Q4 2021 HNI Corp Earnings Call
Good morning, My name is Chris and I'll be your conference operator today.
At this time I'd like to welcome everyone to the Hei Corporation fourth quarter and fiscal year, 2020 One 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.
He would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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Mr. Mcfall, you may begin your conference.
Yeah.
Good morning, My name is Matt, Nicole and Vice President of Investor Relations and corporate development for H&R Corporation.
Thank you for joining us to discuss our fourth quarter fiscal 2021 results.
With me today are 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 <unk>.
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.
The 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 Lawrence or Geoff Thanks, Matt.
Good morning, and thank you for joining us in the fourth quarter. Our members again showed what is unique about H&R.
We battled inflationary pressures supply chain constraints and labor shortages, while taking multiple steps to improve our long term profitability, including additional pricing actions strategies to address our labor constraints restructuring initiatives to simplify our business and the completion of two acquisitions.
These actions along with our ongoing strategy to create long term growth.
Make us optimistic about 2022 and beyond.
Our two differentiated business segments are well positioned to benefit from secular trends in numerous H and I specific growth initiatives.
I will cover three key points today.
First we continue to take actions to improve profitability and workplace furnishings.
Second our performance in residential building products remained strong.
Third we are focused on deploying cash to improve shareholder returns.
I will cover these points.
Marcia will then go through our 2022 outlook.
I'll conclude with some general comments finally, we will open up the call to your questions.
Moving to our first key point.
We are taking actions to improve profitability and workplace furnishings. Our 2021 workplace furnishings margins were severely impacted by two main factors first price cost was negative due to rapid and substantial input cost inflation.
Second constraints around labor availability supply chain capacity and Covid outbreaks shifted revenue out of 2021.
Combined these negative impacts reduced 2021 segment profit by over $80 million.
<unk> segment operating margin by approximately 550 basis points.
We have taken action to address the address both issues and expect to increase profitability as a result.
To address price cost, we have implemented multiple price increases across our brands.
We expect price cost to be approximately neutral in the first quarter and to drive significant profit improvement in the second half of 2022.
We have also taken multiple steps to address our labor shortage.
I'll remind you of three of the more significant actions we have taken.
First we opened a new seating facility in Mexico.
This facility provides access to a new labor pool.
Production at the plant has already started and will ramp up through the first half of this year, we anticipate being at full capacity in the third quarter.
Second we are moving multiple production lines to agi facilities with better labor demand dynamics.
And third we are making.
Our existing labor more productive this.
This includes improving operational flow through layout changes additional automation and creating arrangements to ensure our labor can be deployed where it is most needed.
In total we expect these initiatives will enable us to increase workplace furnishings production by 10% to 15% in 2022.
Labor will remain a challenge, but we will be in a better position to manage it effectively.
We also made two strategic moves in the fourth quarter to simplify our business and improve our long term profitability.
We announced plans to exit a small workplace furnishings brand.
This will allow us to streamline our offering and focus our capacity on our most important and highest profit brands.
We also made the decision to restructure one of our ecommerce businesses exiting the low margin portion of that business.
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 profitable growth.
We have a unique ability to serve fast growing segments of the market, including education home office and with small to midsized customers.
Our investments along with our existing competitive differentiators.
<unk> as well the benefit from office reentry work from home and adoption of hybrid work.
Okay.
While large urban markets have been slower to reopen they remain an area of opportunity for us. These.
These markets are now showing signs of increasing activity.
Importantly, we have strong dealers and a leading competitive position in many of the key metro areas.
Breadth of our offering and investments in new products technology, and partnerships position us well to participate in that rebound.
I will now move on to the residential building products segment and cover my second key point our.
Our performance in this segment remains strong with high margins and multiple opportunities for growth both in our core business and in new addressable markets.
For the full year 2021 residential building products revenue grew over 27% and operating profit increased 30% to $142 million.
We expect another strong year in 2022 driven by.
A positive outlook for new home construction and remodel retrofit activity.
Optimism surrounding our <unk> specific growth initiatives.
<unk> backlog levels entering 2022 for our business and for homebuilders and.
And trends around nesting outdoor living and D organization, which continue to provide secular support for this segment.
To take full advantage of these growth opportunities, we are addressing price costs, and our labor and supply chain constraints, both of which negatively impacted fourth quarter results.
