Q1 2022 HNI Corp Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the <unk> Corporation first quarter fiscal 2022 earnings 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.
I would like to ask a question at that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one thank you.
Now my pleasure to turn today's call over to Mr. Jack Herring. Please go ahead Sir.
Good morning, My name is Jack Herring, I am Vice President corporate Finance and Treasurer for <unk> Corporation. Thank.
Thank you for joining us to discuss our first quarter fiscal 2022 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 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 materially the financial news release 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.
Im pleased to turn the call over to Mr. Jeff Lorenzen.
Good morning, and thank you for joining US are members delivered solid results in the first quarter despite record levels of inflation in a dynamic environment.
I will cover three key points around why we are optimistic about 2022 and beyond first our actions to drive profit improvement and address last year's headwinds are on track and delivering results.
Second top line growth and market demand in residential building products remained strong and third we are generating strong growth in workplace furnishings and the demand environment is improving.
I will cover these points Mark will then go through our 2022 outlook, which is unchanged from what we presented in February .
I will then conclude with some general comments finally, we will open up the call to your questions.
Moving to our first key point, our initiatives to improve long term profitability are on track and delivering results.
In February on our fourth quarter call. We discussed two sources of pressure on our margins in 2021.
First price cost negative negatively impacted profitability due to rapid input cost inflation and second constraints around labor availability and supply chain capacity shifted revenue out of 2021.
We also discussed the actions, we're taking to address these issues, including multiple pricing actions across the brands. The opening of a new seating facility in Mexico, moving multiple production lines to HMA facilities with better labor dynamics and operational changes aimed at making our existing labor force more productive.
These actions are all on track to deliver their expected benefits for 2022 and beyond.
Typically price cost turned positive in the first quarter driving sequential gross margin improvement from the fourth quarter.
While inflationary pressures have recently intensified we have quickly responded with additional pricing actions.
We expect these actions to offset the additional inflation keeping price costs are on track to deliver significant profit improvement in 2022.
Our actions to have labor capacity are also ramping up our.
Our new facility in Mexico is currently up and running the new capacity along with the production line and operational layout changes, we are making will support strong second half volume growth and long term margin expansion.
I will now move on to my second key point.
Topline growth and market demand in residential building products remained strong.
Segment revenue grew 13% organically with comparable strength in both the new construction and remodel retrofit channels.
Incoming orders showed no indications of slowing with first quarter orders in this segment up 25% organically versus the year ago period.
Our strong order rates and elevated backlog point to continued strength this year.
Rising mortgage rates and decreasing affordability our concerns how.
However, our positive outlook is still supported by our growth initiatives demographic trends historically low housing inventories and elevated builder backlogs.
Finally, we expect acquisitions closed over the past 12 months to complement our robust organic growth in 2022.
Our unique vertically integrated business model has unmatched product and channel reach with a regional distribution infrastructure that offers unparalleled customer service.
I will finish with my third key point, we are generating strong growth in workplace furnishings and the demand environment is improving.
First quarter workplace furnishings revenue adjusted for recent restructuring activity increased nearly 25% versus the prior year period.
Order activity continued to be strong with small to mid sized customers.
While contract customers, particularly those in larger cities have been slower to ramp up our second half contract funnel has strengthened in recent weeks and is now back above pre pandemic levels.
And we ended the first quarter with a backlog up more than 50% from the same period last year.
Our strong dealer network unmatched price point breadth and multiple strategic growth initiatives have put us in a strong position to capitalize on the improving environment.
As a result in addition to margin expansion, we expect strong top line growth in workplace furnishings during 2022.
Now I'll turn the call over to Marshall to discuss our outlook.
As Jeff previously mentioned, our revenue and margin enhancement initiatives are on track as a result of the 2022 outlook. We shared with you on our last call is unchanged, we still 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 will drive revenue growth rates in the high teens to low <unk>.
<unk> for the year.
And residential building products pricing benefits revenue from acquisitions and multiple growth initiatives are expected to fuel growth rates in the high teens.
Our view on consolidated margins remains the same we continue to expect improving price cost and volume growth will drive operating margin expansion in the second half of the year and for the full year, we expect to recapture much of last year's price cost gap with price cost driving a net benefit to operating profit of 45 to 54.
$5 million.
Our thoughts and seasonality are also unchanged as a reminder, we historically generate approximately 70% of our full year profit in the second half of the year.
