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HNI Corp (HNI) Q1 2019 Earnings Call Transcript

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HNI Corp  (NYSE: HNI)
Q1 2019 Earnings Call
April 22, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, today's conference call is being recorded.

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

Jack Herring -- Treasurer, Director of Finance and Investor Relations

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'm pleased to turn the call over to Mr. Jeff Lorenger.

Jeffrey Lorenger -- President and Chief Executive Officer

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'll 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 lower volume with better cost. Our markets continue 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 orders 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 mid-size projects. 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 the 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 two-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 over to Marshall for some additional financial details on the first quarter. Marshall?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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?

Jeffrey Lorenger -- President and Chief Executive Officer

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 topline 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 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 the 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'm 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?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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 the change in tariff assumptions has no meaningful impact on our bottom line. We also expect the lower volume in hearth will be offset by lower costs.

We are 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 and 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 of divestitures will reduce sales by approximately $5 million. Second quarter sales in office furniture are 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?

Jeffrey Lorenger -- President and Chief Executive Officer

Thanks, Marshall. I'm 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.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) Your first question comes from Budd Bugatch with Raymond James. Please go ahead, your line is open.

Budd Bugatch -- Raymond James & Associates, Inc. -- Analyst

Good morning. Thank you for taking my question.

Jeffrey Lorenger -- President and Chief Executive Officer

Hey, Budd.

Budd Bugatch -- Raymond James & Associates, Inc. -- Analyst

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 you said?

Jeffrey Lorenger -- President and Chief Executive Officer

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

Budd Bugatch -- Raymond James & Associates, Inc. -- Analyst

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, is that -- or is that --?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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 seeing. 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 so 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 offset with investments in the quarter versus prior year and the other profit drivers more or less are flat.

Budd Bugatch -- Raymond James & Associates, Inc. -- Analyst

So when you say you're ramping up in 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 familiarity?

Jeffrey Lorenger -- President and Chief Executive Officer

Yes. I think it's a couple things, Budd. It's productivity -- it's not real big node closures. It's really productivity and cost savings net of investments and I think 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.

Budd Bugatch -- Raymond James & Associates, Inc. -- Analyst

And what was price cost realization in Q1? How did that (technical difficulty)

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yes. We had about $21 million of price realization in the first quarter against approximately $50 million of total inflation, which includes the impact of the tariffs.

Budd Bugatch -- Raymond James & Associates, Inc. -- Analyst

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?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yes. 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 tariff 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.

Budd Bugatch -- Raymond James & Associates, Inc. -- Analyst

Okay. Does that happen pretty much ratably through the year?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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.

Budd Bugatch -- Raymond James & Associates, Inc. -- Analyst

Okay. And is there any notable change in -- you have some nice growth. I guess there is some growth in office and even in -- even in -- sorry, in the contract side and the supplies-driven side. Where do we get 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?

Jeffrey Lorenger -- President and Chief Executive Officer

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

Budd Bugatch -- Raymond James & Associates, Inc. -- Analyst

Okay. Alright. Thank you very much. Good luck on the rest of the year. Good luck on the second quarter.

Jeffrey Lorenger -- President and Chief Executive Officer

Thank you, Budd.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Thank you, Budd.

Operator

Your next question comes from Matt McCall with Seaport Global. Please go ahead, your line is open.

Matthew McCall -- Seaport Global Securities -- Analyst

Thank you. Good morning, everybody.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Good morning, Matt.

Matthew McCall -- Seaport Global Securities -- Analyst

So, the price cost sounds like that's going to be $15 million to the good, if I just took the midpoint of those -- the pricing cost 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?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

So the first is -- the big driver for the year, Matt, is the net productivity, less investments. We talked about being $10 million to $15 million of benefits for the year. That will occur in the back half, which is -- so. From a -- and that includes what Jeff is 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 million 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.

Matthew McCall -- Seaport Global Securities -- Analyst

Flat -- flat meaning price is equal to cost in Q4?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yes.

Matthew McCall -- Seaport Global Securities -- Analyst

Okay. So whatever, so you had -- I'm looking, so you had $6 million benefit, $0 million to $2 million, and then 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?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yes.

Jeffrey Lorenger -- President and Chief Executive Officer

Yes.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Matthew McCall -- Seaport Global Securities -- Analyst

Okay. And last (inaudible). And then the no BST, what was the BST? I probably got it in my notes somewhere, but I don't have it in my brain. So what's the BST hit last year?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Matthew McCall -- Seaport Global Securities -- Analyst

Okay. Obscure metric, but I noticed that the assets in office furniture moved higher and I'm just trying to understand what that is given that you've 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 tied to the investments that you're talking about that are netting out some of the benefit of productivity and cost savings?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

I don't think there's any 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's more assets on the balance sheet in general for that.

Matthew McCall -- Seaport Global Securities -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yes, Matt. The investments are pretty broad based. I mean our classic operational investments to improve flow and quality and just general labor productivity is what we're doing, there is 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.

Jeffrey Lorenger -- President and Chief Executive Officer

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

Matthew McCall -- Seaport Global Securities -- Analyst

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

Jeffrey Lorenger -- President and Chief Executive Officer

No. I would -- that's a tough -- 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 in how they want to be met at the right time. So, I feel we're kind of right on trend there, Matt.

Matthew McCall -- Seaport Global Securities -- Analyst

Okay. And last question I had, I think Budd may have asked this, but just I wanted to hear it again I guess. Your 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.

Jeffrey Lorenger -- President and Chief Executive Officer

Well, yes, Matt, it's a good question. I think it's both if I step a 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 dialog has remained consistent since the beginning of the year.

Matthew McCall -- Seaport Global Securities -- Analyst

Consistent in the second half supposed to be -- (inaudible) some acceleration.

Jeffrey Lorenger -- President and Chief Executive Officer

Yes, correct.

Matthew McCall -- Seaport Global Securities -- Analyst

Okay. All right. Thank you all.

Jeffrey Lorenger -- President and Chief Executive Officer

Yes. Thank you.

Operator

Your next question comes from Steven Ramsey with Thompson Research Group. Please go ahead, your line is open.

Brian Biros -- Thompson Research Group -- Analyst

Good morning. This is actually Brian Biros on for Stephen. Thank you for taking my questions. I want to start with the new construction channel and just see 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?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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 permits, the 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. And as Jeff mentioned on the previous question for Matt, that we do expect that to rebound in the second half.

Brian Biros -- Thompson Research Group -- Analyst

Got it. Thank you. And just one more for the -- in Q1 you mentioned demand was growing each month kind of compounding. Maybe you could just kind of provide maybe some more details on the level if it 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 would be appreciated?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Brian Biros -- Thompson Research Group -- Analyst

Understood. Thank you.

Jeffrey Lorenger -- President and Chief Executive Officer

Thank you.

Operator

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

Jeffrey Lorenger -- President and Chief Executive Officer

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.

Operator

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

Duration: 23 minutes

Call participants:

Jack Herring -- Treasurer, Director of Finance and Investor Relations

Jeffrey Lorenger -- President and Chief Executive Officer

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Budd Bugatch -- Raymond James & Associates, Inc. -- Analyst

Matthew McCall -- Seaport Global Securities -- Analyst

Brian Biros -- Thompson Research Group -- Analyst

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