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Edited Transcript of HNI earnings conference call or presentation 22-Apr-19 3:00pm GMT

Q1 2019 HNI Corp Earnings Call

MUSCATINE Apr 23, 2019 (Thomson StreetEvents) -- Edited Transcript of HNI Corp earnings conference call or presentation Monday, April 22, 2019 at 3:00:00pm 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

* Brian Biros

Thompson Research Group, LLC - Equity Analyst

* 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 Julie, and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation First Quarter Fiscal Year 2019 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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Thank you. Good morning. I am Jack Herring, Treasurer and Director of Investor Relations for HNI Corporation. Thank you for joining us to discuss our first quarter fiscal 2019 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 Mr. 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 first quarter and provide some thoughts on our outlook for the rest of the year. We'll then open up the call for questions.

I would like to start with a couple of opening comments. First, not much has changed since our last earnings release. The first quarter played out as we generally expected and our profit improvement outlook for the year is unchanged.

I would also like to note that I continue to be impressed by our dedicated members. We are making progress on our initiatives and our teams have done a nice job improving our businesses in the face of dynamic conditions.

I will now cover the first quarter. As anticipated, demand conditions generally improved throughout the quarter after a slow start. We were able to offset much of the impact from the lower volume with better cost. Our markets continued to be dynamic with pockets of uncertainty, but I feel good about our momentum and the opportunities in front of us.

Let me give some color on how each of our main businesses performed in the first quarter, starting with the supplies-driven office furniture business, which was down nearly 8%. The decline in supplies was driven by the transactional portion of that business, which is typically a small order that processes on a quick cycle. Transactional order started the year very slow and generally improved through the quarter. The other parts of the supplies-driven business are positive with good growth in e-commerce and small to midsized project. We are encouraged by the recent order trend in supplies overall, but the transactional portion does remain soft and conditions continue to be dynamic.

Overall, we expect this supplies-driven business will continue to improve. The transactional business responds to macroeconomic factors quickly. As confidence and sentiment improves with items such as tariff resolution, we should see the transactional portion of the supplies business strengthen.

Shifting to our contract office furniture business. We continue to see solid performance. While organic sales were down 2% during the quarter, this was on top of a strong prior year comparison. On a 2-year basis, our compounded growth rate was plus 6% for the first quarter. We have been on a good run in the contract business, and our orders and activity levels give us confidence that we have more growth ahead of us.

In hearth, we saw -- we grew sales and profits despite difficult demand conditions. The new construction market continued to slow in the first quarter consistent with declining single-family housing permits. Our retail business started slowly but improved through the quarter. We have a strong market position and continue to see signals that demand will improve as we progress through the year, particularly, in the back half.

With that, I will turn it to Marshall for some additional financial details on the first quarter. Marshall?

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

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Thanks, Jeff. First quarter consolidated organic sales were down 3.4% versus the prior year. Including the impacts of closures and divestitures, sales were down 5.1%.

In the office furniture segment, sales decreased 5.1% organically. Within office furniture, sales in our supplies-driven business decreased 8%, and sales in our contract business were down 2% organically.

Hearth segment sales increased 1.4%. Within hearth, new construction sales grew 1% and sales of retail products increased 2%.

Non-GAAP net income per diluted share was $0.02 compared to $0.10 in the first quarter of 2018. Compared to last year, non-GAAP EBIT was down $2.5 million.

Lower volume combined with increased input costs drove an estimated $30 million headwind to our bottom line. We were able to offset most of that through price realization, productivity improvements, cost savings and the benefits of not repeating our BST go live. Jeff?

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

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Thanks, Marshall. For the full year, we continue to expect to drive profit growth and our profit outlook remains unchanged. The primary driver of our profit improvement will be realizing $10 million to $15 million of productivity net of investments. We are on track to deliver that goal. Overall, we expect to see a bit less top line for the full year due to two factors. First, we have adjusted our assumptions around tariffs. And second, we are expecting modestly lower growth in our hearth new construction business.

Breaking down our demand picture, not much in our office furniture outlook has changed since the beginning of the year. While uncertainty persists, particularly, in the transactional part of the supplies-driven business, many indicators suggest that the market environment continues to go in the right direction. The macro factors supporting the demand for office furniture remain relatively strong. Employment markets are tight and the war for talent continues to be aggressive. Employers are finding that they need to invest in their office spaces to attract and retain the best and brightest. We believe these factors will drive improved demand as we progress through the year.

In our hearth business, we also see signs of a stronger second half. Our full year result in hearth has tempered slightly as single-family housing permits have been softer than expected so far this year. It is our belief, however, that the market will improve in the second half as the long-term demographics and supply of housing continues to support new home construction growth.

I would like to point out that we expect to generate all of our annual profit improvement in the back half of the year, consistent with last year. This is being driven by a combination of improving demand, cost savings and investment timing along with lower inflation levels in the second half. I am confident in our strategies and our ability to grow profit for the year.

