Q2 2021 HNI Corp Earnings Call
Yes.
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Good day, and thank you for standing by and welcome.
For the H Eni Corporation second quarter fiscal 2021 conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question during the session you'll need to press star 1 on your telephone please be advised for today's.
This conference is being recorded if you require on your further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Matt can call. Please go ahead.
Good morning, My name is Matt Mccall on Vice President of Investor Relations and corporate development for <unk>.
Operations.
Thank.
For you for joining us to discuss our second quarter fiscal 2021 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.
Yeah.
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 materially.
The earnings presentation posted on on our website includes additional factors that could affect actual results.
Corp.
And assumes no obligation to update any forward looking statements made during the call.
I'm now pleased to turn the call over to Jeff Lawrence or Geoff.
Thanks, Matt Good morning, and thank you for joining us.
In the second quarter, our members executed at a high level delivering substantial year over year profit improvement for <unk>.
This pandemic recovery.
Website to use to provide reasons to be encouraged about both the general environment and our opportunities at hsni.
However, the macro backdrop, along with our strong growth also presented new challenges in the quarter related to labor availability supply chain capacity and inflation.
Teams manage through those challenges to deliver strong.
Coverages.
Our 2 differentiated business segments are well positioned to benefit from the recovery of the cycle multiple secular trends and numerous state specific growth initiatives.
We have a track record of effectively deploying capital driving annual productivity and cost savings and managing through macro and operational challenges.
On results on today's call I will cover 3 key highlights of the second quarter first non-GAAP EPS doubled year over year, despite increasing pressure from inflation and returning costs.
Our residential building products segment delivered exceptional performance.
Third demand and workplace furnishings is recovering.
I will start by providing some detail on those highlights Mark will then cover our third quarter outlook.
I will conclude with some general comments finally, we will open up the call for your questions.
Our first highlights for the quarter, we doubled non-GAAP EPS versus the prior year, despite increasing pressures in <unk>.
Us.
Non-GAAP earnings per share of <unk> 40 was up 100% from the 'twenty reported in second quarter 2020.
In the quarter, we overcame greater than expected pressures related to material inflation labor availability and supply chain capacity.
We generated 22% sales growth in our network ramped up to meet.
Turning command.
In addition, as we discussed last quarter some of the costs related to temporary measures taken in the second quarter of 2020 return <unk>.
These pressures, we drove strong margin expansion and profit growth.
Overall, the second quarter shows the power of our diversified revenue streams, our ability to react quickly to changing market.
Dynamics and our overall operational capability associated with our member owner culture.
Yes.
Our second highlight for the quarter, we delivered exceptional revenue and profit growth in our residential building products segment.
On a year over year basis, total revenue growth exceeded 50% in the quarter and operating profit more.
That coupled with operating margins expanding more than 500 basis points from second quarter 2020 levels.
From a channel perspective, new construction revenue was up more than 30% from year ago levels and remodel retrofit sales increased nearly 90% versus the prior year quarter.
Orders were equally strong in the.
More than for growing 53% year over year.
As the quarter progressed for comps became more difficult order growth moderated but remained at high levels are.
For our value propositions growth initiatives and supply chain strength continue to resonate with homeowners.
Myers and builders.
As we look forward we remain optimistic.
Optimistic about prospects for both remodel retrofit and new construction.
Long term demographic trends in a persisting housing supply demand imbalance will continue to support a prolonged housing cycle and elevated remodeling activity.
Nesting and D urbanization trends also provide secular support.
And we have an outstanding opportunity.
Opportunity to grow the category in both new construction and remodel retrofit.
As a reminder, in new construction 2 thirds of homebuyers see having a fireplace is a must have feature of the home for less than 40% by 1.
And on the remodel retrofit side, we estimate that only about 3% of all remodeling projects.
<unk> fireplace.
To take advantage of these opportunities we are driving a better connection with a homebuyer and homeowner and we'll continue to make investments in launch tools that will assist in influence homebuyers in homeowners and their purchase and remodeling journeys <unk>.
