue to drive strong financial returns with fourth quarter operating margins of 22, 5% and full year operating margins of 18, 5%.
Our second highlight for the quarter was our solid profitability and a workplace furnishing segment. Despite continued revenue pressure.
Customer demand remained subdued and segment revenue declined 19% year over year. However.
However segment non-GAAP operating profit still exceeded $11 million and the fourth quarter, and we were able to deliver full year 2020, non-GAAP EBIT of approximately $40 million.
Orders and workplace furnishings improved as we progressed through the fourth quarter.
Segment orders, excluding e-commerce declined 25% versus the comparable prior year period.
However December and January order patterns improved from those in October and November.
The order rates and our businesses that are focused on small to mid sized offices are particularly encouraging.
And on a result of our agility and competitive position and improving demand trends and that portion of the market.
Orders from larger contract customers continue to be slow.
And although there are signs initial signs of increasing preorder activity of these customers are still generally and a holding pattern.
We expect slower order activity with contract customers and tell there is more clarity around the office of reentry timeline.
This timing is uncertain, but most conversations we are having indicate reentry ramping up sometime in the late spring to the late summer timeframe.
Orders and our workplace furnishings e-commerce business increased 37% versus the comparable prior year period.
We achieved 37% revenue growth notwithstanding ongoing supply constraints and difficult prior year comparisons we do expect to see continued strong growth and the first quarter of 2021.
Our differentiation and our workplace furnishings business model positions us well to compete as the market recovers.
Our workplace furnishings businesses have unmatched price point breadth channel access and market reach.
The addition of design public helps further our breadth and reach advantages.
These differentiators position us well to benefit from the work from home and day urbanization trends.
And given our unique competitive position and the small to mid sized market along with our exposure to e-commerce and certain international markets, we have the potential to outperform the market again in 2021.
And our e-commerce business, specifically, the momentum and our video gaming business the deserving of the callout.
We continue to drive continue to drive growth great greatly above market rates with our line of respond branded ergonomic gaming chairs. These.
And these products, which are available at reasonable price points and offer superior comfort are expected to continue to fuel our e-commerce business in 2021 and beyond.
Our third highlight of the quarter was the acquisition of design public growth.
And late December we closed the acquisition of <unk>. We are excited to add this digitally native organization to our portfolio.
The skills and capabilities of the team and design public bring will help accelerate many of our ongoing strategic initiatives.
Specifically designed public provides access to a customer set we previously didn't reach.
Approximately 50% of Tpg's revenue comes from individual consumers.
And like most companies tied to residential activity. This part of <unk> business was very strong and 2020.
The strength has continued into 2021 with January orders up triple digits over January 2020 levels.
The other half of the <unk> revenue comes from commercial customers through contract furniture dealers.
With approximately 500000 skus available through the <unk> dealer portal, we can provide efficient access to products that were previously often difficult to find and acquire.
And unlike and acquisition of a single niche manufacturer DPT and gives us a dynamic platform to rapidly adjust the shifting fashion trends.
And finally design public adds another work from home platform for <unk>.
This is of great business with tools that make <unk> stronger right now.
I will now turn the call over to Marshall to provide some additional detail around our fourth quarter and our outlook Marshall.
Let's begin our first quarter outlook for the residential.
And with our first quarter outlook for the residential building products segment for the first quarter, we expect year over year revenue growth rates and the mid 20% range.
We continue to see strong market momentum and as Jeff previously covered we are positioned for sustained growth and this segment.
Now, let's shift to our outlook for workplace furnishings, let me first say that pandemic related uncertainty continues to limit our visibility and this segment.
That said we are currently seeing continued moderation and year over year revenue declines. This improvement is primarily being driven by our businesses focused on small to mid sized offices.
These trends indicate workplace furnishings revenue will decline at a year over year rate and the high single digits to low teens during the first quarter.
That range includes the impact from the design public acquisition, which will add an estimated two five percentage points to our first quarter growth rate for this segment.
Let's move on to first quarter profitability. There are multiple moving parts of the first quarter profitability story overall, we expect to be profitable, but our current view is profit will be below the prior year pre pandemic levels on.
On the positive side, we expect the first quarter the benefit from higher volume and residential building products.
Broad based cost savings put in place last year.
And our typical annual productivity gains.
However, we expect lower workplace, various furnishings volume and rising input costs on more than offset the positives.
Regarding input costs recently, we've seen rapid increases from steel ocean freight and outbound freight.
