Q3 2021 HNI Corp Earnings Call
Okay.
Good day and thank you for standing by welcome to the H M Corporation third quarter fiscal 2021 results conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone please.
Be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Matt Mccall, Vice President Investor Relations and corporate development. Please go ahead.
Good morning, My name is Matt Mccall, I'm, Vice President of Investor Relations and corporate development for <unk> Corporation.
Thank you for joining us to discuss our third 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.
Statements made during this call that are not strictly historical facts are forward looking statements, which are subject to known and unknown risk.
Actual results could differ materially.
Earnings presentation posted on our website includes additional factors that could affect actual results.
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 Lawrence or Geoff.
Matt.
Good morning, and thank you for joining us in.
In the third quarter. Our members stayed focused on servicing our customers. While we continued to experience ripple effects from the pandemic, which are creating constraints in the near term.
While we drove strong order growth ongoing difficulties tied to labor availability supply chain disruptions and inflation across all input cost categories negatively impacted our results.
Despite these pressures we are increasingly encouraged about 2022, given the actions we are taking the ongoing recovery in workplace furnishings.
Strength in residential building products are.
Our two differentiated business segments are well positioned to benefit from multiple secular trends and numerous <unk> 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 today's call I will cover three key points first we are addressing the constraints negatively impacting our second half results.
Our residential building products segment continues to deliver strong revenue and profit growth.
Third demand and workplace furnishings continues to improve.
I'll cover these three key points Marshall will then go through our fourth quarter outlook.
I will conclude with some general comments and finally, we will open up the call to your questions.
I will now cover our first key point, what we are doing to address the near term macro dynamics impacting our business.
As we discussed in our business update on September 23rd we continue to generate strong order growth across our businesses workplace furnishings orders in the third quarter increased 31% versus the prior year period and were 5% above third quarter 2019 pre pandemic levels.
Residential building products orders in the third quarter were 35% higher year over year.
We have market momentum and are capturing demand.
However, our third quarter profit was below prior year levels and was well below our potential due to three constraints all of which we are addressing.
The first constraint is labor availability.
There are simply fewer people in the labor pool than there were before the pandemic.
This has prevented us from increasing production as fast as we would like.
Our current production staffing is 11% or approximately 340 members lower than what we would like to have given the strong demand we are generating.
Along with the reduced labor pool, we have experienced increased impacts from COVID-19 as the delta variant ramped up in the third quarter.
This has temporarily amplified the staffing shortage at our facilities and with our suppliers.
To combat. This issue we are taking several steps first we are making our operations more efficient mud.
Much of this is being driven by our lean manufacturing expertise for.
Instance, at one of our larger facilities, we're altering the layout and flow, which will allow us to improve output at that location by 17% with the same head count.
We're also pursuing productivity gains related to automation.
Second our new facility in Mexico will provide an additional source of labor to help meet growing demand.
We expect that location to employ 250 members once it is fully ramped up next year.
Third we continue to aggressively hire move production facilities, where labor is more readily available and assess new labor pools with part time and seasonal programs.
These efforts are getting traction and we have seen staffing levels improve over the last 45 days.
That brings us to our second constrained supply chain capacity.
Like many we are experiencing disruptions largely largely tied to staffing shortages at suppliers port congestion and material availability.
These items limited in our ability to keep up with demand and also made our members less productive.
Strength in our supply chains, we have started to diversify their supply base create inventory buffers and increase our monitoring and coordination efforts with key suppliers.
We will continue to focus on these efforts as we expect supply chains to remain stress for the foreseeable future.
The third dynamic is rapid inflation across all input cost categories.
Input costs increased $44 million in the third quarter compared to the prior year, which is by far the most inflation we've ever seen in the quarter all of our input cost categories experienced increases led by steel and ocean freight.
We have responded with aggressive pricing actions the cumulative benefit of which will allow us to fully offset these cost pressures accordingly, our price cost headwind is temporary we.
We expect it to narrow in the fourth quarter and turned positive early next year.
We are taking a more agile and aggressive approach with pricing moving forward.
We are prepared to manage it and ongoing inflationary environment and have the market power to get ahead and stay ahead of these headwinds.
