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Edited Transcript of HNI earnings conference call or presentation 26-Feb-19 4:00pm GMT

Q4 2018 HNI Corp Earnings Call

MUSCATINE Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of HNI Corp earnings conference call or presentation Tuesday, February 26, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jack D. Herring

HNI Corporation - Director of Finance & IR and Treasurer

* Jeffrey D. Lorenger

HNI Corporation - President, CEO & Director

* Marshall H. Bridges

HNI Corporation - Senior VP & CFO

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Conference Call Participants

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* Beryl Bugatch

Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Kathryn Ingram Thompson

Thompson Research Group, LLC - Founding Partner, CEO and Director of Research

* Matthew Schon McCall

Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst

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Presentation

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Operator [1]

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Good morning. My name is Holly, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the HNI Corporation Fourth Quarter Fiscal 2018 Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

Thank you. Mr. Herring, you may begin your conference.

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Jack D. Herring, HNI Corporation - Director of Finance & IR and Treasurer [2]

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Good morning. I am Jack Herring, Treasurer and Director of Investor Relations for HNI Corporation. Thank you for joining us to discuss our fourth quarter fiscal 2018 results.

Here with me are Jeff Lorenger, 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.

I am pleased to turn the call over to Jeff Lorenger.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [3]

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Good morning, everyone. We will share our assessment of the fourth quarter and provide some thoughts on our outlook for 2019. We'll then open up the call for questions.

Our teams performed well in the fourth quarter. We drove significant earnings growth and margin expansion while continuing to manage through multiple challenges.

Inflationary pressures remain high and the market environment was choppy. Despite these challenges, we grew organic sales by more than 5% and improved our overall performance across the board.

As I look back on the full year, we completed multiple strategic actions to build our long-term foundation. We successfully launched our Business Systems Transformation initiative, or BST as we refer to it. BST will be crucial to our future, providing a foundation to more effortlessly serve our customers, adapt to changing market needs and enable greater operational efficiency.

We finalized multiyear transformations of our operational network, lowering costs and improving our responsiveness in both office furniture and hearth. We made significant progress strengthening our supplies-driven office furniture business. We improved our capabilities and created a stable platform to drive that business forward.

We continued to build out our e-commerce capabilities. This is a rapidly growing segment with great opportunity for us. We also completed our long-planned leadership transition. After 26 years with the company, including the last 14 as Chairman, President and CEO, Stan Askren retired at the end of 2018. I was honored to be appointed by our Board of Directors to lead our teams, and I look forward to working with our new independent Chairman, Larry Porcellato.

In addition to these accomplishments, we also drove financial improvement. All of our businesses delivered solid growth. We grew organic sales 6.6%, led by strong growth in our supplies-driven business and our hearth business. Our non-GAAP earnings per share improved 22%. Productivity and cost savings improvements, stronger volume and a lower tax rate, more than offset costs associated with our successful BST launch. We improved our profit while making key investments, including investments in launching new products, continuing to build our quick ship fulfillment capability and adding selling capability in our rapidly growing e-commerce and international markets.

We further solidified our strong balance sheet. During 2018, we generated $147 million of free cash flow. We ended the year with $250 million of debt and our debt to EBITDA ratio was 1.1x. We are financially strong and have significant access to capital to continue to grow our business and drive greater returns for our shareholders.

I feel good about our businesses, brands and the teams we have in place. I am pleased with the progress we have made, and I'm excited about the opportunities in front of us.

I'll now turn the call over to Marshall to review some financial details in the fourth quarter. Marshall?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [4]

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Thanks, Jeff. Fourth quarter consolidated organic sales grew 5.4% versus the prior year. In the office furniture segment, sales increased 4.3% organically. Within the office furniture segment, sales in our supplies-driven business increased 4%. Sales in our contract business were up 5% organically.

Hearth segment sales increased 8.5%. New construction sales grew 3%, and sales of retail products increased 14%. Non-GAAP net income per diluted share was $0.97 compared to $0.47 in the fourth quarter of 2017. We experienced higher input cost, but we're able to overcome them with productivity gains, cost savings, SG&A efficiency and improved price realization.

Jeff?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [5]

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Thanks, Marshall. For the full year 2019, we expect to grow profit while navigating several challenges, including a volatile demand environment, inflationary pressures and negative tariff impacts. We expect demand to start slowly and improve as we progress throughout the year.

