Q2 2019 Earnings Call
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Hi, Good morning Conference I'd. Please.
Eight to nine 5057.
And can you hear me have the spelling of reversal last night.
As thin K R. I S T I M lift from L.A.F.L.A.M. me.
It's and for Nancy correct.
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M. as in Matthew.
Okay from what the company now.
Era A.I.E.R.A. J.
Okay connecting you know conferences on progress have a great day.
Thank you.
Asians for the contract business.
Our hearth business is performing well, while navigating a slower than anticipated housing market.
As expected heart sales were down slightly from last year, driven by lower single family housing starts.
Despite the softer market hard continues to create significant shareholder value.
We are confident about the long term growth, we can generate with our market leading positions and our initiatives to increase penetration.
Second quarter demand in our supplies driven business was inconsistent and soft which negatively impacted our results.
I would like to remind you that this business primarily target small to medium sized businesses and is this and is short cycle in nature.
We believe macroeconomic concerns and general uncertainty continue to weigh on small business owners that uncertainty when combined with the short cycle nature of this market.
Has led to sharp swings in buying patterns.
Specifically demand weakened in mid April .
Driving much of the quarterly shortfall.
We did see demand improve in May and June however, given what we have seen so far this year, we are lowering our supplies driven revenue expectations for the year.
Despite these near term challenges the small business market remains attractive and we feel good about where we are heading with our strategies to grow the business in the mid and long term.
With that I will turn it over to Marshall for some additional financial details on the second quarter.
Thanks, Jeff second quarter consolidated organic sales were down 2.3% versus the prior year.
Including the impacts of closures and divestitures sales were down 3.2%.
And the office furniture segment sales decreased 2.2% organically.
Within office furniture sales in our supplies are in business decreased 5% and sales in our contract business were up 1% organically.
Hearth segment sales decreased 2.7% with a similar decline in both new construction and retail products.
non-GAAP net income per diluted share was 38 cents compared to 44 cents in the second quarter of 2018.
Compared to last year, non-GAAP EBIT was down $4 million.
Lower volume combined with increased input cost drove an estimated 25 million dollar headwind to our bottom line.
We were able to offset most of that through cost management, lower VSP cost and price realization.
Jeff Thanks Marshall.
For the full year, we continue to expect to drive profit growth. We are focused on managing the business to deliver on our profit commitments. Despite demand challenges in some of our markets.
The primary driver of the second half profit improvement.
Results from our productivity and cost savings efforts. We are on track with these initiatives and are confident they will deliver a net 10 to 15 million dollar profit improvement in the second half.
Additionally, relative to the first half we do anticipate stronger second half demand driven by a couple of factors first we expect strong sales in our contract business as I mentioned earlier, we are seeing strong order intake and strong activity in the contract space.
As a result, we are projecting double digit growth in the back half, which has a few points higher than what we previously expected for the contract business.
Second we expect our supplies driven business will be up low to mid single digits in the second half.
Driven by ecommerce growth price realization to offset higher tariffs and general stabilization of small business demand.
Although we are projecting second half growth in supplies. It is a couple of points lower than what we previously expected. It is also more weighted to the fourth quarter when the prior year comparables ease and ecommerce accelerates.
Finally in hearth, we expect modest growth, we are seeing retail demand improve while new home construction remains slower than last year.
This nets to low single digit second half growth, which is a few points lower than previously expected.
I'm confident in our strategies and our ability to grow profit for the full year I will now turn it back to Marshall to provide some additional financial details.
Great I'm going to cover some of the details around our full year outlook.
Our full year forecasted net income per diluted share has narrowed it is now in the range of $2.50 to $2.70.
We now expect full year consolidated organic sales to be up 1% to 4%.
Or flat to up 3%, when including the impacts of closures and divestitures.
We're expecting sales in our supplies driven business will be down 2% to up 1%.
In our contract office furniture business, we expect organic sales will be up 5% to 8%.
