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Edited Transcript of HNI earnings conference call or presentation 24-Jul-18 3:00pm GMT

Q2 2018 HNI Corp Earnings Call

MUSCATINE Jul 26, 2018 (Thomson StreetEvents) -- Edited Transcript of HNI Corp earnings conference call or presentation Tuesday, July 24, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jack D. Herring

HNI Corporation - Treasurer, Director of Finance & IR

* 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 and Director of Furnishings Research

* Brian Biros

* 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 Heidi, and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation Second Quarter Fiscal 2018 Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. Thank you. Mr. Herring, you may begin your conference.

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Jack D. Herring, HNI Corporation - Treasurer, Director of Finance & IR [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 second quarter fiscal 2018 results. Here with me are Jeff Lorenger, Chief Executive Officer and President; and Marshall Bridges, Senior Vice President and Chief Financial Officer. 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 risks. 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'll share our assessment of the second quarter and provide some thoughts on our outlook for the rest of the year. We'll then open up the call for questions. Results for the second quarter exceeded our expectations. Stronger top line growth was the main driver of our performance. We delivered organic sales growth of over 8% for the quarter.

As we look across our markets, we see strong overall activity and customer engagement. Our investments in distribution, new products and fulfillment capabilities are being well received and gaining momentum. We are encouraged by the performance of our supplies-driven business, which was up 10% in the quarter. We continue to refine our supplies operating model and are pleased with the results. We are successfully navigating what continues to be a dynamic environment with significant channel shifts. We like what we are seeing and are excited about where we can take the supplies business.

In our hearth business, we continue to generate strong results. Hearth grew nearly 11% in the quarter with strong performance in both new construction and retail products. We continue to compete well in hearth with brands, products and fulfillment capabilities that are unmatched.

Shifting to the cost side of our performance. We had higher than expected operational costs. Part of the higher operational costs were inflation-driven, partly due to a slower ramp-up in cost savings and productivity initiatives. We remain on track to achieve our cost savings and productivity goals, but the timing of some projects will finish later than previously expected.

I will now turn the call over to Marshall to review the financial details of the second quarter. Marshall?

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

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Thanks, Jeff. Second quarter consolidated organic net sales grew 8.4% versus the prior year. Including the impact of closing and divesting small office furniture companies, sales increased 5.7%.

In the office furniture segment, sales increased 7.8% organically or 4.3% in total. Within the office furniture segment, sales in our supplies-driven business increased 10%, sales in our contract business increased 5% organically or were down 1% in total. In our hearth business, sales increased 10.8%, new construction sales increased 10% and sales of retail products increased 12%. Non-GAAP net income per diluted share was $0.44 compared to $0.42 in the second quarter of 2017.

Organic volume growth and lower taxes more than offset incremental costs from our Business Systems Transformation project and strategic investments. Jeff?

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

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Thanks, Marshall. Let's shift to our outlook. Looking forward, we expect to continue driving strong sales growth. We have momentum in each of our businesses and expect mid-single-digit organic growth for the second half of the year.

For the third quarter, we expect our supplies-driven business will be up 6% to 9%. Small business demand has remained strong and we are competing well. We are seeing strength across our customer base, which is more than offsetting continued declines in the wholesale channel.

We expect our contract business to grow 2% to 5% in the quarter. While the growth in contract is slightly lower than what we saw earlier this year, we feel good about our forecasted growth on top of the 22% increase we delivered in the third quarter of last year. We expect our hearth business will be up 2% to 5%. Our new construction business is forecasted up 4% to 7%, with sales of retail products flat to up 3%.

As I noted earlier, we are seeing higher operational costs. In the second half, we expect a negative impact from additional inflationary pressures and delayed timing related to our cost savings and productivity initiatives. The primary driver of the slower ramp-up on cost savings and productivity is the longer adjustment period related to our BST implementation. That said, the issues are short term. I feel good about our BST implementation and our ability to deliver significant shareholder value. We have line of sight to our future state and are making daily progress on our journey. I remain confident 2018 will be a year of strong organic top line growth and improved earnings.