In addition to driving organic growth. We are also expanding our residential building products business through acquisitions.
In December we acquired the outdoor great room company, a leading manufacturer and marketer of premium outdoor living products, primarily fire tables and fire pits.
The acquisition, which generated approximately $25 million in revenue during 2021 provides us a platform in the fast growing outdoor living market.
It enhances our ability to take advantage of trends around nesting D organization, and increasing interest in creating flexible outdoor living spaces.
We also acquired Trinity hearth and home a large Dallas.
Hearth appliance installing distributor as.
As we discussed in our last call Trinity will act as a hub to better serve the rapidly southwest grow rapidly growing southwest region.
This addition to our fireside hearth and home distribution network bolsters, our competitive advantage, allowing us to control the content and experience throughout the customer journey. We are excited to welcome the outdoor great room and training teams to the <unk> family.
We have strong competitive positions in both the new residential construction and remodel retrofit markets.
Our unique vertically integrated business model unmatched product depth and pricing breath strong builder relationships and regional distribution infrastructure all provide differentiation for this business.
Our scale positions us to benefit from our efforts to grow the category, we have multiple initiatives underway to influence and assist homebuyers and homeowners during their purchase and remodeling journeys.
These initiatives include driving category awareness.
I imagining the fireplace and growing the electric category.
In addition, we are able to deliver digital tools and capabilities to engage customers online improving their experience in ways that are difficult for our competitors to match.
I will now shift to my third key point, we are focused on deploying cash to improve shareholder returns.
In 2021, we paid $54 million in dividends.
We have now paid a dividend continuously for the last six seven years.
We also ramped up our share buyback activity in the fourth quarter.
Repurchasing more than $40 million worth of our shares outstanding taking the total repurchases for the year to nearly $60 million.
We have approximately $100 million of repurchase authorization remaining.
And as previously mentioned, we have invested $45 million in acquisitions, primarily the outdoor great room and Trinity.
As we look forward, we expect our balance sheet and cash flow, we will continue to support elevated cash deployment.
Now I'll turn the call over to Marshall to discuss our 2022 outlook.
Okay for 2022, we expect benefits from pricing actions and added capacity will drive strong revenue growth and profit improvement as the year progresses.
And workplace furnishings, we expect pricing benefits backlog normalization and assumed market improvements to drive revenue growth rates in the high teens to low twenties for the year.
I'd also like to point out that we started 2022 with an elevated workplace furnishings backlog that will support solid growth.
Segment backlog at the end of 2021 was approximately $120 million above normal levels.
And residential building products pricing benefits in organic revenue from acquisitions and multiple growth initiatives are expected to fuel growth rates in the high teens, that's on top of the 25% organic growth generated in this segment during 2021.
Okay, let's look at consolidated margins, we expect improving price cost and volume growth to drive operating margin expansion in the second half of the year.
We expect to recapture much of 2021 price cost gap during the year.
Some thoughts on seasonality historically, we generate approximately 70% of our full year profit in the second half of the year.
We expect 2022 profit to be more weighted to the second half driven by the timing of price cost improvement capacity additions and first quarter Covid impacts.
I would also point out that we'll be comparing against reasonably strong prior year results from the first half despite pressures from the pandemic non-GAAP EPS in the first half of last year.
Was among the highest levels, we generated over the prior 15 years surpassed only by 2016 and 2007.
The second half comps are less challenging.
For the first quarter, specifically, we expect profit to be below levels generated in the first quarter of 2021.
Comparing the first quarter sequentially to fourth quarter of 2021 benefits from reduced price cost pressure are expected to be more than offset by three main drivers first impacts from COVID-19 on the supply chain and labor.
Labor availability worsened in the early part of the quarter as the omicron variant searched.
Our E Commerce international workplace furnishings businesses are experiencing their typical seasonal softness as they moved from the historically strong fourth quarter to the typically slower first quarter and third the actions, we're taking to address labor availability required investment in the first half.
As a result, we expect first quarter EPS will be below prior year levels and near the results of the first quarter 2020.
Although we expect to start slowly we do anticipate strong profit growth for the full year 2022.
I'll now turn the call back over to Jeff.
Thanks Marshall.
Before we take your questions I would like to highlight an important milestone for HII.
This year, we are celebrating our 70 <unk> anniversary.
In 1947, the <unk> company was founded as an idea to launch a manufacturing enterprise to employ Americans veterans returning from World War two.