And generally we expect the more challenging inflationary environment. This year, we have implemented pricing actions and identified cost initiatives to offset these pressures over time.
But expect unfavorable price cost and the first quarter.
Finally, some comments on our cash flow and balance sheet expectations. We ended the fourth quarter with $175 million of total debt, which was unchanged from last quarter and prior year levels our.
Our cash balance was $116 million, which represents an increase of $64 million from the end of fiscal 2019.
We expect to maintain a strong balance sheet throughout 2021 with leverage ratios in line with dosing of recent quarters. We also expect to continue generating strong free cash flow.
Which will provide ample capacity for continued investments dividend payments and opportunistic M&A and buyback activity.
I'll now turn the call back over to Jeff.
Thanks Marshall.
Before we take your questions I want to provide some highlights on our ESG actions many of which have been ongoing for multiple years.
In 2018, we published our initial corporate social responsibility report, which introduced our ESG goals.
Since then we have achieved our 10% energy reduction goal for <unk>.
And sourcing of 100% renewable electricity, which reduced our scope one greenhouse gas emissions by over 35%.
And we diverted over 90% of waste away from landfills and two of our facilities.
We also became a signatory to the UN global compact and joined our E 100.
We set aggressive science based carbon emission reduction goals aligned with the 2015 Paris agreement.
And annually, we donate 1% of our pre tax profit to improve the quality of life and the communities and which we operate.
Additionally, in 2019, I sign the CEO action for diversity and inclusion pledge and we strengthened our initiatives to ensure <unk> of welcoming community for everyone.
And we celebrate our members unique characteristics and talents.
And each of the last three years, we have been recognized by women on boards and by the women's form of New York for the diversity of our board of directors, which is 50% female.
We continue to ramp up of our ESG initiatives and activities and expand our sustainability commitments.
This spring we are planning to issue an update to our CSR report, which will include aggressive new targets along with recapping, our recent accomplishments across a number of ESG areas.
I would like to conclude by saying I'm extremely proud of and grateful for the efforts of all HSA members.
As we look for 2021 and beyond.
And have no doubt will be a stronger company because of what we experienced and how we performed this past year.
We have two differentiated business segments, each well positioned to benefit from a recovery of the cycle.
<unk> trends and <unk> specific drivers.
We are well positioned to grow revenue expand margins and generate cash over the long term.
We will now open up the call to your questions.
At this time and I would like to remind everyone in order to ask a question, perhaps star and the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Our first question comes from Reuben Garner with the benchmark company. Your line is open.
Maybe we can start with the building products segment.
I wanted to hit on the the growth rate a little bit more I don't think there's been many building product categories, the put up that level of growth and in.
Either the fourth quarter or and your outlook for the first quarter can you kind of just talk about what you guys are seeing is it.
Those are the certain faster growing market for us there are your investments are already paying off to accelerate growth and the Hart business.
Yes, Ruben and I think it's a combination I start with the cycle is encouraging we're continuing to you know.
And the demographics.
Well noted millennials are home buying inventories low rates are low.
Consumer net worth is pretty strong so we're benefiting there the secular trends are supporting the nesting D organization. So our model has been very efficient and effective at capturing that business and then yes, we're starting to see.
Initial initial responses to some of our investments as I said, where we're getting more in touch with homebuyers and and homeowners as they consider new home purchases and our remodel and and so that's 0.1 for instance, and new construction markets as I said 66.
Percent of homeowners say they want the fireplace, yet only 40% have them and in the remodel area. We estimate there of 30 million older gas stoves out there that.
The need to be upgraded and we know where many of those units are so we've started our insert selling model is started a year ago. We've now got that deployed and 60 dealer showrooms and insert sales of running well above our normal R&R rates. That's of for instance, so I think it's it's.
Across the board and we think Theres a lot of headroom there still.
Great and then as a follow up.
And we've noticed.
Google trends for fireplace, and Thats kind of gone through the roof here in recent weeks and months I think at record levels can you.
I guess two part question one when we and the past when we've seen waves of cold weather and energy costs rising it's been a benefit to a part of your business are you guys already kind of seeing that and I guess secondarily a lot of the growth from the on the new construction area has been and the south.
Florida, Texas, Arizona markets like that or.
And does the recent kind of weather events I guess.
Provide I hate the opportunity with everything going on down there but.
And the chance for you guys can maybe penetrate.
Some of them.
Markets that maybe otherwise wouldn't have been at the top of the list for for a fireplace.