Marshall will now provide financial details on our outlook.

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

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Looking to the third quarter, we expect consolidated organic sales to be up 4% to 7% or up 1% to 4% when including the impact of closures and divestitures. Office furniture sales are expected to be up 4% to 7% organically or up 1% to 4% in total. Sales in our supplies-driven business are projected to be up 6% to 9%. We're forecasting sales in our contract business to be up 2% to 5% organically or down 2% to 5% in total. We expect hearth sales to be up 2% to 5%. And as Jeff referenced, we expect new construction sales to be up 4% to 7%, with retail product sales flat to up 3%.

Non-GAAP gross profit margin is expected to be between 38% and 38.5%. Non-GAAP SG&A, which includes freight and distribution expense, is expected to be in the range of $180 million to $185 million. Our estimate of non-GAAP earnings per diluted share for the third quarter is in the range of $0.80 to $0.90.

Okay. Let's shift to the full year. So looking at the full year, we now expect consolidated organic sales will grow 6% to 8% or be up 3% to 5% in total. We're expecting our office furniture business to deliver organic growth of 6% to 8%, with our hearth business up 5% to 8%. We estimate non-GAAP earnings per diluted share will be in the range of $2.35 to $2.55. This compares to our prior guidance of $2.40 to $2.70. The primary driver of the reduced full year outlook is the higher operational costs I mentioned earlier. Jeff?

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

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Thanks, Marshall. We remain positive about our markets and prospects for growth, both in top line and earnings. We have strong brands in the markets we serve and the operating platform to drive significant long-term shareholder value.

With those comments complete, I will now open it up for questions.

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Questions and Answers

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Operator [1]

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Your first question comes from the line of Budd Bugatch with Raymond James.

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

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Go over, if you would, again, for us maybe a little bit more slowly, what are you seeing in input costs and how do they look going forward?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [3]

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Yes, Budd. For the year, we're seeing total inflation of around $60 million. And that's weighted a bit in the back half. It's about $15 million to $20 million in each of the third and fourth quarters.

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

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And what about pricing to overcome that?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [5]

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Yes. For the year, we're expecting price realization to be in the range of $50 million. And again, that is weighted in the back half and around $15 million to $20 million in each of the third and fourth quarters.

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

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So basically, pricing will offset that in each of those -- the inflation of each of the third and fourth quarter. And what you're saying is, you've gotten somewhere between $10 million, $20 million of pricing already?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [7]

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That's correct, except for -- Budd, I'm not sure we're going to fully offset the inflationary pressures in the back half. The gap will be pretty small, but we do expect a small negative gap there.

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

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Okay. And basically, are you seeing any moderation or stabilization in costs?

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

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Situation is pretty dynamic. We have seen some inflation over the last 3 months. And so as we sit right now, this is our best estimate, Budd, but it's a pretty dynamic situation out there.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [10]

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No, I think Marshall said, we're looking at all input costs. And it's dynamic. This is our best guess at this time, but we're monitoring it very closely.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [11]

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And when you talk about input costs, would you rank the issues for me? Is it steel primarily or was it steel plus freight, where is that?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [12]

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They're fairly broad-based. Approximately 2/3 of those input costs are materials. And within the materials bucket, steel is the biggest driver there. Overall, we're seeing pressures from other metals and a variety of commodities. And then we're also seeing some pressure on the freight side as well as some other buckets as well.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [13]

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What are some of the other buckets, make sure we...

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [14]

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Labor would be the biggest of those, but there are other items as well.

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

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Hardware.