That company, which later became Han industries, and then <unk> Corporation began as an idea to start a company, where everyone would be treated equally and respectfully.
These founding principles, along with our shared belief of relentlessly focusing on our customers.
Have allowed <unk> to grow into a leading global family of brands across two industries.
As we enter our next 75 years, our focus on our members and our customers will remain.
As well our desire for <unk> to be a good corporate citizen supportive of our communities and the environment.
We are addressing the challenges in front of us with aggressive actions, which will drive long term profit growth increased shareholder value.
Wow us to continue to positively impact our members our communities and our planet.
So our members I would like to express my sincere gratitude for your dedication and commitment to operating each day in a manner consistent with the same core beliefs. Our company was founded on 75 years ago.
Take the big team to contribute to our ongoing success.
We will now open up the call to your questions.
Thank you and as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Reuben Garner with benchmark company. Your line is open.
Thank you and good morning, everybody.
Good morning, Good morning Bill.
Let's I guess, we'll start with the order rates in workplace, if we could.
Maybe if you've said this in your prepared remarks, sorry, I had some difficulties at the beginning of the call, but can you talk about the trend through the quarter and maybe how thats look more recently in light of the omicron cases fading away over the last month or so.
Yeah, Ruben I think.
Yes, the trend as we.
Exited the year or in the fourth quarter and entered the year.
We had some pull ahead, we have a lot of price that we pass it and pulled some orders ahead and created some softness as we <unk>.
<unk> ended the year.
And then omicron hit in January and that kind of slowed some stuff down what I would tell you, though well first of all first quarter is typically our slow slowest time of the year, but secondarily, we're starting to see the recovery again, it's led by <unk>.
S M D customers quarter to date, if you exclude E com, which we took some actions in.
Orders are up 10% year over year.
We've got an elevated backlog, that's encouraging and were optimistic I would tell you what the preorder activity is increasing in north American contract the funnel is growing.
Actually dealer design design requests are at to 2019 levels, we kind of we monitor that as a forward looking indicators. So you know.
That's kind of what we saw we saw kind of a dip and then now we're seeing a lot of forward looking indicators that are double digit positive.
Okay, Great and then the price cost again didn't workplace.
So.
Marshall I think neutral comments or maybe on a sequential basis can you help us.
Understand what kind of year over year price cost pressure still remains in the first part of the year and then maybe how much of a tailwind that becomes as we move through the year, especially if we continue to see steel drift lower and as.
Realizing your pricing actions.
Yes.
We're expecting for the corporation price cost to be roughly neutral in the first quarter and in the second quarter as well in the back half of the year, we expect to recover the majority of that $66 million negative price cost gap we had.
In 2021, so maybe $40 million to $50 million of benefit spread pretty evenly across the third and fourth quarter of 2022.
Okay, perfect and then on the hearth side, I guess, you've got a lot of visibility and workplace because of the backlog being at.
<unk>.
Precedented levels at least relative.
Relative to your history, but what about what kind of visibility do you have in the heart.
There is some concern that rising rates are going to lead to a slowdown in starts you guys have a lot going on internally what kind of comfort do you have that you can grow at those strong levels on top of what was a very strong 2021.
Yes, it's a great question Ruben I would I would say.
Look I mean, we still have an elevated backlog entering the year for that business segment and our orders year to date are up 20%.
Clearly housing indicators are mixed but we are positive in our position and in our in our efforts.
Our <unk> specific growth initiatives gives us some confidence we've been talking about those for a bit now the category awareness efforts. We're starting to continue this will continue to see traction there.
For instance, our our awareness consideration and purchase purchase visits on our websites are up 26% year to date, our gas insert initiative has been rolled out now it had 10 dealers on that program last year, we have 100 dealers on it now.
And.
It was up 30% last year and year to date is up 60%.
And where we're pushing into the electric category quite a bit although it's a small piece of the business it's growing.
And at a nice rate it was up.
79% last year.
So look and then we talk about the new new expansion into the outdoor area, we're bullish on that as well so.
That's our that's our view we are still we think it's an exciting time for growth in this segment or in that portion of our business.
Great and then I'm going to sneak one more in if I can so on that outdoor living note.
Very interesting acquisition can you talk about maybe where you guys could see this business going is there a lot of runway in those sort of heartbeat.
