HNI Corporation

Good morning. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the H&I Corporation fourth quarter and fiscal year 2020 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Mr. McCall, you may begin your conference.

Good morning. My name is Matt McCall. I'm Vice President, Investor Relations and Corporate Development for H&I Corporation. Thank you for joining us to discuss our fourth quarter fiscal 2020 results. With me today are Jeff Laringer, 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. 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. Now, I'm pleased to turn the call over to Jeff Warringer.

Jeff? Thanks, Matt. Good morning, and thank you for joining us. Our members finished the challenging year by delivering another solid quarter. This past year, our members adapted, stayed agile, and kept the corporation strong in the face of challenging conditions as they continue to demonstrate what is unique about H&I. A great example of our strong 2020 performance was our cash flow generation. For the full year, we delivered $173 million of free cash flow, which was up $20 million or 13% from 2019. As a result, while our debt levels at the end of Q4 were unchanged year over year, we were able to fund $58 million of acquisitions, grow our cash balance $64 million, and pay $52 million in dividends in 2020. I would like to point out we have never cut our dividend H&I has continuously paid a quarterly dividend since 1955, and we maintained it last year. We accomplished all of this while funding key investments and despite consistent top-line pressure in our workplace furnishing segment through the final three-quarters of the year. As we look forward, I am optimistic about our enhanced competitive positions and ability to drive profit growth. We have two differentiated business segments, well positioned to benefit from a recovery of the cycle, secular trends, and H&I specific growth drivers. We have diversified revenue streams and clear opportunities to drive revenue growth and shareholder value. I would like to talk specifically about our residential building product segment for a moment. We are the market leader in fireplace and hearth products. We generate operating margins in the high teens, and we are capturing strong growth in both the new construction and remodeling markets. While those markets have strong fundamentals, we have the opportunity to drive even greater growth by better connecting with homeowners and homebuyers in this traditionally under-marketed industry. We have a truly unique vertically integrated business with unique opportunities to grow. We also have outstanding opportunities in workplace furnishings. We are well positioned for a wide range of market scenarios given our price point breadth, product depth, e-commerce access, and range of fulfillment capabilities. We will benefit from trends related to work from home, de-densification, and de-urbanization. And we have the opportunity to capture on our positioning and leverage our operational excellence heritage to expand margins in the workplace furnishing segment. I will now cover some key highlights of the fourth quarter. Marshall will then provide some color around our first quarter outlook. I will then conclude with some commentary on our ESG efforts. Finally, we will open up the call to your questions. I will start with three key highlights from the fourth quarter. First, our residential building product segment delivered double-digit revenue and profit growth. We generated 18% year-over-year revenue growth in the fourth quarter or 16%, excluding the impact of acquisitions. We also delivered 11% fourth quarter operating profit growth on a year-over-year basis with full-year EBIT growth in this segment of 16%. Remodel retrofit sales, which have been strong since the middle of 2020, were up 15% year-over-year in the fourth quarter. We continue to compete well and take advantage of strong ongoing activity in this market. New construction sales accelerated in the fourth quarter and were up 17% on an organic basis. Our value propositions and supply chain strength are resonating with homebuyers and builders. As a result of the accelerating new construction activity, our fourth quarter growth rates were higher than we experienced in the third quarter. We expect our strong results to continue. Orders grew at a high teens rate in the fourth quarter and further strengthened in December and January. Our unique model in this business continues to provide a strong platform for growth. Over the years, we have built a strong residential building products business by focusing on operational excellence and by delivering superior service with our retail distribution centers and a vertically integrated structure. This has allowed us to capture strong demand and grow profits by over $100 million in the last decade. However, as I mentioned earlier, we see even more opportunity to drive growth. In new construction, two-thirds of homebuyers see having a fireplace as a must-have feature on a home, but less than 40% buy one. On the remodel retrofit side, we estimate that less than 3% of all remodeling projects involve a fireplace. To take advantage of these opportunities, we are driving a better connection with the homebuyer and homeowner, and we are working hard to better understand and influence their home purchase or remodeling journey. Some early highlights of this effort include we are investing in enhanced direct and digital marketing. As an example, one small promotion around fireplace inserts created over 8,000 leads, nearly a quarter of which were converted to orders. Our social media efforts are offering fresh content and driving large numbers of new visitors to our websites. We are also partnering with social influencers and targeted media to drive overall awareness and demand. These efforts have already driven hundreds of thousands of impressions and thousands of engagements. Finally, we are launching visualization tools, including mobile-enabled augmented reality applications to help the consumer imagine their possibilities and make decisions. By combining these new efforts with our unique model, we are competing better than ever in this space. We continue to drive strong financial returns with fourth quarter operating margins of 22.5% and full year operating margins of 18.5%. Our second highlight for the quarter was our solid profitability in our workplace furnishing segment despite continued revenue pressure. Customer demand remained subdued and segment revenue declined 19% year over year. However, segment non-GAAP operating profits still exceeded $11 million in the fourth quarter, and we were able to deliver full-year 2020 non-GAAP EBIT of approximately $40 million. Orders in workplace furnishings improved as we progressed through the fourth quarter. Segment orders, excluding e-commerce, declined 25% versus the comparable prior year period. However, December and January order patterns improved from those in October and November. The order rates in our businesses that are focused on small to midsize offices are particularly encouraging and are a result of our agility and competitive position and improving demand trends in that portion of the market. Orders from larger contract customers continue to be slow, and although there are initial signs of increasing preorder activity, these customers are still generally in a holding pattern. We expect slower order activity with contract customers until there is more