When including the impacts of closures and divestitures sales and contract are expected to be up 2% to 5%.
And hearth, we now expect sales will be flat to up 3%.
As Jeff mentioned, we expect our sales and profit improvements will become progressively better as we move through the back half of the year with fourth quarter results outpacing those in the third quarter.
Jeff Thanks Marshall.
We have some short term headwinds to navigate that said I remain confident about the opportunities in front of us to grow the business expand profits and drive increasing value for our shareholders.
We are focused on strengthening our operational model and creating effortless experiences for our customers.
With those comments complete I'll open it up for questions.
Thank you. Your first question comes from the line of but Thats Rolling Stone. Please go ahead.
Good morning.
Thank you for taking my questions.
You talk about.
The growth in contract being strong in the second half maybe you could give us a feel for what order growth was during the second quarter close so.
The overall contract so I guess, it was up 1% or.
I guess with international up nine tenths of 1%.
Yes, but the good question the second quarter orders were up double digits.
In the second quarter.
That's a that's a large range, Jeff could you kind of might be on that in a bit.
Yes, we're in the low teens above which is consistent with what we're expecting in the second half in terms of sales.
For contract backlog has got to be significantly higher year over year right.
That's correct, it's been building through the first half.
And on a year over year basis, or every second quarter versus first quarter basis.
However, you want to look at it sequentially or year over year, how does that look.
Yes, it's up substantially but it's it's in the double digits.
Okay and do you expect most of that to be delivered third quarter or is it.
Scheduled deliveries throughout the second half.
It's throughout the second half of the third quarter for contract is expected to be stronger actually in terms of year over year growth.
Okay. That's helpful.
In supplies I'm I'm kind of confused on what gives you the confidence that you can see some stabilization.
And you talked about short term headwinds to navigate.
I'm still confused on to why supplies will.
Will stabilize and get better.
Yes, but that's that's a that's a good question, we that we have seen some stabilization and we really saw demand.
Kind of stop you know hit the brakes in late April and started to recover in May and June and we believe that recovery is is is a little volatile thats why I say headwinds, but it's it has stabilized we have quite a bit of momentum in our ecommerce platform business, which also is in the supplies area and candidly the fourth quarter comparables ease quite a bit last year.
Quarters, one through three we were up 10% and supplies channel in the fourth quarter, we were only up three and a half so that eases and then and then finally, we got more price driven growth in the second half to offset terraces tariffs thats running about two points higher than the first half.
So again, just trying to pinpoint you a little better.
The third quarter, you still could see some issues in supplies, but that should markedly turn in the fourth quarter is that the way to think about it or is that too draconian.
But I think the third quarter will still be improved but because that lower comp. We will we'll see better growth rates on a year to year over year basis in the fourth quarter, but we're expecting an improvement in the third quarter and supplies.
And you expect the supplies to be up in the third quarter year over year.
No I'm not so sure that we were probably be roughly flattish for the back half you know our guidance implies low to mid single digits for the second half.
Okay, Alright, and lastly for me on harvest again, you talk about retail products, improving the hearth outlook, but in the second quarter retail products were down as similar to what construction was down what gives you the comfort that retail will improve over above slowed construction issues.
Yes, but it's a little similar to the contract furniture story the.
The activity levels are are are ramping up and we also had an inventory issue unwind in the second quarter and.
Has that been normalized actually the Q Q2 would have been up about 4% in the remodel space.
Thanks, so much at all so that means.
Irene unwinding.
There is there is some inventory in the system that that destock, we've mentioned distribution changes and as a result of lowering our sales a bit although there is still demand out there. Yeah. We had a we had a wholesale relationship by that we took off off line in went direct and so that stuff is didnt repeat but its just selling through on more of a day to day basis.
And just to remind everyone that the retail channel is disproportionately weighted to the last four months of the year. So these small changes can make a big difference in the growth rates in the first and second quarter.