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [16]

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Yes.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [17]

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Okay. Also talk to us a little bit about, if you would, the delay in the productivity in the BST. Maybe you explain a little bit what's going on there.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [18]

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Yes, Budd, I think, first, let me say that we're pleased with the platform overall. It's going to be a powerful framework for our future. The bottom line is, we've changed all the workflows for the organization and -- soup to nuts. And it's taking just a little bit longer as the organization gets comfortable working in the new system in order to go get that productivity. We have line of sight to it. I'm confident we're going to go get it, but it's probably a quarter delayed in some of the projects. And the projects are all over the board as well. So there's a lot of little projects. And we're getting after some of them. And they're hitting. And other ones are delayed.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [19]

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So can you quantify that at all? How do we quantify? Where does it hit in terms of the P&L? Where do we see that? And what are the differences to what you thought you were going to see earlier in the year?

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

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Again, the delay is probably hitting the back half, approximately $6 million of negative impact. That's disproportionate in the third quarter. And where it hits in the P&L, there's a mix between cost of goods sold and freight costs there, freight distribution. It's more on the cost of goods sold, but not as weighted as you might think given where the costs are.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [21]

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So if you say it's disproportionate, you're saying something like $4 million in the third quarter, $2 million in the fourth?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [22]

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Yes. That's a good estimate.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [23]

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And this is versus your original expectations or is that -- how do we think about that?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [24]

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Yes. That's versus our last set of expectations.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [25]

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Okay. All right. And I know -- and congratulations on the fact that the supplies-driven business is growing faster. Maybe you can characterize what you're also seeing in contract. What's that market look like today?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [26]

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Yes, Budd. I'd say, overall, there's solid market momentum out there. It's still a bit choppy, but overall, we're competing well and the market's pretty active. I think the third quarter story is, we still like our growth. It's going to be, like I said earlier, a little slower based on the 22% comp of prior year. But the contract market is about what we thought it would be and continues to be. And we're going to show growth in the back half.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [27]

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Organically, but again, you have that divestiture, right, that you're comparing against?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [28]

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Correct. We have the divestiture and a closure that we are carving out for the organic growth calculation, Budd.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [29]

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Okay. Can you quantify those? What's the loss given the divestiture in each of the last 2 quarters?

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

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Yes. The divestiture had the impact for -- in the first half, divestiture and the closure of decreasing net sales approximately $25 million and increasing operating profit approximately $3.5 million in the first half. Those are both first half numbers.

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Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [31]

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And in the last half, what are you looking at in terms of the divestiture impact and the closure impact?

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

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Yes. For the second half, it will be in the range of $32 million of sales impact and approximately $3 million of operating profit impact. So increase operating profit $3 million and decrease sales a little over $30 million.

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Operator [33]

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Your next question comes from the line of Kathryn Thompson with Thompson Research Group.

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Brian Biros, [34]

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This is Brian Biros on for Kathryn Thompson. First question, I guess, would be on the hearth business, good double-digit growth here. Could you just clarify any drivers for that business? Why that was kind of the double-digit growth you saw for the first time in a while and how that might contribute to the fiscal year '18 guidance?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [35]

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Yes, Brian, this is Jeff. Yes. I think the hearth business, overall, is just competing well. They're on their game on all their segments. And that drove growth rates a little higher than we anticipated overall for the year, where we expect to be up high single digits. And so the quarters may move around a little bit, but overall, it's going to be up high single digits. And the drivers are really that they're executing well with their platforms and hitting on most of their cylinders.

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Brian Biros, [36]

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Okay. And wanted to follow up transportation costs. Have you seen any increase in those and are those impacting margins at all?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [37]

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Yes. We have seen some inflation from freight costs, both inbound and outbound freight. And that's in that $50 million total input cost increase that we mentioned earlier when we were answering Budd's question.

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Operator [38]

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Your next question comes from the line of Matt McCall with Seaport Global.

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

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So maybe go back to the productivity delay and the cost saves, the recognition of the cost saves. I'm just trying to understand actually the -- I know there are some things that didn't progress as quickly. Is it doing anything on the service level front because people, that's the first concern when folks hear the letters ERP? Are service levels being maintained? Are you having to spend more to ensure that they do? Just help me understand what the customer may be seeing.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [40]

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Yes, Matt, this is Jeff. I think, the service levels, we worked through -- we've had a couple of issues there right after go live, but we worked through the service levels to customers. That was job one. And so we've worked through most of that really quickly to maintain service levels. And in fact, in some of our efforts in order to do that, because we wanted to maintain those levels, we had to delay some of the other things. I think that's just part of kind of the intricacies of how this has gone.