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

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

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Okay. Let's first cover some of the details around our full year outlook. Our full year forecasted net income per diluted share remains in the range of $2.50 to $2.90. We now expect consolidated organic sales to be up 2% to 6% or up 1% to 5% when including the impacts of closures and divestitures.

As Jeff mentioned, our reduced sales outlook is driven by tariff assumptions and modestly lower growth in our hearth new construction business. I would like to note that change in tariff assumptions has no meaningful impact on our bottom line. We also expect a lower volume in hearth will be offset by lower costs.

We're expecting sales in our supplies-driven business will be up 2% to 6%. In our contract office furniture business, we continue to expect organic sales will be up 3% to 7%. When including the impacts of closures and divestitures, sales in contract are expected to be flat to up 4%.

In hearth, we now expect sales will grow 1% to 5%.

Okay. Let's shift to our sales outlook for the second quarter. We expect second quarter organic sales will be up 2% to 4% driven by price realization required to offset higher input costs. The impact to divestitures will reduce sales by approximately $5 million. Second quarter sales in office furniture is expected to be up low- to mid-single digits. And we are forecasting sales in our hearth business to be flat to down low single digits. Jeff?

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

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Thanks, Marshall. I am excited about the opportunities in front of us to grow the business, increase profits and drive greater value for our shareholders.

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) Your first question comes from Budd Bugatch with Raymond James.

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

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Jeff, I want to make sure I understood the profit outlook, did you say all of the profit gain will be in the second half of the year? Is that what...

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

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Yes, that's what I said. That's correct, Budd.

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

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So last year's second quarter, you earned $0.44 as I see adjusted, so you're looking for a lower earnings in the second quarter than $0.44, right? Or is that...

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

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Well, let me give some color on the second quarter, Budd. We're not giving formal guidance, but we can maybe give you some color on what we're saying. In general, what we're seeing is that most of the profit drivers are flat to slightly negative. We talked about 2% to 4% organic growth, which is mostly price-driven. And non-price volume is roughly flat to slightly negative than prior year. We're still ramping up on our productivity, and expect that to be again offset with investments in the quarter versus prior year. And the other profit drivers more or less are flat.

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

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So when you say you're ramping up on productivity, do you have any nodes that you're closing in the system that's accounting for that right now? Or is it just BST primarily?

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

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Yes. I think it's a couple of things, Budd. It's productivity. It's not real big node closures. It's really productivity cost savings net of investments. And I think the second quarter is a little higher on the investment load than the rest of the year. And then the second big piece is the lower BST cost and disruption that's starting to get untangled, continue to get untangled and get streamlined. And that ramps in the back half a lot more in the second.

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

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And what was price cost realization in Q1? How did that...

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

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Yes. We had about $21 million of price realization in the first quarter against approximately $15 million of total inflation, which includes the impact of the tariffs.

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

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So $6 million to the good. And what do you think it will be for the year? How do you -- what's your crystal ball say today?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [11]

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Yes. We're -- for the year, we do expect it to be positive. Our outlook for price realization is a little bit lower than it was mainly due to the tariffs, as we mentioned in our call comments. But we are expecting $75 million to $85 million of price realization against $60 million to $70 million of total cost inflation.

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

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Okay. And has that happened pretty much ratably through the year?

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

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Yes. It does. It's pretty consistent through the year. Although, it's actually less in the fourth quarter as we start to anniversary some of our tariff-driven price increases.

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

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Okay. And is there any notable change in -- you have some nice growth, I guess, there was some growth in office and even in the contract side and the supplies-driven side. Where do we get the comfort that we can make those kinds of looks right now? What's the backlog? What's the incoming order flow? How do we see that?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [15]

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Yes, Budd, I think, look, I mean the -- I'll say a couple of things. One in the supplies side, we've seen the business get stronger through the quarter. We started slow and it started to get stronger as the quarter has built and into this quarter. On the contract side, same thing. We're seeing activity levels, backlog, final order rates support the growth we're projecting. On that hearth side, the demand indicators still with customers, channel partners, sales teams are pointing to a stronger back half. So we're feeling like all -- and on the retail, I should comment on the retail side. The store traffic, website visits, et cetera on that hearth retail side of things are ramping up. So kind of across the board, it feels like that that's where we're banking on. We need the demand to continue to improve and it's generally heading in the right way.

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Operator [16]

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Your next question comes from Matt McCall with Seaport Global.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [17]

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So the price cost, it sounds like that's going to be $15 million to the good, if I just took the midpoint of those -- the price and costs you just gave, Marshall. Jeff, you also talked about productivity, you talked about cost savings, you talked about no BST. Can you remind us what the benefits from each of those are expected to be for the full year and how they're going to be recognized as you progress through the year?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [18]

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So the first is -- the big driver for the year, Matt, is the net productivity less investments that we talked about being $10 million to $15 million of benefit for the year. That will occur in the back half, which is -- so from a -- and that includes what Jeff was alluding to using BST to drive productivity and things like that. As it relates to price cost, we did have some benefit in the first quarter. We expect a smaller benefit in the second quarter, somewhere between $0 and $2 million. Third quarter will be the balance of it and then roughly flat in the fourth quarter based on what we know now.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [19]

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Flat meaning price is equal to cost in Q4?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [20]

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Yes.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [21]

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Okay. So whatever. So you had $6 million benefit, $0 to $2 million and then the remainder of that $15 million will show up in Q3? And is there -- you said productivity and cost savings, is the $10 million to $15 million a combination of those two buckets?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [22]

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Yes.