Market activity slowed in the fourth quarter and the weakness extended into the early part of this year. The decline coincided with general concerns around the economy, slowing new home construction, a drop in key confidence metrics, potential trade issues and the government shutdown.

As a result, we expect low first quarter volume, which will challenge our first quarter profitability.

Activity levels are recently recovering. We are assuming that positive trend will continue, but expect conditions will be choppy and dynamic. For the full year 2019, we're expecting low single-digit growth in demand. Including additional price realization, necessary to offset higher input costs, we expect consolidated organic sales will grow 3% to 7%.

Continuing improvements in productivity and cost savings are key drivers of our 2019 profit growth. These initiatives are gaining momentum now that we are through the initial BST learning curve and have stability in our operational footprint. We expect productivity and cost savings, net of our investments, will drive $10 million to $15 million of financial benefit during the year.

We are continuing to make long-term growth investments in areas such as digital and data analytics, go-to-market capability, new products and operational capability.

Based on the combination of strong productivity and cost savings, modest volume growth and investments for long-term growth, we are currently forecasting our diluted earnings per share in the range of $2.50 to $2.90 for the full year.

Consistent with our focus on long-term profitable growth, we have made the decision to change our guidance practices. Going forward, we will no longer issue quarterly guidance. As a transition, we will provide our outlook for the first quarter, but we'll not provide a quarterly outlook in subsequent earnings calls or press releases. We will continue to update our annual outlook each quarter.

I will now turn it back over to Marshall to provide some additional financial details.

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [6]

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Thanks, Jeff. And as Jeff noted, we are expecting full year consolidated organic sales to be up 3% to 7%. We're expecting each of our businesses, supplies-driven office, contract office and hearth to have similar growth rates with each up approximately 3% to 7% for the year.

Our 2019 gross profit margin is expected to increase modestly from the levels we realized in 2018. We expect SG&A, including freight and distribution expense will increase 3% to 5%, driven by inflation and investments in growth initiatives.

For the full year, we are forecasting a tax rate of 22.5%. This results in forecasted net income per diluted share of $2.50 to $2.90 for the full year, primarily driven by improved productivity and cost savings not having the negative impact of our 2018 BST launch costs and modest volume growth. We expect free cash flow will be in the range of $130 million to $140 million, including $65 million to $75 million of capital expenditures.

Okay, let's shift to the first quarter. As Jeff noted, demand activity slowed late in the fourth quarter and the early part of this year. As a result, we expect consolidated first quarter organic sales to be down 2% to down 4%, or down 3% to 5% when including the effects of divestitures. Office furniture sales are expected to be down 3% to 5% organically, or down 5% to 7% in total.

Sales in our supplies-driven business are projected to be down 3% to 5%. We are forecasting sales in our contract office furniture business to be down 3% to 5% organically, or down 7% to 9% in total.

We expect hearth sales to be flat to up 3%, with new construction sales down 2% to up 1%. And sales of retail hearth products up 3% to 6%.

Gross profit margin for the first quarter is expected to be approximately 35%. SG&A, which includes freight and distribution expense for the first quarter is expected to be $165 million to $170 million.

Our estimate of net income per diluted share for the first quarter is in the range of minus $0.02 to plus $0.04.

Jeff?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [7]

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Thanks, Marshall. We remain confident about our markets and our prospects for growth. Our teams are highly capable and engaged. Our strategy to deliver best value to customers through a convenient buying experience is ramping up. We remain focused on the long term and have strong market positions, the right products, the tuned operating platform and dedicated members to drive significant profit improvement.

With those comments complete, I'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Budd Bugatch, Raymond James.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [2]

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You used some interesting terms in the release, calling the -- I think, calling it a dynamic environment and talking about it slowing. Can you give us maybe a little bit more color as to where it slowed? You're in several different market segments between hearth and office. So maybe a little color on that would be helpful?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [3]

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Yes, Budd. I appreciate the question. In -- beginning in kind of November we saw a pretty noticeable slow down, primarily in the supplies-driven business and in the hearth business. That's -- we believe it's broad-based concerns on the economy we're kind of hitting at that time. Slowing new home construction, some trade issues, the government shutdown, et cetera, et cetera. But it was primarily in the supplies business, in the hearth business.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [4]

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So not in the contract office? Contract got stayed reasonably...