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

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Okay. So is there a financial impact from maintaining those service levels that goes beyond just the delayed -- the savings? What I'm getting at is, you've got the delayed savings that you expected, but is there, in addition to that, some service level expenses that were maybe -- or service expenses that were maybe elevated?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [42]

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Yes, no, I don't really think so, Matt. We have focused the core group on those service levels maybe before they went after some of the other stuff for a few extra months. But no, there's not like a permanent service level increase in costs at all.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [43]

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Okay. All right. That's helpful. I think one of the questions was asked around pricing overall. What about contracts specifically, what was the contract pricing benefit in the quarter? What's baked into the guidance as we progress through the year? I guess you talked about the demand environment. What's the pricing environment overall look like for contract specifically?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [44]

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The pricing environment in contract, Matt, is pretty similar to what we've seen over the last several quarters.

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

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Yes. I'd say, Matt, it's pretty stable. We monitor it obviously pretty closely. But right now, we saw in the second quarter and we project out that the pricing environment is pretty stable, not too much volatility from our vantage point.

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [46]

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And we're not seeing a meaningful difference in the price realization between the supplies-driven business and the contract business at this point.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [47]

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Okay. And the price realization, the timing of the price realization, it's all pretty consistent across those businesses?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [48]

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Yes, it is.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [49]

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Okay. All right. Let me see. So I just want -- I don't know if you said this, I apologize, I'm in a lobby right now so I can't hear part of it. But you talked about, Marshall, your input cost expectations for the back half and your pricing expectations for the back half. How do those compare to what you thought they were going to be a quarter ago? So I think it was $60 million in costs in the back half. What did that number look like? And then the $50 million in price, what did that number look like last quarter?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [50]

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Well, there's been a lot of movement there, but if you boil it all out, Matt, I think it's about $5 million to $7 million higher on the input cost side in the back half. And the pricing is pretty similar to what we had thought back in May when we did the last call.

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Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [51]

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Okay. Okay. And the last question I had, I guess, related to that. As we look out, it looks like in your Q4 guidance, it implied -- and the other outlook you gave, it looks like you're pointing to some margin expansion in Q4. Can you give us an idea of the level of comfort you have, Marshall, you'd help me out with kind of a bridge to the future when it comes to some of the buckets. Can you remind me of some of those buckets, where they stand today and how they give you confidence that Q4 should start to show some margin improvement on a year-over-year basis?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [52]

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Yes, Matt, this is Jeff. I would say, from a high level, as we've talked about, I think our exit velocity coming out of BST implementation was a little bit slower on the ramp, but we like what we see as we look out. And I think that in the fourth quarter, we're going to start to see the benefits of that, albeit maybe a little bit delayed. And so that we have line of sight to that, and that gives us confidence in a macro sense that we're going to be able to expand margins in the fourth quarter.

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [53]

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And the biggest driver of that fourth quarter product expansion, Matt, is the productivity cost savings achievement that Jeff is mentioning there. We also need to continue to see the good volume growth and minimize that freight cost gap that we talked about earlier. The one unique thing, and it's not terribly large, is the impacts from BST start to reverse in the fourth quarter. It's been a negative impact for the first 3 quarters, but we'll see a benefit from that as we anniversary some cost that we expensed last year that we no longer have.

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Operator [54]

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Your next question comes from the line of Greg Burns with Sidoti & Company.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [55]

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What percentage of your business this year on the supplies side is coming from wholesale?

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

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I'd say it's probably in the 5% to 7% range. Is that about right?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [57]

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Yes, it's down dramatically, but it's kind of low teens, yes. And I guess, Greg, we should clarify. I think Jeff answered the question as percent of HNI and I'm answering as the supplies business.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [58]

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Oh, yes, I'm sorry. I'm sorry.