My second key point is residential building products delivered strong results, despite increasingly difficult comps and multiple sources of pressure.
Revenue in our residential building products segment increased 25% year over year in the third quarter on an organic basis.
As I mentioned earlier segment orders increased 35% year over year.
Growth in the remodel retrofit channel slightly outpaced the new construction channel despite increasingly difficult comps in R&R.
Our building products segment was impacted by the three factors I discussed earlier and as a result lead times have extended and price costs continue to be negative.
However, our members worked hard to maintain production output and service levels and the business generated more than 10% year over year operating profit and an EBIT margin of more than 17%.
As we look forward, we remain optimistic about the prospects for both remodel retrofit and new construction.
As we have stated previously our residential building products business is supported by favorable trends in unique opportunities.
Long term demographic trends and a housing supply demand imbalance will continue to support a prolonged housing cycle and elevated remodeling activity.
<unk> and D. Urbanization trends also provides secular support.
And we have an outstanding opportunity to organically grow the category in both new construction and remodel retrofit.
In addition, we have opportunities to enhance our strategic position through acquisitions.
As an example earlier this month, we acquired Trinity Hearth and home a large installing distributor headquartered in the Dallas Metro area.
Trinity generates approximately $40 million of annual revenue and employs approximately 100 members.
Trinity will act as a hub to better serve the rapidly growing southwest region.
And it further strengthens our unique vertically integrated business model and our regional distribution infrastructure.
Following this acquisition, we now own 26, fireside hearth and home locations. We're excited to have Trinity joined the <unk> family.
Our third key point.
Demand in workplace furnishings continues to recover with year over year order growth up at least 25% in each month of the quarter.
In total workplace furnishings orders increased 31% during the third quarter on a year over year basis.
And we are seeing growth across all major channels.
Although demand was strong the three constraints discussed earlier drove a year over year profit decline.
As I previously noted we are addressing these constraints and as we look into 2022, we expect to return to driving profitable growth.
We are increasing our capacity strengthening our supply chains, and taking aggressive pricing actions to offset the ongoing and increasing inflationary pressures.
We also expect strong revenue growth in 2022 supported by our elevated backlog and the ongoing recovery.
Our workplace furnishings businesses have unmatched price point breadth channel access and market reach and we are investing in multiple strategic initiatives strategic initiatives aimed at driving continued outperformance.
We have unique exposure to fast growing segments of the market, including education home office and with small to midsized customers.
Our investments along with our existing competitive differentiators position us well to benefit from office reentry work from home and de urbanization trends.
I will now turn the call over to Marshall to provide some detail around our fourth quarter outlook Marshall.
Okay, let's start with our outlook for our fourth quarter revenue growth.
We expect consolidated fourth quarter revenue to grow in the mid to high single digit percent range compared to the prior year quarter, including the impact of acquisitions labor.
Labor and supply chain issues are expected to limit our output in both segments again in the fourth quarter.
And workplace furnishings, we expect growth in the mid single digit percent range on a year over year basis, including acquisition impacts.
In residential building products, we expect year over year growth rates in the high single digit percent range, including acquisitions.
Next let's cover fourth quarter profitability, we expect the margin pressures, we faced in the third quarter to continue in the fourth quarter.
As a result, we expect operating profit and earnings per share to be at or below what we just reported in the third quarter.
As Jeff mentioned earlier as we look to 2022, we are increasingly optimistic.
The combination of our order trends and backlog levels increased capacity and strengthened supply chain points of revenue strength.
Particularly for workplace furnishings in the seasonally lower first half.
From a profitability perspective, we are addressing price cost in 2021, we estimate price cost will be approximately a $60 million of headwind.
Next year, we expect a positive price cost and we cover much of 2020 one's deficit.
As a result, we expect profitability margins in earnings to recover in 2022.
Finally, some comments on our cash flow and balance sheet expectations quarter, ending debt levels were approximately $178 million that was modestly lower than last quarter and up slightly from the third quarter of last year.
The gross leverage ratio at the end of the third quarter was approximately 0.9 unchanged from last quarter.
And our projected cash flow provide ample capacity for continued growth investment dividend payments and opportunistic M&A and buyback activity.