Yes, yes sure Reuben.
The weather is certainly helpful but.
The product category Youre alluding to that really responds well the cold weather is actually not growing as fast as the other product lines right now so.
I am sure of the weather hedge trigger and people to think about the fireplace, but it's not the thing that we've seen five six years ago are really ran because of the cold and the high energy prices.
In regard to opportunities and warmer geographies I think there are opportunities there I'm not sure we're seeing a lot of benefit from it right now and I think it's more upside as we move forward.
People just really digesting. This these recent KOL events and may be reconsidering other other options for their house.
Great. Thanks, Marshall on and then.
Shifting over to the workplace business.
Okay.
Certainly bouncing back I think quicker than we had anticipated.
And you can you kind of parse out the small business you mentioned the smaller customers smaller office is it is it looking.
I guess from a geographical perspective are you guys benefiting from your your presence and some of the smaller markets already or is it truly just the smaller office may be bringing people back it's a little easier to get on small office reopened and it has to have on Google headquarters.
Returned to normal.
Yes.
I think some of both I think our positioning within the channel and in some of the markets, where and we're definitely benefiting I think smaller and smaller businesses are more active.
Small medium businesses are more active the D urbanization trends are starting to kick in and we're getting some interest and satellite offices.
That kind of thing its still early but but it's exposure.
Its dealer network its channel and it's.
It is ease of opening to some extent as well it's easier than the major urban centers for sure Yeah Reuben.
Business has a different set of customers and general and it's got a little more education and little more public sector exposure and we're seeing some strength in those areas as well.
Yeah.
Perfect and then if I could sneak one more and the design public group acquisition.
Pretty interesting and it seems like it can help you guys across a number of different.
Sort of categories that Youre looking for can you all the way to quantify what the businesses today and maybe what what targets are as you look out and then the next few years.
Yes, I mean for the year, Ruben and we're expecting it to add about $36 million to $38 million of revenue. So that's kind of how big it is its on a pretty.
High growth trajectory. So we expect it to the larger and we move forward and other years.
Great I'll pass along thanks, guys and congrats on the end of year and start to 'twenty one.
Thank you.
Our next question is from Steven Ramsey with Thompson Research Your line is open.
Hey, good morning.
Maybe I'll start with the the resi segment.
<unk> challenges.
Thank you al just slowing down the time from orders being placed two orders being fulfilled.
And maybe what are you doing the vantage or mitigate.
And this dynamic and as.
And the timeframe is there any projected timeframe of of the <unk>.
A huge alleviating maybe on the next couple of quarters or beyond that.
Yes, Steve and in General, we're holding our own in the residential building products segment in terms of demand is certainly very strong.
And the supply chains are stressed a bit, but we're not seeing any major disruptions there.
And you're able to keep up with it.
Particularly on the new construction side, it's basically lead times are pretty normal and we've seen a few products in the remodel retrofit side, and maybe get a little bit longer but still better than our competition. So we're doing pretty well there and just not a major issue.
Yes, I would just I would.
Tag onto that Marshall.
Our operating model with the Rd sees and the way the way we operate I mean, we we definitely have been busy but we have not builders.
New construction.
They're waiting on other categories not on our stuff, we've been able to capture that demand without without a lot of stress at this point.
Excellent, Okay, and then on on ready.
Investment spending up to take advantages of.
And of that arbitrage of intention to purchase and actual purchasing.
Maybe is it a meaningful dollar increase in 2021 to continue.
Capture that opportunity and then.
And secondly.
<unk> for M&A as you continue to acquire dealers is that still I know, it's still a focus is that likely to turn into meaningful investments in 2021.
Yes on the on the operating expense side, Steven we are continuing to invest and ramp up investments.
And especially in the residential building products segment, where.
And when you expect to add $6 million to $8 million of investment to the P&L. This year since about double what we had last year and these efforts to connect with the homebuyer and the homeowner.
In terms of M&A, and we're always looking for opportunities.
And then I think our actions in 2020 speak to what where we're going that we acquired three smaller.
Distributors and we continually continuously on the lookout for other ways to create value, but that's kind of the thing we'd be looking for.
Okay, Great and then thinking on.
Workplace e-commerce.
Demand is work from home is still the main driver of E. Commerce demand do you expect that to still be the cases as things play out where do you think more contract type of office demand.
Bill.
Support the ecommerce channel and a more meaningful way going forward.
Yes, I think the work from home is clearly still I think in the early innings.