<unk> or fire related.
Or could you see yourself getting outside of the.
The fireplace business in outdoor living and Ford via acquisition or organically.
Yeah.
It's an interesting question Ruben I mean, we first of all on the core there.
Their core business, we see a lot of headroom for growth and we it's a pretty fragmented market and we think we can bring some capability expertise to that business and use it as a platform whether it looks whether that leads to other product categories in the outdoor living space, it's too early to tell.
<unk>.
But we'll we'll obviously always evaluate those opportunities as we get closer to them.
Perfect. Congrats on the close to 21 and good luck this year guys.
Thanks Reuben.
Our next question is from Bud to catch with water Tower Research. Your line is open.
Yes, good morning, and my congratulations to you for <unk> to.
<unk> four for its history and for its future as well.
Thanks Budd question.
You're welcome.
A question Jeff.
Make sure I understand what's going on in the and workplace furnishing versus SMB versus the contract channel I kind of got confused a little bit with your comments about how the how the year ended and where you are now with <unk> and where it's going on with.
With the various geographies.
Yes, but that's a great question I did kind of combine the overall workplace area, what I would say is the the SMB business.
Mauler market business has been stronger.
Dave If you think about they've been probably went back to work a little sooner and we're well our SMB business, where we're strongly positioned with our distribution network in those in those areas.
So thats been been a positive in the what I would say the contract business as you would call it or we would call. It in the urban markets Thats, what I was saying that's still been down the omicron really hit that piece of the business, but thats, where this preorder activity. Some of the rates I was quoting you know are up for instance.
<unk>.
Our back half funnel strength for that piece of the business is up 40% over prior year. So it's still in the build phase.
But we're pretty bullish.
On that piece of the business as well so that's kind of the two pieces SMB is stronger with education and small markets right now and the contract business is building.
Okay. That's helpful could.
Could you give us by the way on price cost Marshall, maybe we can get.
A review of of where we are what is the composition of raw materials, and how does price cost in labor and other factors fit into it.
We started with some numbers, but I'm trying to understand by segment and for overall, what's that composition steel versus wood plastics or fabric and other and labor.
Yeah. So the the price cost number that I gave Ruben earlier.
Includes all of that right. So roughly speaking as we look into 2022, we're expecting input cost to be up.
$220 million to $240 million in that in that range.
About <unk>.
<unk> 85.
Plus percent of that is basically things that hit cost of goods sold the biggest for would be steel the carryover from steel ramping up last year. We also have carryover from ocean freight wage.
Wages and then there's just a broad set of commodities that are we're seeing inflation in none of which are our large individually, but collectively very impactful.
So we're seeing inflation also in wages outside of Cogs as well as just freight costs going up so collectively that gets you to about that 220 $240 million range, which we expect to offset with price.
In order to drive that $40 million to $50 million positive price cost for 2022.
And so the price then somewhere in the $2 70 to 300 million kind of number or is it price realization.
Yeah, I think it's $2 60 to 290 I think gets you there right.
Yep, Okay, Alright, and when you talked about investment in wages are investment in labor I think in the first quarter. If I remember right. Your language is that is that an increase wages that'll be sticky for them that will never go back down.
I think the reinvestment.
Yes, there are two things there we certainly have.
Some increased wages.
Unlike the rest of the world right, we're seeing that but I think what we're also explaining that in the first half the cost of adding this extra capacity, which kind of Jeff walked through.
A new Mexico facility and.
Moving some of our production lines to other facilities with better labor dynamics that has a bit of an investment costs in the first half and so we're looking at a temporary one time sort of hit there of.
Approximately $10 million on the year to get that capacity online.
So that's our training costs and those are onetime costs kind of.
<unk>.
It seems like that might cause that does that understand.
Okay.
Yeah, Yeah, it's the inefficiency of starting those loans up and moving them, yes, not so much training, but you get the idea.
Okay sure got it okay and the backlog.
You talked about an elevated backlog in.
Okay and workplace I think there was a $120 million Delta did I get that did you get the number and workplace.
Our residential and hearts.
We didn't.
The backlog there is elevated we do believe that will support an extra $30 million of growth. This year. So if demand.
Work to come in we have $30 million of backlog that we can normalize there.
And Thats, an organic I mean, that's not that's outside of the outdoor great room right, that's not correct Greg.
Yes core business core business.