clarity around the office reentry timeline. This timing is uncertain, but most conversations we are having indicate reentry ramping up sometime in the late spring to the late summer timeframe. Orders in our workplace furnishings e-commerce business increased 37% versus the comparable prior year period. We achieved 37% revenue growth, notwithstanding ongoing supply constraints and difficult prior year comparisons. We do expect to see continued strong growth in the first quarter of 2021. Our differentiation in our workplace furnishings business model positions us well to compete as the market recovers. Our workplace furnishings businesses have unmatched price point breadth, channel access, and market reach. The addition of design public helps further our breadth and reach advantages. These differentiators position us well to benefit from the work from home and de-urbanization trends. And given our unique competitive position in the small to mid-sized market, along with our exposure to e-commerce and certain international markets, we have the potential to outperform the market again in 2021. In our e-commerce business specifically, the momentum in our video gaming business is deserving of a call-out. We continue to drive growth greatly above market rates with our line of Respawn-branded ergonomic gaming chairs. These products, which are available at reasonable price points and offer superior comfort, are expected to continue to fuel our e-commerce business in 2021 and beyond. Our third highlight of the quarter was the acquisition of Design Public Group. In late December, we closed the acquisition of DPG, We are excited to add this digitally native organization to our portfolio. The skills and capabilities the team at DesignPublic bring will help accelerate many of our ongoing strategic initiatives. Specifically, DesignPublic provides access to a customer set we previously didn't reach. Approximately 50% of DPG's revenue comes from individual consumers. And like most companies tied to residential activity, this part of DPG's business was very strong in 2020. The strength has continued into 2021, with January orders up triple digits over January 2020 levels. The other half of DPG's revenue comes from commercial customers through contract furniture dealers. With approximately 500,000 SKUs available through the DPG dealer portal, we can provide efficient access to products that were previously often difficult to find and acquire. And unlike an acquisition of a single niche manufacturer, DPG gives us a dynamic platform to rapidly adjust to shifting fashion trends. Finally, Design Public adds another work-from-home platform for H&I. This is a great business with tools that make H&I stronger right now. I will now turn the call over to Marshall to provide some additional detail around our fourth quarter and our outlook. Marshall? Okay. Let's begin our first quarter outlook for the residential business. Let's begin with our first quarter outlook for the residential building product segment. For the first quarter, we expect year-of-year revenue growth rates in the mid-20% range. We continue to see strong market momentum, and as Jeff previously covered, we are positioned for sustained growth in this segment. Now let's shift to our outlook for workplace furnishings. Let me first say that pandemic-related uncertainty continues to limit our visibility in this segment. that said we are currently seeing continued moderation in year-over-year revenue declines this improvement is primarily being driven by our businesses focused on small to mid-sized offices these trends indicate workplace furnishings revenue will decline at a year-over-year rate in the high single digits to low teens during the first quarter that range includes the impact from the design public acquisition which will add an estimated 2.5 percentage points to our first quarter growth rate for this segment. Let's move on to first quarter profitability. There are multiple moving parts to the first quarter profitability story. Overall, we expect to be profitable, but our current view is profit will be below the prior year pre-pandemic levels. On the positive side, we expect the first quarter to benefit from higher volume in residential building products, broad-based cost savings put in place last year, and our typical annual productivity gains. However, we expect lower workplace furnishings volume and rising input costs will more than offset those positives. Regarding input costs, recently we've seen rapid increases from steel, ocean freight, and outbound freight. And generally, we expect a more challenging inflationary environment this year. We have implemented pricing actions and identified cost initiatives to offset these pressures over time, but expect unfavorable price cost in the first quarter. Finally, some comments on our cash flow and balance sheet expectations. We ended the fourth quarter with $175 million of total debt, which was unchanged from last quarter and prior year levels. Our cash balance was $116 million, which represents an increase of $64 million from the end of fiscal 2019. We expect to maintain a strong balance sheet throughout 2021 with leverage ratios in line with those seen in recent quarters. We also expect to continue generating strong free cash flow, which will provide ample capacity for continued investment, dividend payments, and opportunistic M&A and buyback activity. I'll now turn the call back over to Jeff. Thanks, Marshall. Before we take your questions, I want to provide some highlights on our ESG actions, many of which have been ongoing for multiple years. In 2018, we published our initial Corporate Social Responsibility Report, which introduced our ESG goals. Since then, we have achieved our 10% energy reduction goal. We began sourcing 100% renewable electricity, which reduced our Scope 1 greenhouse gas emissions by over 35%. and we diverted over 90% of waste away from landfills at two of our facilities. We also became a signatory to the UN Global Compact and joined RE100. We set aggressive science-based carbon emission reduction goals aligned with the 2015 Paris Agreement, and annually we donate 1% of our pre-tax profit to improve the quality of life in the communities in which we operate. Additionally, in 2019, I signed the CEO Action for Diversity and Inclusion Pledge, and we strengthened our initiatives to ensure HNI is a welcoming community for everyone, where we celebrate our members' unique characteristics and talents. In each of the last three years, we have been recognized by Women on Boards and by the Women's Forum of New York for the diversity of our board of directors, which is 50% female. We continue to ramp up our ESG initiatives and activities and expand our sustainability commitments. Later this spring, we are planning to issue an update to our CSR report, which will include aggressive new targets, along with recapping our recent accomplishments across a number of ESG areas. I would like to conclude by stating I'm extremely proud of and grateful for the efforts of all HNI members. As we look to 2021 and beyond, I have no doubt we'll be a stronger company because of what we experienced and how we performed this past year. We have two differentiated business segments, each well-positioned to benefit from a recovery of the cycle, secular trends, and H&I-specific drivers. We are well-positioned to grow revenue, expand margins, and generate cash over the long term. We will now open up the call to your questions.