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HNI Corp (HNI) Q4 2018 Earnings Conference Call Transcript

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HNI Corp  (NYSE: HNI)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Holly, and I will be your conference operator today. At this time, I would like to welcome everyone to the HNI Corporation Fourth Quarter Fiscal 2018 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 D. Herring -- Treasurer, Director of Finance and Investor Relations

Good morning. I am Jack Herring, Treasurer and Director of Investor Relations for HNI Corporation. Thank you for joining us to discuss our fourth quarter fiscal 2018 results. Here with me are Jeff Lorenger, President and CEO and Marshall Bridges, Senior Vice President and CFO.

Copies of our financial news release, earnings presentation, and non-GAAP reconciliations are posted on our website. Statements made during this call that are not strictly historical facts are forward-looking statements, which are subject to known and unknown 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'm pleased to turn the call over to Jeff Lorenger.

Jeffrey Lorenger -- President and Chief Executive Officer

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

Our team performed well in the fourth quarter. We drove significant earnings growth and margin expansion, while continuing to manage through multiple challenges. Inflationary pressures remained high and the market environment was choppy. Despite these challenges, we grew organic sales by more than 5% and improved our overall performance across the board. As I look back on the full year, we completed multiple strategic actions to build our long-term foundation.

We successfully launched our Business Systems Transformation initiative, or BST, as we refer to it. BST will be crucial to our future, providing a foundation to more effortlessly serve our customers, adapt to changing market needs, and enable greater operational efficiency. We finalized multi-year transformations of our operational network, lowering costs and improving our responsiveness in both office furniture and hearth.

We made significant progress strengthening our supplies-driven office furniture business. We improved our capabilities and created a stable platform to drive that business forward. We continue to build out our e-commerce capabilities. This is a rapidly growing segment with great opportunity for us. We also completed our long-term -- long-planned leadership transition. After 26 years with the Company, including the last 14 as Chairman, President and CEO, Stan Askren retired at the end of 2018. I was honored to be appointed by our Board of Directors to lead our teams. And I look forward to working with our new Independent Chairman, Larry Porcellato.

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

We further solidified our strong balance sheet. During 2018, we generated $147 million of free cash flow. We ended the year with $250 million of debt and our debt-to-EBITDA ratio was 1.1 times. We are financially strong and have significant access to capital to continue to grow our business and drive greater returns for our shareholders. I feel good about our businesses, brands and the teams we have in place. I'm pleased with the progress we have made and I'm excited about the opportunities in front of us.

I will now turn the call over to Marshall to review some financial details on the fourth quarter. Marshall?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Thanks, Jeff. Fourth quarter consolidated organic sales grew 5.4% versus the prior year. In the office furniture segment, sales increased 4.3% organically. Within the office furniture segment, sales on our supplies-driven business increased 4%. Sales in our contract business were up 5% organically. Hearth segment sales increased 8.5%, new construction sales grew 3% and sales of retail products increased 14%.

Non-GAAP net income per diluted share was $0.97 compared to $0.47 in the fourth quarter of 2017. We experienced higher input costs, but we were able to overcome them with productivity gains, cost savings, SG&A efficiency, and improved price realization. Jeff?

Jeffrey Lorenger -- President and Chief Executive Officer

Thanks, Marshall. For the full-year 2019, we expect to grow profit, while navigating several challenges, including a volatile demand environment, inflationary pressures and negative tariff impacts. We expect demand to start slowly and improve as we progress throughout the year. Market activity slowed in the fourth quarter and the weakness extended into the early part of this year. The decline coincided with general concerns around the economy, slowing new home construction, a drop in key competence metrics, potential trade issues and the government shutdown. As a result, we expect low first quarter volume, which will challenge our first quarter profitability. Activity levels are recently recovering. We are assuming the positive trend will continue, but expect conditions will be choppy and dynamic.

For the full-year 2019, we're expecting low single-digit growth in demand. Including additional price realization necessary to offset higher input costs, we expect consolidated organic sales will grow 3% to 7%. Continuing improvements in productivity and cost savings are key drivers of our 2019 profit growth. These initiatives are gaining momentum now -- now we're through the initial BST learning curve and have stability in our operational footprint. We expect productivity and cost savings, net of our investments, will drive $10 million to $15 million of financial benefit during the year. We are continuing to make long-term growth investments in areas such as digital and data analytics, go-to-market capability, new products and operational capability.

