Good morning. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the HNI Corporation Fourth Quarter and Fiscal Year 2020 Conference Call. [Operator Instructions] Thank you. Mr. McCall, you may begin your conference.

Good morning. My name is Matt McCall, I'm Vice President, Investor Relations and Corporate Development for HNI Corporation. Thank you for joining us to discuss our fourth quarter of fiscal 2020 results. With me today are Jeff Lorenger, Chairman, 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. Now, I'm pleased to turn the call over to Jeff Lorenger. Jeff?

Thanks, Matt. Good morning and thank you for joining us. Our members finished the challenging year by delivering another solid quarter. This past year, our members adapted, stayed agile, and kept the corporation strong in the face of challenging conditions as they continue to demonstrate what is unique about HNI. A great example of our strong 2020 performance was our cash flow generation. For the full year, we delivered $173 million of free cash flow, which was up $20 million or 13% from 2019. As a result, while our debt levels at the end of Q4 were unchanged year-over-year, we were able to fund $58 million of acquisitions, grow our cash balance $64 million, and paid $52 million in dividends in 2020. I would like to point out we have never cut our dividend. HNI has continuously paid a quarterly dividend since 1955 and we maintained it last year. We accomplished all of this while funding key investments and despite consistent top line pressure in our workplace furnishings segment through the final three quarters of the year. As we look forward, I'm optimistic about our enhanced competitive positions and ability to drive profit growth. We have two differentiated business segments, well positioned to benefit from a recovery of the cycle, secular trends, and HNI specific growth drivers. We have diversified revenue streams and clear opportunities to drive revenue growth and shareholder value. I would like to talk specifically about our residential building products segment for a moment. We are the market leader in fireplace and hearth products. We generate operating margins in the high-teens, and we are capturing strong growth in both the new construction and remodeling markets. While those markets have strong fundamentals, we have the opportunity to drive even greater growth by better connecting with homeowners and homebuyers…

Okay. Let's begin our first quarter outlook for the Residential -- beginning with our first quarter outlook for the Residential Building Products segment. For the first quarter, we expect year-over-year revenue growth rates in the mid-20% range. We continued to see strong market momentum, and as Jeff previously covered, we are positioned for sustained growth in this segment. Now let's shift to our outlook for Workplace Furnishings. Let me first say that pandemic-related uncertainty continues to limit our visibility in this segment. That said, we are currently seeing continued moderation in year-over-year revenue declines. This improvement is primarily being driven by our businesses focused on small to mid-sized offices. These trends indicate Workplace Furnishings revenue will decline at a year-over-year rate in the high-single digits to low-teens during the first quarter, that range includes the impact from the Design Public acquisition, which will add an estimated 2.5 percentage points to our first quarter growth rate for this segment. Let's move onto first quarter profitability. There are multiple moving parts to the first quarter profitability story. Overall, we expect to be profitable, but our current view is profit will be below the prior year pre-pandemic levels. On the positive side, we expect the first quarter to benefit from higher volume in Residential Building Products, broad-based cost savings put in place last year and our typical annual productivity gains. However, we expect lower Workplace Furnishings volume and rising input costs were more than offset these positives. Regarding input costs, recently we've seen rapid increases from steel, ocean freight and outbound freight, and generally, we expect a more challenging inflationary environment this year. We have implemented pricing actions, identified cost initiatives to offset these pressures over time, but expect unfavorable price cost in the first quarter. Finally some comments on our cash flow and balance sheet expectations. We ended the fourth quarter with $175 million of total debt which was unchanged from last quarter and prior-year levels. Our cash balance was $116 million which represents an increase of $64 million from the end of fiscal 2019. We expect to maintain a strong balance sheet throughout 2021, with leverage ratios in line with those seen in recent quarters. We also expect to continue generating strong free cash flow, which will provide ample capacity for continued investment, dividend payments and opportunistic M&A and buyback activity. I'll now turn the call back over to Jeff.

Thanks, Marshall. Before we take your questions, I want to provide some highlights on our ESG actions, many of which have been ongoing for multiple years. In 2018, we published our initial Corporate Social Responsibility report, which introduced our ESG goals. Since then, we have achieved our 10% energy reduction goal, began sourcing 100% renewable electricity which reduced our Scope 1 greenhouse gas emissions by over 35% and we converted over 90% of waste away from landfills at two of our facilities. We also became a signatory to the UN Global Compact and joined RE100. We set aggressive science-based carbon emission reduction goals aligned with the 2015 Paris Agreement and annually we donate 1% of our pre-tax profit to improve the quality of life in the communities in which we operate. Additionally in 2019, I've signed the CEO Action for Diversity and Inclusion pledge and we strengthened our initiatives to ensure HNI's a welcoming community for everyone, where we celebrate our members unique characteristics and talents. In each of the last three years, we have been recognized by women onboards and by the women's form of New York for the diversity of our Board of Directors which is 50% female. We continue to ramp up our ESG initiatives and activities and expand our sustainability commitments. Later this spring, we are planning to issue an update to our CSR report, which will include aggressive new targets, along with recapping our recent accomplishments across a number of ESG areas. I would like to conclude by stating that I am extremely proud of and grateful for the efforts of all HNI members. As we look to 2021 and beyond, I have no doubt we'll be a stronger company because of what we experienced and how we performed this past year. We have two differentiated business segments, each well-positioned to benefit from a recovery of the cycle, secular trends and HNI specific drivers. We are well positioned to grow revenue, expand margins and generate cash over the long term. We will now open up the call to your questions.

[Operator Instructions] Our first question comes from Reuben Garner with The Benchmark Company. Your line is open.