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [5]

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Yes, let's say it's reasonably -- in the contract space, as you recall, we said in the third quarter, we had some project push into the fourth, and we saw that hit and deliver in the fourth. Overall, I'd say, the contract activity is pretty solid, continue to see new projects come into the funnel. So that was not as noticeable, maybe slightly tick. But that was not as noticeable as the supplies and the hearth.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [6]

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And so does that variance with what you're planning for the first quarter then? Tell about -- connect those dots, if you would?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [7]

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Yes. I think, look, the contract business is, like I said it's -- we're seeing good funnel activity there. We're seeing good activity overall. We are confident 13% up last first quarter in the contract space. So that's probably -- that's a little bit more what's going on. Our comp on the supplies business was more like plus 6%.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [8]

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Okay. So just talk a little bit about backlog in the contract business. Just give us a little flavor. Is it up year-over-year? Or is it up quarter-to-quarter? How is that funnel translated into backlog?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [9]

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Yes -- but our preorder activity and order rates reflect our outlook for the year. We have good funnel activity supporting that 3% to 7% growth rate that we're expecting for 2019. The backlog is growing. It's up over prior year. So feeling pretty confident about the longer selling cycle of contract business.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [10]

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Okay. And in supplies, we've had structural issues there that impacted us 2 years ago. Are there any structural issues again impacting supplies or no?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [11]

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I think, Budd, it's a good question. I think for the most part, that was macroeconomic-driven. There is a little bit of noise in the channel with the -- some of the dynamics. But not like you experienced 2 years ago by any means. And I think, whatever that noise is, that'll probably unwind here in the next couple of months anyway.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [12]

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Okay. And Marshall, you talked a little bit about inflation persisting. I mean, we are seeing some rollover in steel and some other commodities. Talk to me about what you expect in cost versus price, either in the first quarter or the year? What's the -- how do we quantify that?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [13]

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Yes, Budd. For the first quarter and the year, we expect price, net price to roughly equal our inflation and the negative impact of the tariff. So we're expecting a 0 price cost gap for the year and for the first quarter. The tariff is a bit of a wild card. So the amount of price we'll realize will fluctuate with whatever happens with the tariff. But on the inflation side, we're expecting $55 million to $65 million of total inflation for the year, which reflects…

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [14]

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And offset by price?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [15]

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Yes, which will be offset by price, exactly. And we do expect to see the benefit of steel mainly in the back half. If you remember our contracts on steel lagged the spot price by 6 months. So we'll still see some inflation in the early part of the year.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [16]

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So now you've confused me because I thought you said in the first quarter it's going to be roughly balanced between price and cost?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [17]

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That's correct. I was just giving you some color on the steel. I think that was one of your questions.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [18]

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So steel is one. So the other commodities that are abating to let you -- get you net 0?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [19]

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We are going to see some inflation, Budd, steel will be part of that. And we're going to offset that with price realization to be net 0.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [20]

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Okay. And if tariffs went away, like I think there's a reasonable likelihood they will. What would happen?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [21]

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Yes, if tariffs went away, let's say, at the end of March, we would have seen about $5 million of impacts in the tariff. So you'd add that $5 million to the $55 million to $65 million of inflation we already have. And we would see a total impact of $60 million to $70 million, which we'd offset...

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [22]

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$5 million a quarter then, right?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [23]

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Yes, at 10%.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [24]

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Okay. All right, that's good. Last question for me is, as I look at the segments, explain to me what happened in corporate in the first -- in the fourth quarter?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [25]

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Yes. Now, if you look at the segment results that includes some of the charges we carved out for non-GAAP. So last year, the biggest thing there is, we had a $10 million impairment on a long-lived asset and we had a $2 million -- roughly $2 million recovery of an allowance we take. And there's a $12 million swing in the fourth quarter there that accounts for majority of the $22 million decrease you saw. So most -- little bit more than half comes from those nonrecurring items. The other half is really driven by the roll-off of BST support costs that we were expensing in the fourth quarter of last year, but didn't have those this year, lower incentive comp and lower insurance costs.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD & Director of Furnishings Research [26]

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So cut to the chase, what's corporate running? That's usually a pretty close to a fixed cost per quarter with -- on a period basis. What should the corporate run on a quarterly basis or on an annual basis? How do we think about that?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [27]

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Yes, there's about a $12 million worth of noise in the fourth quarter. So we are expecting it to be around $60 million for the year. So we're roughly saying 60 -- $15 million a quarter.