Thats helpful. All right. Thank you very much good luck on the balance.
Thanks Budd.
Your next question comes from the line of Matt Mccall with Seaport Global Securities. Please go ahead.
Thank you good morning, everybody.
Morning that so so maybe I'll start with the.
The cost takeout remind me.
Maybe Marshall the specifics around the cost take out what you're doing in the back half forgive my memory, but and then.
More specifically the timing of that I think Jeff you said $10 million to $15 million benefit hasn't layer in the back half.
Yes, I'm happy that we're expecting productivity net of investments to deliver $10 million to $15 million for the year and that's all going to hit in the back half.
This is consistent with what we've been saying.
For the for the year.
You know, we're we're doing pretty well right now were maybe a little bit ahead of schedule, we feel like we're going to get that $10 million to $15 million a little late into the fourth quarter, but there will be some benefit in the third quarter as well.
Okay, So 10 to 15.
So is it do you expect our range there I know that's the number you've been talking about what the range is still 10 to 15, what makes it 10, what makes it 15.
You know this is this is a a wide range of initiatives that really just has to do with how they progress and how much execution, we deliver on those things so.
I think were probably more in the middle of that range, but there are there are things going occur to cause us to go up or down from there.
Okay.
You mentioned in the release and I think you just talked about again, Jeff the effortless experience for the customer can you can you tell us more about what you're doing there I assume there's maybe some investment that's involved in and improving that experience, making it effortless can you tell us more.
Yes, Matt we've we are.
Really spending a lot of time on understanding our customer journeys in in their purchasing process.
And really spending time on on meeting those customers, where they want to be met in the process and it's it's you know early on but where we've got a lot of investment behind that and we're organizing ourselves around that and then we're we're pushing forward tools.
In order to interact with our customers that make it a lot easier to to interact with us.
So as Marshall when you talk about 10 to 15 net of investments.
And is that net of investments does that thing or is that inclusive of any investment you're having to make around that that effort.
Yes. It is that it includes the digital analytics investments as well as our go to market investments that just referencing.
Okay.
And go to market Okay.
So can you I missed the.
Outlook I think you said heart flat to up 3%, but what was new versus versus retail and the full year outlook.
In for hearth.
Yes.
Yes, new construction and for the full year outlook is minus 2% the plus one.
And we expect retail products and hard to be up 3% to 5% for the full year.
And maybe.
And then on the new side I understand the the out the outlook, but if maybe.
Yeah, the expectation I think broadly and housing lists some improvement I mean, I know the comps for starts get a lot easier in the back half and definitely in Q4, but maybe what are you hearing from some of your builder customers. What's the broader outlook just for housing in general.
Yes, Matt I'd say you know early in the year, we had anticipated that the new home market would rebound more than it has looked more than it looks like it's going to in the second half I mean, the permit data has not been as strong as some people thought it was going to be so we're we're kind of hearing you know what we're what we're talking to you about for our business is that it's going to be it's still going to be flat to down.
And maybe the rebound is going to be delayed a little bit longer than people had anticipated.
The.
The.
You talk to those builders, Jeff or though is that the view that there is still an anticipated rebound, but any thoughts on what's what's really delaying any anything interesting to see her.
You know, Matt I think we look at the the housing permits and you know there are new construction channel has a pretty decent relationship to that and it's still it's still down so it's yeah.
Supporting our view of little bit more continued softness in new construction in the back half.
I think people overall have gotten a little more cautious Matt as you know as we talk to them than they were three four months ago.
Any any more color on why that is what are they talking about race combat freight rates have pulled back a little bit.
Just curious if you're anything different than.
Not really you probably you probably hear what we hear Matt and that nothing really I think people you know.
Yeah, that's fair Okay. Thank you guys.
Thanks.
Your next question comes from the line of Greg Burns with Sidoti and company. Please go ahead.
Good morning.
That's a slower Pos business is the weakness you're seeing completely macro related or is there any market.