For example of our investment and our model home is our model.
Home virtual tour capability, where we content, where our content and messaging seamlessly plugged into the builders virtual experience. This allows us to reach the homebuyer early in the decision process with consistent and effective content.
We have strong competitive positions in both new construction and R&R.
Our vertically integrated business model unmatched product depth and pricing breath strong builder relationships and regional distribution infrastructure all provide differentiation for this business.
As a result, we have significant opportunities ahead of us to grow revenue in the building products business.
The third highlight for the <unk>.
Quarter, our workplace furnishing segment is recovering.
On an organic basis net sales in the segment increased 9% and orders grew 32% versus the prior year period second.
Second quarter non-GAAP operating income grew 21% year over year, despite the pressures discussed earlier our.
Our small to midsized customers.
Can you offer for them.
As does demand in the public sector with orders in our businesses focused on these markets, increasing 55% year over year in the second quarter, putting us back to pre pandemic levels.
In addition, the North American contract market continues to recover with orders in our contract business.
<unk> of more than 23% from the second quarter year over year.
And in the past 5 weeks contract orders were up approximately 30% versus the prior year period.
Looking to the back half, we believe workplace furnishings has turned the corner and expect to drive revenue growth through the remainder of the year.
Recent order patterns.
<unk> and are indicative of our agility, our competitive position and improving demand trends.
Market demand signals indicate activity will continue to ramp in the back half.
As a result, we continue to expect year over year revenue growth in our workplace furnishing segment to accelerate as the recovery in our contract business gains momentum.
Our workplace furnishings businesses have unmatched price point breadth channel access and market reach and we are investing in multiple strategic initiatives aimed at driving continued outperformance.
A few examples of our growth initiatives include the December 2020 acquisition of design public group, we're seeing strong momentum.
With BTG year to date orders are up over 40% with record bookings in day in July and June.
<unk> is also giving us more access and greater insight into the work from home segment and ecommerce possibilities.
Another example is our recently launched DSR app.
This is a mobile app.
To drive engagement with dealer sales reps. It currently provides quick access to marketing content product information visualization and order status updates on from a single mobile enabled platform.
Over 600 dealer sales reps are already using the App, we expect that number to grow as we add more capability.
Additional.
We built we are investing to make our contract dealers more efficient and effective.
This includes technology to streamline the design and selling processes and platforms to make our back office more efficient.
These investments along with our existing competitive differentiators position us well to benefit from office reentry.
Work from home and the urbanization trends.
I will now turn the call over to Marshall to provide some detail around our third quarter outlook Marshall.
Let's start with our outlook for consolidated revenue growth, we expect third quarter revenue to grow in the mid 20% range compared to the prior year quarter.
Because of.
Seasonality this outlook implies third quarter volume will be substantially above second quarter levels, the sequential growth in the mid 20% range.
That level of growth when combined with the general labor and sourcing environment is presenting new challenges.
Our staffing levels and overall supply chain capacity are ramping up but not as fast as demand.
Demand.
As a result, we expect labor and supply chain constraints will limit third quarter revenue growth versus the prior year quarter by 4% to 6 percentage points.
That headwind is included in our outlook.
This is a timing impact we can solve these constraints over time, we are capturing demand and expect.
That 4% to 6 percentage points of growth to flow into subsequent quarters.
Let's move to our third quarter outlook for the residential building products segment.
<unk> order trends new home construction activity the outlook for remodel retrofit demand and expected benefits tied to a multiple growth initiatives combined to suggested.
Adjusted revenue growth rate in the mid to high 20% range compared to the prior year quarter.
We see continued momentum with both remodel retrofit and new construction.
Now, let's shift to our outlook for workplace furnishings.
Strong second quarter order trends are growing backlog and a low prior year comparable.
Adjusted growth rate, including acquisition impacts from the low to mid 20% range on a year over year basis.
