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.

Thank you. Good morning. I'm 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 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.

Good morning, everyone. We'll 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 continued to be dynamic with pockets of uncertainty, but I feel good about our momentum and the opportunities in front of us. Let me give some color on how each of our main businesses performed in the first quarter, starting with the supplies-driven office furniture business, which was down nearly 8%. The decline in supplies was driven by the transactional portion of that business, which is typically a small order that processes on a quick cycle. Transactional order started the year very slow and generally improved through the quarter. The other parts of the supplies-driven business are positive with good growth in e-commerce and small-to-midsized 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 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'll turn it over to Marshall for some additional financial details on the first quarter. Marshall?

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?

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 that they need to invest in their office spaces to attract and retain the best and brightest. We believe these factors will drive improved demand as we progress through the year. In our hearth business, we also see signs of a stronger second half. Our full year result in hearth has tempered slightly as single-family housing permits have been softer than expected so far this year. It is our belief, however, that the market will improve in the second half as the long-term demographics and supply of housing continues to support new home construction growth. I would like to point out that we expect to generate all of our annual profit improvement in the back half of the year consistent with last year. This is being driven by a combination of improving demand, cost savings, and investment timing along with lower inflation levels in second half. I am confident in our strategies and our ability to grow profit for the year. I'll now turn it back to Marshall to provide some additional financial details. Marshall?

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're expecting sales in our supplies-driven business will be up 2% to 6%. In our contract office furniture business, we continue to expect organic sales will be up 3% to 7%. When including the impacts of closures in 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're forecasting sales in our hearth business to be flat-to-down low-single digits. Jeff?

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.

We'll 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.

Good morning. Thank you for taking my question. 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…

Yes, that's correct Budd.

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

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 product 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 the prior year. We're still ramping up on our productivity and expect that to be again offset with investments in the quarter versus prior year, and the other product drivers more or less are flat.

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 primarily?

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

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

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

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?

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

Okay. And does that happen pretty much ratably through the year?

Yeah, 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.

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

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

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

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

Thank you. Good morning, everybody.

Good morning, Matt.

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

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

Flat meaning price is equal to cost in Q4.

Yes.

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

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

Okay. And then the no-BST, what was the BST, I probably got my notes somewhere around $100 million in my brain. So what's the BST hit last year.

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

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 in these things. Can you me understand what that is and maybe it's hard that the investments that you're talking about that are netting out some of the benefit of productivity and cost savings.

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 reasons and there's more assets on the balance sheet in general for that.

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

Yeah 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's no single big item there and we do expect that to peak in the second quarter and then kind of ramp down as we get into the back half of the year.

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 you know, but we've also ramped up the digital and analytics investments as well.

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

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

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

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

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

Yes. Correct.

Okay. All right. Thank you all.

Thank you.

Your next question comes from Stephen Ramsay with Thompson Research Group. Please go ahead. Your line is open.

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

Yeah 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. The slowing housing activity, the permits and starts are -- will have an impact on our business. We're expecting that to be more of a headwind in the second quarter than in the first as Jeff mentioned on the previous question from Matt that we do expect that to rebound in the second half.

Got it. Thank you. And just one more for the -- in Q1 you mentioned demand was growing each month kind of compounding, if you just kind of provide some more details on the level. 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. We appreciate it.

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

Understood. Thank you.

Thank you.

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

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.

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