Gotcha, Okay. Thank you very much congratulations again.
Best of luck on <unk>.
'twenty two and beyond.
Thanks Budd.
The next question is from Greg Burns with Sidoti <unk> Company. Your line is open.
Good morning.
But the restructuring on the.
The online channel was that with all of them are D. P J and what what was the impetus there.
What were those channels underperforming like Wow why didn't you take a look at restructuring that side of the business.
Yes, Greg.
It was on the <unk> side of the business and if you think about that business.
You know it's.
The part we're exiting is really opening price point sold through E Tailers and a profit pool there is.
No longer in our judgment attractive for our business many new entrants have come into that over the last couple of years.
And so we wanted to pivot and get our focus on we have a nice portion of that business in the gaming space and believe the macro environment for gaming is get are going to be continue and so we're going to put our efforts behind behind that.
Okay.
And then when we look at the profitability initiatives on the on the workplace side of the business, where where do you.
I guess, where do you see the operating margins of that that business getting to over the next couple of years and do you see I guess, you mentioned I think it was $80 million of operating profit.
Lost in some of these headwinds like do you.
I expect to get.
How much of that do you expect to get back in 2022.
Yes.
We will not get all of that $80 million of pressure back.
We talked about the price cost in 2021, it was a negative $66 million and I talked about getting back 40 to 50 of that in 2022, but Greg we fully anticipate getting that back over time, So we would get that.
Likewise.
We may not.
Completely normalize our backlog and workplace furnishings. During 2022, you said there is that volume growth to go after.
The two examples we gave of exiting one of our smaller businesses and then the restructuring around E. Commerce are sort of indicative of the type of action, we're going to be taking over the next few years to drive margins forward. So we we certainly expect to recover some margin in 2022, but there'll be more to come after that.
Okay, great. Thank you.
The next question is from Steven Ramsey with Thompson Research Group. Your line is open.
Hey, good morning wanted to continue with the backlog topic for a second you said workplace, probably not normalize this year, but what about the residential.
<unk>.
Segment and how much of this depends on.
The company specific initiatives on labor and capacity and how much of this depends on incoming orders throughout the year.
I think the way to think of it Stephen is that.
If orders are strong in both.
Segments, we will not completely normalize the backlog as you sit right now we expect to normalize the backlog and the residential building products segment.
And then we expect to have a significant amount of tailwind from normalizing the backwind backlog in workplace furnishings that we are expecting a pretty strong year as Jeff mentioned in the back half of the year and so our ability to lower that backlog. It depends on the equation of how much capacity, we can add and what the incoming.
Orders are and I'm not sure we have complete visibility to either of those yet.
Okay, very fair and then thinking about the elements of the workplace guidance you pointed out a few of these in the release. It is there a way to rank the contribution of the various drivers to the workplace sales guidance and maybe what is the key factor that moves you from the low.
Side or to the high side.
Yeah for workplace furnishings, just to recap we had given an outlook for revenue growth in the high teens to low twenties.
So the thing to remember that that price cost that were going to close is driving a lot of price realizations. So may be 13 to 14 percentage points of that outlook is coming from price realization and then the rest of it 4% to six percentage points or so is really net organic non price growth.
That depends on how strong the incoming orders are from this building activity that we talked about as well as how much capacity we can add.
Okay helpful. And then last one for me on the hearth business thinking about the new construction side.
Potential benefit from the wave of new starts, but the bigger opportunity seems to be penetration for you guys is this happening at a slower pace than maybe you would hope for given builders are working through so many other operational issues or do you feel like youre able to to make a strong push still on the penetration side this year.
Yes, Steven this is Jeff yes, no. We still feel we can we can penetrate I mean look there is clearly building delays in the system is gummed up a little bit, but we penetration comes in multiple forms.
Awareness and.
And our operational model the categories. Those are all we see the benefits.
And timing.
Marshall said timing of all this stuff is a little still a bit foggy given given the constraints, we're dealing with but we think we can penetrate.
At a rate that is acceptable for our investment level.
Okay helpful. Thank you.
We have no further questions at this time I'll turn the call over to Mr. Lawrence <unk> for any closing remarks, great. Thank you. So much. Thanks for your interest in <unk> and thank you for joining us today on the call have a great day.
Okay.
Ladies and gentlemen. This concludes today's conference call you may now disconnect. Thank you.