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Operator [28]

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Our next question will come from the line of Matt McCall, Seaport Global.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [29]

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So you gave some good detail around the guidance, both Q1 and the full year. Can you go into price versus volume versus any mix impact? Just more top line detail is what I'm looking for across the different segments and then subsegments?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [30]

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You're talking about the fourth quarter, Matt? I didn't hear the first part of your question.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [31]

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No, I'm sorry, for -- in your guidance. What's assumed in the guidance? You said full year, I think up 3% to 7%. I'm just trying to figure out across the different segments and subsegments, what the volume and price is expected to look like as specific as you're willing to get?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [32]

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Yes, yes. So the total organic growth we expect to be 3% to 7% across supplies, contract and hearth. There is a decent amount of price realization in there. As I mentioned earlier, depending what happens with the tariff, we can need to realize up to $90 million to $100 million in price, which should be roughly 4%, 5% of that growth. So we have pretty modest nonprice growth assumptions. But we are assuming growth, excluding price for the year in all of our businesses.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [33]

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Okay. So the -- should I just use that 4% to 5% across the 2 segments and equally across the businesses? Or I think, there's some mix kind of skewed towards, say, supplies rather than contract. But how shall I think about the 4% to 5% across the different businesses?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [34]

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Yes. You're right. There is a little bit more in the supplies-driven business due to the exposure to the tariff. Now if the tariff goes away, there probably won't be much difference, Matt. So it really depends on what this tariff does. But it could be a couple of points higher of price realization in the supplies business if the tariff goes to 25%.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [35]

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Okay, okay. And then -- so the 3% to 7%, there's 4% or 5% price. So you said there's still some volume in there? Maybe, I'm having trouble with the math there. It seems like that the midpoint should be about -- all price. So what's the volume assumption that you're using?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [36]

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Yes. So let's maybe unpack this a little bit. So we had to kind of settle on what that tariff assumption is. If the tariff is 25% for rest of the year, we have that 4% to 5% of price. So we'd be maybe above the midpoint in that case. If the tariff stays at 10%, we probably have more like 3.5% of price and if it goes to 0, it'd be closer to 3%.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [37]

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Okay, okay. And then, I guess, just one more time, the volume across the different business, you said you're assuming some volume growth, but what -- can you give me specifics around the assumption for the different segments?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [38]

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More detail beyond that 3% to 7%, Matt?

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [39]

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Yes, yes, segment. So what are you assuming for furniture and for contracts and supplies and new? And do you just have any volume detail there is what I'm trying to get to.

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [40]

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You're saying excluding price, I think that's you're getting after. So that's the...

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [41]

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Correct, volume. Yes.

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [42]

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Yes. It's low single-digit growth basically for all our markets.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [43]

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Yes.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [44]

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Okay. All right. Can you talk about the retail strength a little bit more? So I think you said hearth retail up 14%. What's behind that? You're only assuming low single digits for the year. So does that imply that, that moderates? Or just give me more detail around retail?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [45]

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Yes, Matt, this is Jeff. Yes, I think it moderates. That's what we're seeing. We're coming off a couple of good years in that business. We still think it's going to grow in the 5% to 9% range. So it's good growth. But we do -- we're going to see it moderate just a bit.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [46]

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And so what is it that drove the 14%, Jeff? Or what's been behind some of that stronger growth?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [47]

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The pellet business, Matt, it's just only 10% of the -- of hearth, it's a pretty small part of HNI, showed some pretty strong growth. We are up close to 28% in the fourth quarter. We're also up in non-pellet retail business. But we're not expecting that pellet business to continue to same growth that we saw here in the fourth quarter through 2019.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [48]

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Okay. And then, I guess -- and I think maybe Budd asked some of this. But when you're talking about this revenue recovery and you said things seems to be getting better. Can you go into more detail in both furniture and hearth about what you're seeing? And what gives you comfort that you're going to see this kind of recovery post Q1?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [49]

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Yes, Matt, this is Jeff. I think, overall, the economic -- the labor market as you well know remains tight. The people are still in -- business are still investing in offices, continue to invest in their people and new working environments. So we feel that, that's good. We think it was a little bit of a short-term issue that kind of went across our businesses in the fourth quarter. But that -- the outlook is strong for furniture. Same with new home construction in the hearth business. That business continues, so we think it's going to project stronger in the back half. And so that gives us confidence for these revenue numbers.