Related changes, maybe in terms of market share or impact from.
Your wholesale consolidation with the acquisition of Ascendance is there anything else beyond besides macro that might be affecting that business. Thanks.
Yes, Greg I'm not that we can see at this point you know yeah. There's there's always movement around the channels, but you know we haven't been able to pick up any specifics there.
On that I mean, the data we have when we talked about April for instance, hitting the brakes.
All our channel partners at all our customers.
So almost to the person talked about a similar slowdown so.
That's our best view at this point.
Okay. Thank you.
And your next question comes from the line.
And Ramsey with Thompson Research Group. Please go ahead.
Hi, good morning.
I guess the tenant.
Heart penetration increasing penetration can you talk about what channel you're targeting is it builders retail or dealers or growing kind of the direct.
Portion of the business and does this type of sluggish environment make it.
Tougher or easier to.
Gain penetration.
That's a good question Stephen So we're we're interested in all aspects of that market and it's a it's not a terribly large market we have a reasonably large share there.
But we have talked about we've got ongoing initiatives to have better penetration of both retail market and we've talked about trying to promote and grow the category of fireplace in search.
As well as.
Replacing existing gas fireplaces as they age out. We're also trying to work on trying to get better penetration in the lower price point homes, which are a bigger mix of the starts these days.
By making sure we educate the homeowner about the benefits of putting a fireplace in when they build the home as opposed to trying to do it later.
Great and switching to logistics you guys for before kind of the freight pressures hit last year.
How would you describe the logistics pressures now versus last year and does the facility consolidation that you had.
Conducted over the past few years has that played out to be negative or positive as far as.
Cosco.
As it relates to.
Freight costs, you know, we have seen year over year pressures, but they have been less than we expected.
So we're pleased by that but.
If you look at it from a high view, it's still a pretty competitive marketplace.
That's okay that does it for me thanks.
And we have a follow up from the line of.
Hi, buckets with Raymond James Please go ahead.
Yes, Marshall I'm kind of looking at.
The slide on the second quarter results and you can see the the improvement in.
Indeed.
Year over year, so see the that but.
The non-GAAP best DNA, excluding the.
Pretty flat on significantly lower revenue can you kind of walk us through.
What.
What's going on there, it's a 50 basis point.
Going the wrong way.
Yes, I'll answer the freight first.
Where we are we talked about having benefits of DST costs. Some of those hit freight last year as we were kind of inefficient as affluent lives. We're also seeing some better productivity there.
So as it relates to SG nay.
You know we.
We are seeing some inflation there your typical wage inflation offset by cost management. So that's why it's basically flat.
In fact.
Other than the freights.
Is a benefit from the volume.
And that $10 million to $15 million of productivity in the back half whats the geography of that on the CNL.
Oh, it's predominantly in cost of goods sold there is some benefit that hits freights, but it's it's you know.
Less than a quarter of it.
Okay, and and how much of that is our flow through.
After investments I mean, he's going to invest in that's going to show up on SGN, Hey, where is that going to show up.
Yes, some of your growth investments are the other things you.
Initiatives that you've got.
Yes, Thats a good question the investments are.
Both investing a and cost of goods sold there I'm not sure I have a precise number for you.
But I would roughly say they are roughly equal in those two categories.
And how much of those investments so what's the net flow through of that 10 to 15.
Net investments would be in the 15 to 20 million range and the productivity.
It will be closer to the.
25 to 30, but it will not to be 10 to 15 in total.
So the 10 to 15 productivity is net flow through to the Pinedale.
Correct, Yeah, exactly and we're seeing that ramp up and feel confident in that number.
Okay. Thank you very much.
Thank you thanks.
And as there are no further questions in the queue I would like to turn the call.
Mr Line here for closing comments.
Thank you everyone as always we appreciate your continued interest in age and I in for spending time with US. This morning have a good day.
And this concludes today's conference call you may now disconnect.
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