Let's shift to third quarter profitability compared to the prior year quarter.
The impact of strong volume growth to be mostly offset by cost challenges related to inflationary pressures.
Increased growth investments.
And the return on costs associated with temporary actions taken in the prior year.
While I expect operating income to modestly higher than the third quarter of 2020 operating margins will likely compress on a year over year basis, We do expect margin expansion to return post the third quarter as our recent price action.
Take hold and we anniversary for temporary cost actions taken during the pandemic.
Finally, some comments on our cash flow and balance sheet expectations quarter, ending debt levels were approximately $179 million modestly higher than last quarter and down slightly from the second quarter of.
Peter.
The gross leverage ratio at the end of the second quarter of 2021 was approximately 0.9 on.
Changed from last quarter.
On a sequential basis, while our leverage ratio was unchanged cash increased by more than $24 million.
We expect free cash flow to ramp up in the second half.
Last thing with normal seasonality and our projected cash flow provide ample capacity for continued growth investment dividend payments.
Opportunistic M&A and buyback activity.
I'll now turn the call back over to Jeff Marshall.
Let me wrap up by stating that as we look through the rest of 2021 and into 2022.
We remain optimistic about our businesses and our markets, we continue to gain momentum and workplace furnishings, where our winning customer experiences the multiple strategic investments discussed earlier and our operational excellence will combine to provide a competitive advantage as the market recovers.
Recall, our focus on our workplace furnishing segment is a combination of driving.
Revenue growth and expanding margins.
We are increasingly confident in the recovery of the workplace furnishings market as order strength is broadening across customer groups project sizes and geographically.
Our improving order growth in the quarter and over the past 5 weeks is encouraging.
Our unique industry.
Leading residential building products platform is positioned for sustained long term revenue growth.
Our growth strategies in this segment continue to gain traction and we see strong demand supported by demographics and low housing inventories.
As a reminder, our focus and our building products segment is on maintaining our strong margins while continuing.
Moving to drive strong revenue growth.
As we move through the next stage of the recovery, we do so positioned to grow revenue expand margins and increase cash flow.
I would like to conclude by saying I am extremely proud of and thankful for the efforts of all <unk> members, particularly given how hard everyone is working to overcome the.
As we've described.
We will now open up the call to your questions.
Thank you.
A reminder to ask a question you will need to press star 1 on your telephone for Woodbury question press the pound key lease standard while we compile the Q&A roster.
Your first question is from.
<unk> of Sidoti and company your line is open.
Good morning.
In relation to look for to 6 points of growth due to some of the staffing and supply chain.
<unk> can you talk about where that is in the business is that.
Mainly.
In the workplace furnishings or is it across segments and then also.
And how much of a margin impact.
<unk> constraints.
Good day.
Yes for the third quarter, Greg the constraints are mostly in workplace furnishings.
And in terms of the margin impact it's not a.
I'm, Greg material driver right now of course inflation, which is.
Okay.
Factors is a big headwind for us in the third quarter.
Okay. So it's.
It's not really creating efficiencies, it's just limiting your ability to produce produce more agility.
Right here.
Yes.
Okay.
Alright.
And then I guess, you gave a little color on the.
The order patterns, you're seeing in workplace for things.
After the quarter can you just talk about.
In the residential building products.
Ex segment, you did mentioned that they've moderated a little bit can you just talk about kind of we ended the quarter.
How we've trended into the first part of the third quarter.
Yes, I think what we're seeing is a little bit of noise just based on the prior year order activity.
So if you think about last.
Peter remodel retrofit kind of tail off as the early in the early stages of the pandemic and so a lot of the reason are our growth rates in the second for so high on our remodel retrofit.
Sales rep actually up 90% versus the prior year, but you kind of compare that for 2019 levels.
Our.