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Operator [50]

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Our next question will come from the line of Kathryn Thompson, Thompson Research.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [51]

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First focusing on just the transportation of logistics, has been a challenge throughout 2018. But the feedback we are getting from large party of our industry contacts is that we've seen an improvement in trends in terms of availability, while pricing may not -- necessarily has improved, or the cost structure. What are you seeing in your business? And how should we think about this in 2019?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [52]

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Kathryn, this is Marshall. We're not really seeing a dramatic change in that environment. It's not much different we've seen all year. So I don't know if we're -- can really give you a lot of color on that subject.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [53]

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Okay. I noted that you, in the Q&A and prepared commentary, gave a little bit more color in terms of the pricing and how tariff impacts your guidance. But maybe put differently, does a lower postponed tariffs put you at that high end of EPS range? Or does it just shift the range upwards?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [54]

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Regards to the EPS, we're not expecting the presence of the tariff or the lack of the tariff to have any material impact. We're expecting to offset that tariff with that price realization. So if the tariff goes away, we won't realize more price. But we won't have the cost to go along with it. So it's -- we're expecting a net neutral there in basically all the scenarios.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [55]

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Okay. And I know that the hearth and supplies business, as noted, is more sensitive to swings in sentiment and economic change. But between the two, historically, which has been more sensitive? And based on historic trends, how is that similar or different given what you're seeing right now between hearth versus the supplies business? And what does it speak to overall future trends?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [56]

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Well, Kathryn, this is Jeff. Let me -- If I understand your question, I think, I would say the supplies business is a little more sensitive to overall economic trends. I mean, it's a lot of small business customers, it's a short-cycle business. And so it reacts fairly quickly, both up and down then housing, which is -- operates a little bit more for a lack of better term like the contract market where it's a longer selling cycle. And so that's -- I'm not sure I'm responding to your question directly, but I think that's what you asked?

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [57]

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Yes. And so -- go ahead.

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [58]

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Within your own construction element, responds very directly to that macroeconomic factor but maybe not as much to others.

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Operator [59]

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Our next question will come from the line of Greg Burns, Sidoti & Company.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [60]

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You might have mentioned this, but what was the $13 million goodwill impairment related to?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [61]

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Yes, it wasn't $13 million. We had approximately $13 million of impairments. We did have about a $12 million goodwill impairment related to a small office furniture company.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [62]

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Okay, okay. And then in terms of the gross margin for the fourth quarter, came in a little bit lower than expected. And I think from what you were kind of aiming for at the beginning of the year, also the gross margin didn't expand as much as expected. But you completed a lot of your cost savings projects and as well as some price increases. So I just wanted to kind of understand the divergence in your view earlier this year where you thought you can get gross margin to, to where you ended up and kind of what you're guiding to for next year? What are the offsets to some of the positives you were hoping to drive?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [63]

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Yes. There's probably 3 factors going on in the gross profit line. So the first is that -- the price cost, right? So when we talked earlier about how we expect to have 0 price cost in 2019. In the fourth quarter, we actually had positive price cost when you account all the factors. So we had about $20 million of total inflation, including the tariff. And we realized about $20 million of lift price. So we were basically 0. But then we also benefited about $7 million from business mix, which lowered discount. So we had about a $7 million positive price cost gap which was -- which is actually is a little better than we expected to be. But that was offset by lower volume, which caused some deleverage. And also, the volume challenged our productivity initiative. So we did not realize the productivity that we expected to in the fourth quarter. As we look into next year, we feel pretty good about where we are from a productivity run rate. The $10 million to $15 million of productivity and cost savings, net of investments, that Jeff mentioned earlier, is in line with the run rate we achieved in the second half. So I think that our 2019 guidance is reflective of where we are, and we're feeling pretty solid about it.

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Operator [64]

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At this time we have no further questions in the queue. I'd now like to turn the conference over to Mr. Lorenger for closing comments.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [65]

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Yes. Thank you for your time today and for your interest in HNI Corporation. Have a great day. Thanks.

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Operator [66]

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Once again, we'd like to thank you for participating on today's conference call. You may now disconnect.