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

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Yes. It's basically the net of productivity cost savings less investments that we put in place to sort of drive those things.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [24]

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Okay. And then the no BST, what was the BST? I probably got it in my note somewhere, don't have it in my brain. So what's the BST here last year?

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

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Yes. We expect BST to be an $8 million improvement for the full year. Majority of that was in the first quarter.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [26]

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Okay. Obscure metric, but I noticed that the assets in office furniture moved higher. And I am just trying to understand what that is given that you divested and maybe that has nothing to do with it, but given that you're focused on productivity and cost savings and these things. Can you help me understand what that is and maybe it's hard that the investment you're talking about that are netting out some of the benefit of productivity and cost savings?

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

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I don't think there is a material impact from the investments on the office furniture assets. I think what you're probably picking up there, Matt, is the change in the accounting rules related to leases. And so there is more assets on the balance sheet in general for that.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [28]

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Okay. Okay. But well, maybe talk about the investments a little bit? And specifically, what are you doing? What's the impact? How does it flow through the next three quarters?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [29]

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Yes. Matt, the investments are pretty broad-based. Our classic operational investments to improve flow and quality and just general labor productivity is what we're doing. There's no single big item there. And we do expect that to peak in the second quarter and then kind of ramp down as we get into the back half of the year.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [30]

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Yes, I'd say the other thing, Matt, is we are continuing to invest in kind of digital and analytics to better connect to our customers and streamline connectivity to the marketplace. So it's our traditional operational investments. But we have also ramped up the digital and the analytics investments as well.

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

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Is that an area, Jeff, where you're behind? Or do you feel like you're behind from a digital and analytics perspective, you're trying to catch up? Or is it more of a leadership effort?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [32]

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Yes, I would -- that's a tough question, leadership or behind, Matt. I think we're right where we want to be for our business. And the timing is right. And the marketplace is receptive to these and customers' buying behaviors and patterns are such that we're meeting them in the marketplace and how they want to be met at the right time. So I feel we're kind of right on trend there, Matt.

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

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Okay. And last question I had. I think Budd may have asked this, but just -- I wanted to hear it again, I guess. You're housing outlook and your improved feelings about the back half of this year, are you hearing commentary from your builder customers? Or is it more, you're looking at the macro, you're looking at the same things we are from a supply and demand perspective? What is it that's giving you that confidence? I'm specifically curious about your conversations with some of your bigger customers.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [34]

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Well, yes, Matt, it's good question. I think it's both if I step way back. I mean, we look at all the macro drivers that you probably look at. But we also talk to customers and channel partners and sales teams that are maybe more discrete and in certain geographic regions. And that dialogue has remained consistent since the beginning of the year.

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

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Consistent in that the second half is supposed to be -- there appears some acceleration?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [36]

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Yes. Correct.

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Operator [37]

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Your next question comes from Steven Ramsey with Thompson Research Group.

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Brian Biros, Thompson Research Group, LLC - Equity Analyst [38]

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This is actually Brian Biros on for Steven. I want to start with the new construction channel. And if you could dig in a little deeper into how that played out in Q1 given the environment that was in Q4 and Q1 and also kind of the outlook for the rest of the year for new construction specifically?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [39]

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Yes. We were able to show some growth, just a tad over 1% in new construction hearth business in the first quarter, Brian. We are seeing that market slow. I mean, the slowing housing activity, the permit starts are -- will have an impact on our business. We are expecting that to be more of a headwind in the second quarter than in the first quarter. As Jeff mentioned on the previous question from Matt that we do expect that to rebound in the second half.

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Brian Biros, Thompson Research Group, LLC - Equity Analyst [40]

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Got it. And just one more for the -- in Q1, you mentioned demand was growing each month kind of compounding. If you can just kind of provide maybe some more details on the level. If there was kind of a steady demand or if there was a big jump from month to month? Any insight into how that played out throughout the quarter will be appreciated.

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [41]

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Yes. We said on our last call that demand started very slowly in the first quarter. So January, it was very slow. It was a carryover from slow activity that we saw that was sort of late in middle of the fourth quarter of last year. And we did see a rebound sequentially as we move through the quarter from those levels. So it's not really been a step-up or rapid change, it's been pretty steady build.

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Operator [42]

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I will now turn the call back over to Mr. Lorenger for closing remarks.

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

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Yes. Thank you, everyone. As always, we thank you for taking time to talk with us and your continued interest in HNI Corporation. Have a great day. Thanks.

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Operator [44]

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This concludes today's conference call. Thank you for your participation and you may now disconnect.