We expect 2020 to profit to be more weighted to the second half driven by the timing of price cost improvement capacity additions and first quarter Covid impacts.
Also recall, our second half comps are less challenging than those in the first half.
For the second quarter, specifically, we expect profit to be near the levels generated in the first quarter of 2022.
On a sequential basis the benefits from additional workplace furnishings volume is expected to be offset by the seasonal step down in residential building products sales.
Finally, some brief comments on our financial position, we expect to maintain a strong balance sheet throughout 2022, our modest increase in debt from the fourth quarter is consistent with our normal seasonal use of working capital.
We expect to generate strong free cash flow this year, which will provide capacity for continued investment M&A dividend payments and share buyback activity.
Now I will turn the call back over to Jeff.
Thanks, Marshall you will notice a consistent theme across our comments. This morning, our initiatives and outlook remain on track despite inflationary pressures in a dynamic environment and we are staying focused on our two primary objectives, improving our long term profitability of our workplace furnishing segment by focusing on margin expansion.
And driving strong top line growth in residential building products by leveraging our differentiated business model.
I'll now open up the call to your questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question is from the line of Budd.
Do that with water Tower research your line is open.
Good morning.
This is a very very nice and hardening report congratulations on that.
During the quarter I know, it's not been an easy time so.
Questions if I could.
Workplace Foreign exchange you mentioned I think.
<unk> customer slower to ramp up but yet the funnel seems to be increasing can.
Can you give us a little bit more color on that Jeff.
Yes Budd.
Yes.
We are above pre COVID-19 levels and across the board the trends, we look at our continuously improving day over day week over week.
I'd tell you.
Bid activity is nearly double where bid pricing activities nearly double fourth quarter levels.
Stroke continued strong activity in the small business at any asks about that but.
And.
Across the geographies, we're seeing constant improvement across pretty much every region of the country dealers are reporting.
They are having trouble keeping up with with request design requests than pricing exercises leasing activities up.
It just continues to build so we're confident that it's it's coming.
And the order growth in <unk> and.
<unk> is consistent with.
We have Glenn <unk> would start to see.
Talk about that in relationship to the market.
Up 25%. So a notable number and I know that you also mentioned.
That some affordability.
Mortgage issue.
Might be.
That brings up some of that demand further on but.
I was curious about how youre seeing the Hart business relationship to the overall market, but youre seeing the primary demand and are starting to show some signs of growing.
But look at the.
Affordability question is what is out there and it's well known and we're clearly keeping a really close eye on that as a concern.
I would tell you on a macro basis, we still like the demographics and the inventory stock being low.
But we also have high visibility to our backlog right now so we have a really large backlog in that business and remodel.
Theres strength kind of across the board in the remodel.
The Lira index is up mid to high teens.
And are we continue to see momentum in our growth initiatives many of which are focused on the remodel market. The electric category, which if you think about hits customers, who sometimes are not necessarily gas buyers is continue to.
Turning to grow it's up 44% our website traffic's up our gas insert program, which is focused on existing homes is up category awareness issues.
<unk> are going well, we're really starting to reach customers and as customers think about maybe not moving up there.
We are really bullish on the remodel side of our business. So it's a great question, we're going to we're going to stay focused on the on the new home construction, but we're still seeing growth there and we've got a big backlog.
Okay.
Every question.
Last couple of quarters or extraordinary price cost as we started they're saying that it turned positive or Marshall can you quantify for us.
Just maybe talk about.
You said the pricing actions I think in the quarter. So that you can quantify some of the right course.
Yes, but for the first quarter price cost was positive $2 million.
Clean dollars of incremental price versus the prior year and about $60 million incremental input costs versus the prior year period.
And as we look forward.
We said in our.
Prepared remarks that we expect price cost to be positive $45 to $55 million and so it has happened over the last 60 90 days that we have seen an increase in input costs that we're expecting that sort of run in the $240 million to $250 million range versus last year, but we've also.
Set that with price so we're expecting to have about $285 million to $305 million of incremental price.
So both of those have gone up and in fact, our price cost outlook is.
Slightly improved or certainly in the range of what we had before.
And how does that split between the two.
What we say.
If you look at the midpoint of that $45 to $55 million range.
Approximately $35 million of it would hit workplace furnishings.
With the balancing residential building products.
Yes.
That's that's very helpful in your store.
Gross margins.
So that's still.
Very helpful.
And last for me you talked a little bit about the.
Yeah.
Feedback, we see that coming back down at the end of the year.