I'll now turn the call back over to Jeff. Thanks Marshall.
Let me wrap up by stating that as we look forward, we remain optimistic about our businesses and our ability to drive profit growth.
Our members continue to effectively manage through the post pandemic environment, allowing us to maintain our revenue momentum.
Our workplace our focus in our workplace furnishings is on expanding margins.
Our focus in residential building products is on driving above market revenue growth, while maintaining our strong margins.
As we move past the recent headwinds we will do so well positioned to grow revenue expand margins and increase cash flow.
I would like to conclude by stating I am extremely proud of and thankful for the efforts of all H ni members, particularly given how hard everyone is working to overcome the constraints we have described.
We'll now open up the call to your questions.
Thank you.
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While we compile the Q&A roster.
Our first question comes from the line of Greg Burns with Sidoti and company.
Good morning.
Just wanted to start with the the order patterns order trends you are seeing throughout the quarter on both sides of the business.
How they trended throughout the quarter and how you are.
What youre seeing in the early part of the fourth quarter, and then secondly to that on the workplace.
Side of the business are you seeing any change in.
Ford indicators like like Mark up.
Pipeline opportunities like in terms of dollar value a number of project opportunities you are seeing any any change there that might indicate.
A shift in demand going forward, given what we're seeing with <unk>.
Covid. Thank you.
Yes, sure, Greg, let's start with orders and workplace furnishings.
For the segment their orders were up 31% versus the prior year for the third quarter and if you look at the individual components.
If you click down to each business.
We were pretty pretty consistent so we saw similar growth rates in the contract business as well as the business focused on small to mid sized offices and the growth rates through the quarter were pretty similar there were some noise related to the timing of price increases, but we exited the quarter pretty similar to the rate that we had for the whole quarter there. So.
There is no change in trajectory it feels feels pretty decent.
In residential building products and orders were up 35% versus the prior year.
Remodel retrofit was up a little more.
And new construction was.
That low 30% growth range there new construction was really consistent through the quarter remodel retrofit has started to taper off now it's not an issue of the dollar intake tapering off that remains good. It's just we're starting to come up against some tougher comps in the prior year period. So the growth rate is slowing as you might expect given the.
Growth rates, we saw late last year and early this.
As it relates to forward looking indicators.
What I would tell you is that we probably have a little bit less visibility than we normally would have on that front right now Greg.
The customers and the dealers maybe shifted a little bit more of their focus to dealing with the here and now.
Given the construction delays that are out there and just overall.
<unk> disruptions that we're seeing so I'm not sure we have great view that what we do see is that contract is strengthening and the SMB business continues to be strong.
Okay.
Okay.
And you mentioned.
Our focus on improving margins on the workplace side of the business how should we think about.
I guess, what your goal is or where you think that that business can get to because I know you were starting to see.
A little bit of improvement in 19 before the pandemic hit.
<unk>.
So I just wanted to get a feel for it.
What's your aspirations are for that segment and where you think you can get the margins over time.
If inflation in some of these supply chain issues improve.
Yes long term Greg.
We believe we can get back to the margins. We are at in that 2015, 2016 timeframe and workplace furnishings in the short term. We've got two big levers that will help us out in next year and the first one is.
Improving price cost price cost is a major headwind this year.
We're looking at about a $44 million negative price cost for workplace furnishings, and we think we can recover the majority of that next year, which could add approximately 300 basis points of margin. The second big lever in the short term is just catching the volume Miss out there where our backlogs are extended demand continues to run.
As we increase our capacity and get more productive with the capacity. We do have we can capture some some volume maybe get another 150 basis points of margin expansion there.
As you look into subsequent years, we're committed to expanding margin. We've got some efforts underway to improve underperforming businesses and of course, we've got our ongoing annual cost savings initiatives.
Yeah.
Okay.
When you referenced like 2015, and 16, so that would be like a high high single digit.
And number four back and look at it you know it looks like you were in the.
And that range of eight to 10 kind of range.
Yes.
Yes.
Okay.
Right. Thank you.
Thanks, Greg.
Our next question comes from the line of Reuben Garner with the benchmark company.