Based on the combination of strong productivity and cost savings, modest volume growth and investments for long-term growth, we are currently forecasting our diluted earnings per share in the range of $2.50 to $2.90 for the full year. Consistent with our focus on long-term profitable growth, we have made the decision to change our guidance practices. Going forward, we will no longer issue quarterly guidance. As a transition, we will provide our outlook for the first quarter, but will not provide a quarterly outlook in subsequent earnings calls or press releases. We will continue to update our annual outlook each quarter.

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Our 2019 gross profit margin is expected to increase modestly from the levels we realized in 2018. We expect SG&A, including freight and distribution expense, will increase 3% to 5%, driven by inflation and investments in growth initiatives. For the full year, we are forecasting a tax rate of 22.5%. This results in forecasted net income per diluted share of $2.50 to $2.90 for the full year, primarily driven by improved productivity and cost savings, not having the negative impact of our 2018 BST launch costs and modest volume growth. We expect free cash flow will be in the range of $130 million to $140 million, including $65 million to $75 million of capital expenditures.

Okay. Let's shift to the first quarter. As Jeff noted, demand activity slowed late in the fourth quarter and in the early part of this year. As a result, we expect consolidated first quarter organic sales to be down 2% to down 4%, or down 3% to 5% when including the effects of divestitures. Office furniture sales are expected to be down 3% to 5% organically, or down 5% to 7% in total. Sales in our supplies-driven business are projected to be down 3% to 5%. We are forecasting sales in our contract office furniture business to be down 3% to 5% organically, or down 7% to 9% in total. We expect hearth sales to be flat to up 3%, with new construction sales down 2% to up 1%, and sales of retail hearth products up 3% to 6%.

Gross profit margin for the first quarter is expected to be approximately 35%. SG&A, which includes freight and distribution expense for the first quarter, is expected to be $165 million to $170 million. Our estimate of net income per diluted share for the first quarter is in the range of minus $0.02 to plus $0.04. Jeff?

Jeffrey Lorenger -- President and Chief Executive Officer

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

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

Questions and Answers:

Operator

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

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

Good morning.

Jeffrey Lorenger -- President and Chief Executive Officer

Good morning, Budd.

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

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

Jeffrey Lorenger -- President and Chief Executive Officer

Yeah, Budd. Appreciate the question. Beginning in kind of November, we saw a pretty noticeable slowdown, primarily in the supplies-driven business and in the hearth business. That's -- we believe it's broad-based concerns on the economy, we were kind of hitting at that time, slowing new home construction, some trade issues, the government shutdown et cetera, et cetera. But it was primarily in the supplies business and the hearth business.

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

So not in the contract office? Saw contract -- that stayed reasonably --

Jeffrey Lorenger -- President and Chief Executive Officer

Yeah, that stayed reasonably. In the contract space, as you recall, we said in the third quarter we had some projects pushed into the fourth. And we saw that hit and deliver in the fourth. Overall, I'd say the contract activity is pretty solid, continuing to see new projects come into the funnel. So that was not as noticeable -- maybe slightly ticked, but that was not as noticeable as the supplies and the hearth.

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

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

Jeffrey Lorenger -- President and Chief Executive Officer

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

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

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

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

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

Jeffrey Lorenger -- President and Chief Executive Officer

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

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

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

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

Offset by price?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yeah, which will be offset by price, exactly.

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

Alright.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

And we do expect to see the benefit of steel mainly in the back half. If you remember, our contracts on steel lag the spot price by six months. So we'll still see some inflation in the early part of the year.

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

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

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

So steel is one. So there are other commodities that are abating, so that should get you net zero?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

We are going to see some inflation, Budd. Steel will be part of that and we're going to offset that with price realization to be net zero.

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

Okay and tariffs -- if tariffs went away, like I think they -- there is a reasonable likelihood they will, what would happen?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yeah, if tariffs went away, let's say, at the end of March, we would have seen about $5 million of impact from the tariff. So you'd add that $5 million to the $55 million to $65 million of inflation we already have, and we would see a total impact of $60 million to $70 million, which we (multiple speakers).

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

$5 million a quarter then, right?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yeah, at 10%.

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

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

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

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yeah, that -- there is about $12 million really noise in the fourth quarter. So we were expecting it to be around $60 million for the year, so we're roughly saying $16 million -- $15 million a quarter.

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

Now that makes sense. Okay. All right, thank you. I'll let others ask questions. Thank you for taking mine.

Jeffrey Lorenger -- President and Chief Executive Officer

Thanks, Budd.