Just normal pattern.
Yes, but I think we have.
Pretty normal pattern.
As you know, we typically use cash in the first quarter and the first half and then generate quite a bit of cash in the back half and we don't expect that to change this year.
Okay Alright, great.
Well a very heartening.
Thank you very much and good luck.
Second quarter and the balance of the year.
Thanks, Matt Thanks.
Okay.
Thank you and good morning, everybody.
Good morning.
So maybe.
Follow up to the price cost question I think you guys got back to price cost positive.
Talk about.
When maybe you expect to be able to kind of recover for the margin.
Thank you all over the lot.
You can do it by segment.
Yes.
And we said we'd be roughly neutral in pricing.
Costs in the first half than we were.
But in the in the range of what we expected.
So we expect very positive price cost in the second half of the year.
Roughly 30% to $35 million in the third quarter and 15% to 20 in the fourth quarter and Thats going to drive margin expansion pretty considerable margin expansion I'm not sure we get all the margin back that we're looking at some healthy op margin increases during those quarters.
And it will be more in workplace furnishings than in residential building products because of the just the margin differences between those businesses.
Okay.
And then.
Maybe.
The residential building product side, a lot of good commentary on kind of the.
Drivers there in R&R and your internal initiatives.
There's been a lot of talk about the impact of rising interest rates and gas prices and everything else on the consumer can you just talk about what you guys saw more recently and maybe in March and April trends held up your order rate for the first quarter was obviously very strong as it has it remained tailored as you guys already kind of be an impact.
From the consumer from an affordability standpoint.
I think so far it's staying pretty solid and it remains so maybe a little description behind that that 25% growth rate that we had some of thats being driven by the trade partners ordering for delivery later in the year. So what it's doing is giving us a lot of visibility more than we normally would have to the.
Growth rates were going to see and so basically we see we're very confident in what we've laid out here.
Okay, Great and last one for me.
Workplace furnishings.
The funnel versus the order commentary can you is there any way to kind of.
Yeah. The slide just how I mean, you said the funnel back above pre pandemic level, but I think you said can you just.
What kind of growth rates does that point to from an order perspective, as we move through the year I know a lot can change between now and then but.
Is it direct.
Or are we going to see an acceleration pretty big acceleration in your order growth as the year progresses and is that mostly driven by the contract piece coming back or is it across the board.
Ruben, it's driven by the contracting proving the SMB business has shown some pretty steady growth and which we expect to continue but what we've seen throughout 2022 is the contract side of workplace furnishing started pretty pretty slow and here recently.
The order rates have converged and we expect contracts continue to accelerate.
Partly just due to the lower comps, but partly due to the increasing activity you've seen in the major metros and so we're pretty excited about the growth prospects in the contract as we entered the rest of the year.
Yes, Reuben we see the SMB business, probably hanging in there.
Typically now this isn't a typical cycle, but typically those those are early market indicators and we see those hanging in through the year and the contract kind of like Marshall said merging in an increasing above those rates as we go throughout the year.
Great. Thanks, guys.
Your next question is from the line of Greg Burns with Sidoti Your line is open.
Good morning.
So in the residential building.
Building products.
There was a lot stronger this quarter than I was expecting I think historically, you would see like kind of a sequential decline into the first quarter from the fourth quarter and obviously that wasn't the case here. So.
Was there any degree of <unk>.
Pull forward or.
So anything unique there to call out that would.
Not not be sustainable going forward.
I'm just trying to figure out how we should model off of the first quarter.
Yes, Greg.
We did see.
More seasonally strong pattern and residence from building practice of the first quarter I think were up roughly 5% versus the fourth quarter, that's a little bit above what we normally see we'd see a little bit of a decline and I think this just reflects the strong backlog, we had and the fact that we were hitting some capacity constraints in the fourth quarter and so that volume.
To the first quarter we.
We don't see that as a pull forward. We absolutely are seeing some good growth in that segment are expected to continue through the year.
Okay and then.
With energy prices going up.
Are you seeing an increased demand in woods those pellets the pellets side of that business and can you just remind us.
Maybe how big that business is currently for you in.
Maybe what the where it peaked out at the last.
Kind of.
Hi.
To a degree.
Yes, yes.
<unk> is doing well.
It is along with all of our stove businesses.
We're seeing really big backlogs longer lead times.
There is the growth is somewhat constrained by our capacity there were certainly.