Year on its pretty similar to what we saw on the first the first quarter and Thats continuing we're still seeing strong activity, but now we're starting to compare against where orders grew in the third quarter of 2020. So the growth rate is coming down it's more of a reflection of the prior year levels and it is a change in trajectory of market activity.
Our growth okay.
And then.
Yeah.
In terms of some of the growth initiatives you mentioned.
On the residential building products side of the business.
How are you seeing the benefit for those yet in your numbers or is that still.
Things that are in the early stages that will benefit you in a few quarters is there any way to play.
Quantify or any qualitative kind of color you can give around the impact those are having.
Yes, Greg this is Jeff.
Look I would tell you we can quantify I'll give you a couple of examples I would also say we're also early on.
On but we're there is we believe there's a lot of headroom. Some some examples would be like we started.
Aggressively going after fireplace inserts, that's 1 of our initial areas of focus to connect with homeowners existing homeowners and those are up over 90% year to date.
We're also seeing.
Anecdotally much more.
On site traffic from.
Awareness consideration purchases, which were up 47%.
And other growth initiatives on the electric category and.
To create awareness and acceptance of electric fireplaces, and we're gaining traction there with sales in that category up over.
Over 100%.
So.
Even though it's early we have real tangible evidence that those growth initiatives are on.
Taking hold and starting to drive the business.
Okay, great. Thank you.
Thank you your next.
Your next question is from Reuben.
<unk> from the benchmark company your line is open.
Thank you and good morning, everybody.
Apologies, if I repeat anything I got kicked off the call briefly earlier, but maybe.
Maybe just to follow up on Greg's first question to start Marshall can you clarify.
What is the.
Labor constraints are not causing the year over year margin pressure is it entirely.
Price cost that is leading to the near term margin drag and that will normalize as your price increase comes through.
As we move into the fourth quarter.
Yes.
That's certainly a major factor so.
In the second quarter, we had a price cost gap of about $11 million, we expect that to be $10 million to $15 million in the third quarter of a negative price cost gap.
As we move into the fourth quarter, we expect our price increases to ramp up and catch up with inflation and be roughly neutral.
About a 200 basis point headwind.
Going to abate as we as we progress into the fourth quarter.
And that's the major driver, but we also have the impact of some of the costs that are coming back from temporary actions. We took last year, we're investing in growth.
So that's where we.
Got some some impacts from the normalization on the variable comp and insurance programs, all of which impact the second and third quarter more than for us.
Your next question is from Steven Ramsey from from.
And kill right.
Yeah.
Hi, good morning.
Maybe.
To start with on the orders and delayed a single family starts kind of extending lag time between start and completion, yet seeing strong orders and read is that pushing out.
<unk> resin sales for.
Where single family into Q4, and even into early 2022 or is that not a major factor in in the segment.
Steven It's Jeff I'll take a shot at that I don't we don't think it's pushing out the long term fundamentals remain the supply.
Demand in balance we've talked about.
As you know for instance, new home sales slowed in June I mean that was the headline.
However building permits outpacing starts starts are outpacing orders.
And Bill Bill is trying to manage the inventory right now just to manage their margin. So we.
We're very bullish on on that and we don't we don't think it's pushing out we we continue to see strong activity there.
For as far as for quite a while.
Steven just to add to that.
Our our new construction sales were up 24% in the first quarter and we actually accelerated to 31.
Percentage. So we had thought it might decline a little bit from that strong first quarter growth rate because of the trends you mentioned and we just haven't seen it yet.
Okay, Yes.
That's helpful color.
And then.
I wanted to.
Clarify on the cost the temporary cost reductions.
Coming back in can you maybe clarify the impact for Q3, and Q4 or another way to think about it maybe a quarter.
Quarter do you expect that temporary comeback to be over be completed and operating at normal.
Yes.
There's about a $2 million.
Sure.
Cost related temporary actions that we took last year theyre coming back in 2021.
$2 million and $18 million hit second quarter, we expect about $6 million hit a third and by the fourth we only have about $2 million left and then that's the end of it.