Operator

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

Matt McCall -- Seaport Global Securities LLC -- Analyst

Thanks. Good morning, everybody.

Jeffrey Lorenger -- President and Chief Executive Officer

Good morning, Matt.

Matt McCall -- Seaport Global Securities LLC -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Matt McCall -- Seaport Global Securities LLC -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Matt McCall -- Seaport Global Securities LLC -- Analyst

Okay. So the -- should I just use that 4% to 5% across the two segments, and equally across the businesses, or I think there some mix kind of skewed toward -- toward, say, supplies rather than contract, but how should I think about the 4% to 5% across the different businesses?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Matt McCall -- Seaport Global Securities LLC -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yeah. So let's maybe unpack this a little bit. So we have to kind of settle on what that tariff assumption is. If the tariff is 25% for rest of the year, we have that 4% to 5% of price.

Matt McCall -- Seaport Global Securities LLC -- Analyst

Okay.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

So we'd be maybe above the midpoint in that case. If the tariff stays at 10%, we probably have more like 3.5% of price and if it goes to zero, it will be closer to 3%.

Matt McCall -- Seaport Global Securities LLC -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Matt McCall -- Seaport Global Securities LLC -- Analyst

Yeah yeah, segment. So what are you assuming for furniture and for contract and supplies and new -- and do you just have any volume details there is what I'm trying to get to?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

You're saying, excluding price, I think is what you are getting after (multiple speakers).

Matt McCall -- Seaport Global Securities LLC -- Analyst

Correct, volume. Yep.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yeah, it's low single-digit growth basically for all our markets.

Jeffrey Lorenger -- President and Chief Executive Officer

Yeah.

Matt McCall -- Seaport Global Securities LLC -- Analyst

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

Jeffrey Lorenger -- President and Chief Executive Officer

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

Matt McCall -- Seaport Global Securities LLC -- Analyst

So what is it that drove the 14%, Jeff, or what's been behind some of that stronger growth?

Jeffrey Lorenger -- President and Chief Executive Officer

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

Matt McCall -- Seaport Global Securities LLC -- Analyst

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

Jeffrey Lorenger -- President and Chief Executive Officer

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

Matt McCall -- Seaport Global Securities LLC -- Analyst

Okay, thanks guys.

Jeffrey Lorenger -- President and Chief Executive Officer

Thanks, Matt.

Operator

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

Kathryn Thompson -- Thompson Research Group -- Analyst

Hi, thank you for taking my questions today. First, focusing on just the transportation and logistics, has been a challenge throughout 2018, but the feedback we're getting from the library (ph) of our industry contacts is that, that you've seen an improvement in trends in terms of availability, while pricing may not -- necessarily has improved with the cost structure. What are you seeing in your business and how should we think about this in 2019?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Kathryn Thompson -- Thompson Research Group -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Kathryn Thompson -- Thompson Research Group -- Analyst

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

Jeffrey Lorenger -- President and Chief Executive Officer

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

Kathryn Thompson -- Thompson Research Group -- Analyst

Yeah. And so...

Jeffrey Lorenger -- President and Chief Executive Officer

I mean hearth...

Kathryn Thompson -- Thompson Research Group -- Analyst

Go ahead.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

But the new home construction element responds very directly to that macroeconomic factor, but maybe not as much to others.

Kathryn Thompson -- Thompson Research Group -- Analyst

Okay, perfect. That's helpful. Thank you very much.

Jeffrey Lorenger -- President and Chief Executive Officer

Thank you.

Operator

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

Greg Burns -- Sidoti & Company LLC -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Greg Burns -- Sidoti & Company LLC -- Analyst

Okay. Okay. And then in terms of -- the gross margin for the fourth quarter came in a little bit lower than expected. And I think what you were kind of aiming for at the beginning of the year, also you know the gross margin didn't expand as much as expected, but you completed a lot of your cost savings projects and passed along some price increases. So I just wanted to kind of understand the divergence in your view earlier this year, where you thought gross margin to (ph) end up and kind of what you're guiding to for next year. What are the offsets to some of the positives you're still hoping to drive? Thanks.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Greg Burns -- Sidoti & Company LLC -- Analyst

Okay. Thank you.

Operator

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

Jeffrey Lorenger -- President and Chief Executive Officer

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

Operator

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

Duration: 30 minutes

Call participants:

Jack D. 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

Matt McCall -- Seaport Global Securities LLC -- Analyst

Kathryn Thompson -- Thompson Research Group -- Analyst

Greg Burns -- Sidoti & Company LLC -- Analyst

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