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [59]

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For you to do your math.

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

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Okay. All right. And the profitability of going through the wholesale channel versus direct, is your direct margins comparable to what they were when you were going majority through wholesale?

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

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I think you're alluding to our kind of quick ship fulfillment or maybe you're talking about just in general if we don't go through the wholesaler. At this point, either way, we're working through those new flows, new processes.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [62]

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Yes. I agree. I think we anticipate -- look, we got some start-up costs on that. And we're early on in this journey, but we anticipate those margins will be comparable going forward as this model gets filled out.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [63]

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Okay. And can you just talk about maybe some of the programs or initiatives you have in place to better service that dealer channel as you move away from wholesale? I know at NeoCon we saw a little bit of the easy quick product kind of initiative in the HON showroom. So if you could just talk about any of those, that will be helpful.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [64]

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Yes. We've got multiple -- I mean, what we're really doing is we're getting close to the DSRs and the dealer/sellers in those markets that rely on that type of service. We're putting in place new selling capabilities, new selling tools, new digital tools to make their life easier in order to process their business and really providing support in the sales process that they require in order to make a sale and make it easier. And then part of that, you saw in NeoCon with the easy quick project is determining what they need. And the made to order, part of that program as well is, we're making the made-to-order business easier for them by going to high runners and a group of products that they can sell easily every day and be comfortable with.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [65]

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And then lastly, can you just talk about your plans in terms of e-commerce. I know you purchased OFM. But what are your plans for that asset and maybe leveraging that to accelerate growth of the supplies and HON?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [66]

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Yes, it's a great question. We are investing in that business right now. It's growing fairly rapidly. And we're driving those capabilities across the business where it makes sense. And so we're running that business separate, but we also are working with HON and merchandising the appropriate HON products through that channel. But it is a growth platform for us, for sure.

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Operator [67]

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And we have a follow-up from the line of Kathryn Thompson with Thompson Research Group.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [68]

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So just following up on the free cash flow guidance that you've given at the beginning of the year. You gave a range of $100 million to $120 million. Is there any change in that projection? And how should we think about as we look over the next 18 to 24 months in terms of that free cash run rate?

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Marshall H. Bridges, HNI Corporation - Senior VP & CFO [69]

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Kathryn, yes, we are estimating now that our free cash flow be in the $125 million to $135 million range for the year. So that's an increase over what we had said at the beginning of the year. And we're focused on driving that free cash flow, and we should expect similar results for the next year or so.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [70]

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Okay. Also, could you give any more color, and this is really more stepping back and looking at the forest through the trees, any color on market momentum or feedback in the office side in terms of what they're seeing in terms of momentum of business? And this is really kind of more of your day-to-day business is how we think about that as an indicator of broad economic trends.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [71]

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Yes, sure. As I stated earlier, Kathryn, I think we're seeing strong momentum on the supplies side, for sure. It's coming -- the market, we're executing well. We're making the investments, I think, to meet the market. And the market is fairly strong out there. The small and medium business activity is strong. And that translates to really core day-to-day business as we look at it. So I see that momentum continuing. We see some strong momentum in the contract side as well. So overall, the furniture space, from our vantage point, has got strong momentum and we like what we see.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [72]

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And so it's a better, improving momentum versus last year at the same time?

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [73]

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I'm sorry, the question, is it better momentum than last year at this time?

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [74]

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Correct.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [75]

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Yes. I think in the supplies business, for sure, it's better momentum. Contract, it's probably similar but slightly better.

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Operator [76]

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There are no further questions in the queue. I turn the call back over to Mr. Lorenger. Please go ahead.

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Jeffrey D. Lorenger, HNI Corporation - President, CEO & Director [77]

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Okay. Thank you, everyone, for your interest in HNI. And I'd like to thank you for taking the time today, and we'll talk to you soon. Thank you.

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Operator [78]

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This concludes today's conference call. You may now disconnect.