Thank you and good morning, everybody.
No.
It sounds like.
Some optimism.
Surrounding 2022, and Marshall, you mentioned $60 million, a price cost drag but.
<unk> I think is a little over a dollar a share of my.
If my math is right does that include the all encompass is that an all encompassing figure with the supply chain.
Parts of it or is that purely sort of material.
And I guess is there any other thing to think about it as we as we're putting together a bridge for 2022 other than that that $60 million headwind going away.
Yes.
Our input costs include.
Materials wages freight your classic input cost. It doesn't include any kind of disruption to productivity related to supply chain disruptions and things like that.
Yes, I think as you look to next year, the two big levers as well.
And Greg is the recovery of price cost and then the leverage off of volume growth as we expand capacity and also use the capacity that typically isn't used in the first half and there's we're not going to see a lot of seasonality next year in workplace furnishings, just due to the pent up demand in the backlogs we have.
Great.
Feeds nicely into my next question about the capacity additions can you.
Put into perspective, the Mexico operation, how much does that add to capacity I think it's a seating facility is is that where you need capacity. The most stores that just going to allow you to.
Better utilize your facilities in the U S for some other.
Product categories, and then secondarily and sorry for the long winded question, but the production rate.
Jeff that you mentioned I think you said your 11% short of where you want to be what where does that number normally sit just kind of.
More normal environment, if there's such a thing.
Yes, Reuben what I can tell you is.
The Mexico operation It will relieve pressure overall on the network. So that's a that's a positive.
Positive thing.
It's multiple levers it's additional hiring its enhanced productivity, it's shifting production around its Mexico.
It's Marshalls point about level loading the first half as opposed to kind of the cyclical nature of the business.
We're looking to increase output somewhere in the 15% to 20% range for 2022 over 2021 two.
2021 levels from a capacity output standpoint, so that's.
It's not just isolated in Mexico, but it's kind of all those items.
Okay, and then that's great what kind of investment are you having to make.
Increase the.
Productivity by that much.
Much as theyre going to be an incremental pressure on on Capex next year or is this within your sort of normal spending parameters.
We've been most of it's in our normal spending the Mexico facility, obviously is going to have a little bit more but it's not a dramatic change.
Most of them were trying to do is utilize.
The capacity, we have in access labor, which is just not as capital intensive as some some capacity expansions would be.
Okay, and then on the workplace furnishing side I think that there is some skepticism from investors or.
I guess unknown about the recent surge in demand how much of it is catch up from the last year, how much of it is a return to normalization how much of it is spending to reconfigure the office to be.
Better for for more Covid friendly going forward I know this is a tough question, but any sense from you guys on those three buckets. What we're seeing right now can you tell by the types of products that are being ordered is this just kind of things returning to the way they were prior to COVID-19 or are there other factors.
Rubin, that's a great question I think it's both and to be candid I think we're seeing you know.
People ramp up, particularly with some segments you know education.
<unk> businesses are moving forward with their with their life.
Their business is doing well. So that's just that's just demand coming online as those businesses do well I don't think.
The reconfiguration.
For post Covid has really hit yet those.
Office re entry in major Metros has been delayed so that's still I think out there I think we hear a lot of discussion about the war for talent.
Operating in a hybrid environment.
And those I think that demand is still.
TBD.
As companies figure that out so you know I would I would characterize this as we've seen nice nice return in certain segments of the business and that's driving our strong our strong order patterns and there are theres still another couple of chapters to be played out as companies kind of auger through a return.
The office scenario and Hi, Brad and then you layer on top of that the war for talent and Theres a lot of discussions underway about how thats going to play out.
Great I'm going to sneak one more in.
Haven't seen a surge in fuel or energy costs like this in a while back.
Back in 2014, and 15 I think it was your heart business had a pretty big boost from folks looking for different ways to heat their homes in the winter I guess.
Any chance that we see something like that given the current environment and then secondarily do you have the capacity and that kind of the area to service an uptick in demand if there was one.
Yes, it's a great question Reuben.
I always enjoy talking about the pellet business.
Yes, we would expect that to run given.
How are high energy is I would say, we haven't necessarily seen it yet.
So I guess it remains to be seen.