Okay.
Great and then last thing for me on the workplace Guy.
Guidance.
For Q3, what swings that range to low high is it broad based demand from here or is it the constraints that you've discussed.
Yeah.
I think it's mostly the constraints, we probably will.
See some variation in demand, but I think given that we've got that 4% to 6% buffer and it really comes down to how we manage the constraints.
This is Jeff I would agree I think the demand continues if we look at.
5 week order averages for instance in the contract segment.
For the quarter.
Okay for was up 20, we were up 23% in the 5 weeks up 30%. So it's it's really just guessing how we can break constraints.
It's kind of all over the map with supply chain and labor throughout the value chain.
Excellent. Thank you.
We have a follow up question from Reuben Garner from the benchmark company. Your line is open.
Thank you and good morning, guys can you hear me.
Yes, we can hear you.
Alright, sorry about that.
So I don't know what I missed on what's been asked but I'm going to I'm going to do my best.
Sure.
First question is kind of a follow up I heard Greg's first question about the cost.
The cost impact on the margin impact from the constraints and I think you can just clarify Marshall.
What that impact is to your to your margins in the second third and fourth quarters is there.
Does that include the price cost drag and if not can you quantify what that looks like and how that you expect to sort of progress as we move into Q4 and then into early next year.
Yes, sorry, so you're keeping disconnected so.
What I answered just previously you had to do with the returning costs related to the temporary actions we took.
Took last year. So that's that's 1 headwind we face.
Cost is significant though right so maybe ill kind of cover that.
I think I mentioned that we had about $11 million price cost gap in the second quarter, and we expect that to be $10 million to $15 million in the third but by the time, we get to the fourth quarter, we expect our pricing actions.
The catch up.
With inflation, even though it is continue to go up and it will basically be price cost neutral by the fourth quarter.
So that we do expect.
Our incremental margins to be higher in the fourth quarter than they have been here in the us.
Second and third because of that price cost gap.
<unk>.
For the incremental margin sort of returned to normal less the $2 million.
That you've called out before all the sort of labor constraints on supply chain and others factors, where we need to factor that in.
In Q4 and beyond.
I wouldn't expect.
And the return to normal on the fourth quarter. There is a lot of price that we're pushing to cover that inflation, which is in creating any incremental profit right. So net dilution is.
On a lower our incremental margins.
Along with the other items that we've already talked about.
Got it.
And then I think I heard you say that the small and midsized businesses back to pre pandemic levels. I guess, 1 did I hear you write on too.
It sounds like contract is really starting to accelerate.
Do you guys expect that we'll get back to pre pandemic levels, maybe quicker than we would have.
And thought 3 or 6 months ago.
Yes.
The business for a focus on the small to midsize customers is doing really well our order activity in the second quarter is basically back to 2019 levels.
We're still running below that in contract, but as you said it is encouraging accelerating.
I think the outlook for contract is positive, but it is moving slower than the small to midsize.
Business segments.
Which is where we have a lot of our exposure.
It's a positive to us.
And I think the other positive thing is that.
The growth environment is encouraging but.
We're also focusing on driving margin expansion in that segment. So.
We're pleased with the traction we're getting on our productivity and cost savings initiatives and just the improvement we're making across the board. There. So that's 1 of our big near term goals. In addition to the recovery on the topline.
Got.
Last 1 for me.
Any comments or color on the home office.
Against your E Commerce business is that.
And on how we're going to start Anniversarying, some really difficult comps there is that something we need to factor in or is that business remained pretty robust even.
Year.
On to this.
Net revenues, Jeff I'd say that both of those.
Aspects of our business remain robust and.
Yeah.
We like our position there and we continue to invest.
In both those aspects of the business.
Thanks, guys I appreciate it okay take care.
There are no questions on reader phone I will now turn the call back to Jeff <unk> for closing comments.
Well great. Thanks, Thank you for joining us today.
Have a great day everybody.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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