At those levels. So we're excited about it and I think what it does is it gives us confidence in that remodel retrofit which is.
Perl. That's included in that is going to do well this year and it is consistent with the growth outlook that we said, it's not going to be the major growth.
No it's not.
But.
So it's.
It's been the overall category Greg is up just because the remodel side is strong and it's all types.
The units are up and as Martin said, where our lead times have stretched out there now the recent spike in.
Gas in <unk>.
Fuel oil and other things.
We haven't seen if there is going to be a bump off that but youre right. It historically there is some bump.
But it's too early to tell.
If that's going to add to the already strong category going forward.
Okay, and then lastly, sticking with the residential building products in terms of the new home construction and I know you've been doing a lot of.
Category awareness kind of trying to grow.
Kind of grow the category initiatives. So have you seen any change there where attach rates are increasing where maybe even if we do see a slowdown because of affordability youre, making it up because youre getting higher attach rates what are your thoughts there.
Yes, Greg I think intuitively we are.
We are.
We're definitely seeing that and continues to grow.
Chris on.
HD.
The block.
<unk>.
So we've got a lot of of driving a lot of awareness.
That's through that and so these things take time to filter through and some of them. It's a little hard to track, but we believe that.
That's going to start to take hold in the new home side as well we have a strong A&D program that we've tipped up that's driving additional specification with some of the builders and so.
All of those efforts are I think probably somewhat embedded in our growth rates and more to come.
Okay, great. Thanks.
Yes.
Your next question is from the line of Kathryn Thompson with Thompson.
Research Group your line is open.
Thank you for taking my questions.
One just focusing on Mexico.
The prevailing theme that we're seeing so.
For many companies.
Private exchange.
The globalization and shifting operations later operations too.
The America, North America with Mexico.
So.
So against that.
That drop.
What is the longer term impact.
Of how this facility.
<unk> demand and also strategically how are you thinking.
The global supply chain issue playing out.
Next three to five years.
Yes.
Thats Great question I think in the short term as we said it was Mexico was a pure capacity play for us.
Relative to <unk>.
Labor availability with what's happened in the last couple of years now as time goes on you are correct that the.
The supply chain surely that's all going to be a positive on the inventory side look we were we were kind of rotating through.
Bringing stuff closer to home even before the pandemic yet so I think what that has done is accelerate that now it's not you don't do that overnight.
As you look out three to five years, I think you're going to we're going to have shorter supply chains, where we don't we're going to probably carry some more inventory.
And which we are already.
Just to keep our lead times in check and make sure that we can service our customers and we see that as a good trade on both fronts.
Okay.
More on the quarter and margin improvement.
Jack.
Can you give us more of a breakdown though.
Terms of the segment how much is.
First as pricing actions.
And how do we think about that.
Trend as the year progresses.
For margins.
Yes, Catherine I mean, the big drivers in both segments.
For the year earnings for the quarter our volume.
<unk>.
And pricing is price cost certainly the sequential margin improvement you saw.
<unk> had a lot to do with price cost mix is not a big play there and then we've got timing of SG&A. So I think the story that they look for this year is the progression of price cost as we laid out its second half weighted and it's similar for volume as we bring that capacity online as that Mexican facility ramps up is there other initiatives get traction.
We will get more output and volume will increase sequentially and drive profit improvement.
Okay helpful.
In terms of backlogs.
Really looking more at the pace of orders.
And how our shipment levels versus.
For the second half of 'twenty one.
Part of the two with the pace of orders we've seen.
Couple of different an acceleration from <unk>.
Not as much.
Okay.
What are you seeing in terms of your backlog.
Take care.
Have orders.
So I would say that we are seeing choppiness. If you look at workplace furnishings. Our backlog is elevated it's up about 50% over the same period last year, but thats down about 25%, 30% from its peak and it goes to the really rapid order growth that we had.
In the third quarter of last year, followed by a little bit slower slower order growth in the fourth and first quarter.
And it's picking back up again, so I think that reflects whats going on there.
In residential building products similar story.
Our backlog is almost double what it was last year and I think that goes to that so what we talked about earlier and that we are seeing some of the trade partners were a little bit earlier than they normally would and also reflects the underlying strength in those markets.
Okay, great. Thank you for taking my questions.
Thank you.
There are no further questions at this time I will now turn the call back over to Mr. Jeff Lawrence here.
Okay. Thanks, everybody for joining us today and have a great day and the rest of the week.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
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Sure.
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