And we are pretty tight in capacity across the hearth business. So we're going to have to figure out how to capture all of it but that's that's a potential upside for us as we go into next year.
Great. Thanks, guys.
Thanks Reuben.
<unk>.
Our next question comes from the line of Steven Ramsey with Thompson Research.
Hey, good morning, thinking about the Q4 guidance to start with sales.
It looks like Q4 sales being better than Q3 can you maybe go through how much of that is pricing flowing through and how much of that is better production and shipments and then secondly, if Q4 sales are higher sequentially, but profits at or below what is what is driving that dynamics at price cost or are there other.
Items.
Yes, it's a good question Steven Let me, let me try to answer the second part of your question first so yes.
As you look at the fourth quarter as it relates to the third quarter. We said conditions will be generally same but theres a lot of moving parts basically net together offset each other so maybe walk through them and I think that answers both both of your sub questions. So.
On the positive side, we are going to see better price cost.
Our pricing is ramping up and even though inflation continues to increase we're going to narrow that gap.
That's an improvement sequentially.
So the volume in residential building products will improve sequentially, that's really related more to shifting inventory we produce.
Earlier in the year.
We're pretty tight on production said earlier, so those two positives.
Get offset by basically three negatives. The first one is there some seasonal uptick in the corporate and non allocated overhead we were about $11 million in the third quarter. There that showed increased $7 million, but the year over year, increasing shows quarters, they're still.
Pretty small it's just how those costs flow.
We're also going to see fewer production days. This is the fourth quarter's got more holidays.
And so the workplace furnishings business will have lower unit volume price excluded and then lastly, we're going to see a little bit lower productivity, particularly in workplace furnishings.
<unk> to two factors one starting up the new Mexico facility and then secondly.
The supply chains are still not back to being healthy. So you net all that together, we're looking at pretty similar profitability.
And the volume picture.
Excluding price depends on which segment.
Okay very helpful very helpful.
Then thinking about the constraint improvement.
As one improving sooner than another thinking about supply or labor getting better how much of that is factored into your <unk>.
Bridge to 2022.
On the on the other side as these things get better which one it is a greater tailwind.
The profit supply or labor and maybe some of this is chicken and egg. So maybe it's not right to break it out that way.
Yes.
Hey, Joe.
Good question, we watch this every day, Stephen and I think it is a bit of a chicken and egg the labor pressures kind of ripple through the supply chains as well just like just like us So we make.
We're making some progress on both what I would tell you we continue to have to try to balance those two things kind of in tandem so.
Candidly if one runs way ahead of the other.
It's not going to really net out.
As well as it could or should anyway. So we're really working hard at both of those levers and we do expect improvement stability first and improvement.
As we get into 2022.
On both fronts, but like I said, it's kind of six to one they both need to improve kind of at the same rate and as is as people and we've seen some stabilization in the supply chain.
But we watch it daily.
Okay, Great and then last one for me.
Hei bill for being extremely efficient and.
We talked to many people in the supply chain and procurement.
Just in time inventory will change permanently from this situation in the world.
Therefore, more companies will hold more inventory so I guess have you.
All contemplated.
How you will change managing inventory and working capital as on the other side of the current issues.
Yes.
That's a great question and we have.
We have absolutely contemplated that and I do think we're no different.
We will be carrying more buffers.
Candidly, it's even think about our business model some of the small and medium size business that we have.
We got some high runners.
We can we can build ahead and so we will definitely use the balance sheet appropriately two to change that dynamic over time that will happen overnight, but I do think we're entering a period here, maybe maybe a perm.
Minute period in which the business is going to have to kind of reset its expectations on just in time versus inventory I think I mean, that's.
And where we're going to we're going to be playing that.
Pulling some of those levers as we as we get into next year.
Helpful. Thank you.
Thank you.
This concludes alright question. It. This concludes the question and answer portion of todays call I will now turn the call back over to Mr. Lawrence <unk> for closing remarks.
Awesome. Thank you again.
Thanks, everybody for joining US today, you don't have a great day, and we'll talk to you and talk to you soon thanks.
This concludes today's conference call. Thank you for participating you may now disconnect.
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