I would tell you up to this point, though we have we've got a pretty large position and the gaming segment.
So called out why don't always work from home, it's from home a lot of it but it's not probably of work from home, although maybe it will turn into that so I think that is.
You know that.
We're well positioned there we got the price point, Brett we've got product gaps and we've got we've got.
Distribution reach and operating model reach so we are and that business and.
And where.
And we were ARIA E Commerce was strong before.
The pre pandemic and.
As accelerated post pandemic.
Great that does it for me thanks.
Thanks.
Our next question is from Greg Burns with Sidoti Your line is open.
Good morning.
Good morning.
Highlight of touch upon anything that Youre seeing that gives you the optimism of our confidence and that kind of broader reopening of the workplace you know as we get to the middle parts of the second half of this year.
Yes.
Great Thats, we are seeing some.
Uptick and activity I would say you know the.
The the bid the RFP requests.
The conversations are starting to ramp up I mean, it's early for sure.
But that <unk>.
It gives us.
You go back three months, even four months ago. The levels are are higher than they were and so we're we think that it's real and people are have been thinking about it and.
And are starting to seriously engage and processes to reenter and and anytime theres a theres a reentry point changes you know, there's the furniture events and.
And it's all over the map I would tell you the conversations we're having it's pretty clear that one you know we're going to avoid a one size fits all approach I think every business enterprises different it's going to depend on their culture and how they create value for all of their stakeholders et cetera, but it's no doubt the lead to a variety of outcomes for the office.
All of which are well positioned for and and you know those of furniture events. So that's good.
Okay.
And obviously a lot of moving pieces on the the cost side of the equation.
And how much avoided costs do you expect to come back into the P&L and 'twenty, one and maybe can you just.
You gave the nice.
Guideposts for the first quarter, but think about the full year.
How should we think about.
Incremental margins or the.
Potential for.
For margin improvement and in 'twenty one.
Yes, Greg.
Last year and 2020, we reduced our cost by approximately $90 million and of that $90 million of about $18 million of it.
Had the temporary measures salary reductions and furloughs were the main contributors there so that $18 million will come back.
But there's multiple moving parts and that's not the only sort.
And of cost or positive that will hit the P&L in 2021, So we're going to add to our productivity and we had a very strong productivity year and 2020 and we expect another good year. In 2021, we also had some other cost normalization around variable comp and <unk>.
Insurance costs, and so all of that's going to net together.
And to be roughly neutral at this point and of course, we have the rising input costs to deal with.
So it's kind of hard to say, how all of that plays out, but the $18 million doesn't flow through directly but it goes into other multiple moving parts.
Okay.
Alright, Thanks, and then.
And what is the split of revenue.
The.
And the residential building products between new construction and residential remodel.
And it's approximately evenly split between the two.
Okay.
Okay alright, thank you.
Thank you. Our next question is from Reuben Garner with benchmark company. Your line is open.
Thanks, guys just a couple of quick follow ups. The Marshall you mentioned price cost.
And maybe be a drag and the first quarter can can you quantify that and then do your pricing actions and your cost initiatives.
Assuming the current levels of inflation kind of persisted do they get back get you back to neutral starting in the second quarter or is that more of the it'll progress through the through the year kind of thing.
Yes, we are and we've seen these rapid increases, especially steel sales basically double what it was last August actually more than that.
So we're going to see some negative price cost and the first quarter and by the second half of our pricing actions on our cost initiatives will be in place there will be roughly neutral on a cost price cost basis, but we do expect some headwind and the first quarter and a little bit less so and the second quarter.
Okay, and then a follow up to that.
Thanks.
Full year incremental margin or margin outlook so of.
A lot of those puts and takes come out the neutral does that mean.
Whatever kind of volume growth, we think that the business is going to have we would apply kind of normal contribution margins, maybe less the price cost pressures that you have and the first part of the year.
And Thats a reasonable.
The assumption I would point out to you that over the long term our goal is to expand margins and workplace furnishings and depending on the volume situation that will hopefully begin in 2021 and residential building products our goals and so much to expand margin there and we talked about the investment levels and the growth opportunities, we have and our goal of.
There is to really drive the top line.
And hold the margins very strong margins that we have.
Got it thank you Marshall and I appreciate it.
And there are no further questions at this time since the launch here I will turn the call back over to you.
Thank you thanks, everybody for joining us today have a great day and of Great week. The next time.
This concludes today's conference call you may now disconnect.
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