Maybe we can start with the Building Products segment, I want to hit on the growth rate a little bit more. I don't think there has been many Building Products categories to put up that level of growth in either the fourth quarter or in your outlook for the first quarter. Can you kind of just talk about what you guys are seeing, is it exposure to certain faster growing markets, is there -- are your investments already paying off to accelerate growth in the hearth business?

Yes Reuben, I think it's a combination. I'd start with -- the cycle is encouraging, we're continuing to -- the demographics, well noted millennials are home buying, inventory's low, rates are low, consumer net worth is pretty strong, so we're benefiting there -- the secular trends are supporting, the nesting de-urbanization. So, our model has been very efficient and effective at capturing that business. And then, yes, we're starting to see initial responses to some of our investments, as I said we're getting more in touch with home buyers and homeowners as they consider new home purchases and/or remodel, and so that's point one for instance. In new construction markets, as I said, 66% of homeowners say they want a fireplace, yet only 40% have them. And in the remodel area, we estimate there are 30 million older gas stoves out there that need to be upgraded, and we know where many of those units are. So, we've started our insert selling model, it started a year ago. We've now got that deployed in 60 dealer showrooms, and insert sales are running well above our normal R&R rates. That's it for instance. So, I think it's kind of across the board and we think there is a lot of headroom there still.

Great. And then as a follow-up, we've noticed Google trends for fireplaces has kind of gone through the roof here in recent weeks and months, I think at record levels. Can you -- I guess a two-part question, one when we -- in the past when we've seen waves of cold weather and energy costs rising, it's been a benefit to a part of your business, are you guys already kind of seeing that? And I guess secondarily, a lot of the growth has been in the new construction area, has been in the south, Florida, Texas, Arizona markets like that, are -- does the recent kind of weather events, I guess provide, I hate to say opportunity with everything going on down there, but a chance for you guys to maybe penetrate some markets that may be otherwise wouldn't have been at the top of the list for a fireplace?

Yes. Sure, Reuben. The weather is certainly helpful, but if -- the product category you're alluding to that really responds well to cold weather is actually not growing as fast as the other product lines right now. So, I'm sure the weather has triggered people to think about a fireplace, but it's not the thing that we've seen five, six years ago where it really ran because of the cold and the high energy prices. In regard to opportunities in warmer geographies, I think there are opportunities there. I'm not sure we're seeing a lot of benefit from it right now. I think it's more upside as we move forward. People are just really digesting these recent cold events and may be reconsidering other options for their house.

Great. Thanks, Marshall. And then, shifting over to the Workplace business; certainly bouncing back I think quicker than we had anticipated, can you kind of parse out the small business -- you mentioned the smaller customers, smaller offices, is it looking -- I guess from a geographical perspective, are you guys benefiting from your presence in some of the smaller markets already or is it truly just the smaller office maybe bringing people back, it's a little easier to get a small office reopen than it is to have a Google headquarters return to normal?

Yes, I think sum of both. I think our positioning was in the channel and in some of the markets we're in, we're definitely benefiting. I think smaller businesses are more active, small medium businesses are more active. The de-urbanization trends are starting to kick in. We’re getting some interest in satellite offices, that kind of thing is still early but it's exposure, it's dealer network, it's channel, and it's -- I think it is ease of opening to some extent as well. It’s easier than the major urban centers for sure.

Ruben, that business has a different set of customers in general. Just got a little more education, a little more public sector exposure, and we're seeing some strength in those areas as well.

Perfect. And then if I could sneak one more in the Design Public Group acquisition, pretty interesting. It seems like it can help you guys across a number of different sort of categories that you're looking for. Can you -- any way to quantify what the business is today and maybe what targets are as you look out into the next few years?

Yes, I mean for the year, Reuben we're expecting it to add about $36 million to $38 million of revenue, so that's kind of how big it is. It's on a pretty high growth trajectory. So, we expect it to be larger than we move forward in other years.

Great. I'll pass it on and thanks guys. And congrats on the ended year and start to 2021.

Thank you.

Our next question is from Steven Ramsey with Thompson Research. Your line is open.

Hey, good morning. Maybe I'll start with the Resi segment supply chain challenges. Are supply chain challenges slowing down the time from orders being placed to orders being fulfilled, maybe what are you doing to manage or mitigate this dynamic? And is the time frame -- is there any projected time frame of the issues alleviating maybe in the next couple of quarters or beyond that?

Yes. Steven, in general, we're holding our own in the Residential Building Products segment in terms of, demand is certainly very strong. The supply chains are stressed a bit, but we're not seeing any major disruptions there. We're basically able to keep up with it particularly on the new construction side, it's basically -- lead times are pretty normal. We’re seeing a few products in the remodel retrofit side, maybe get a little bit longer, but still better than our competition. So, we're doing pretty well there, it's just not a major issue.

Yes, I would just -- I would tack on to that Marshall a bit, our operating model, if you already see and the way we operate. I mean, we definitely have been busy, but we have not builders -- new construction, they are waiting on other categories, not in our stuff. We've been able to capture that demand without a lot of stress at this point.

Excellent, okay. And then on Resi, investment spending up to take advantages of kind of that arbitrage of intention to purchase an actual purchasing, maybe is it a meaningful dollar increase in 2021 to continue to capture that opportunity? And then secondly investment for M&A as you continue to acquire dealers, is that still -- I know it's still a focus, is that likely to turn into meaningful investments in 2021?

Yes. On the operating expense side, Steven, we are continuing to invest and ramp up investments especially in the Residential Building Products segment. We expect to add $68 million of investment to the P&L this year, so it's about double what we had last year in these efforts to connect with the homebuyer and the homeowner. In terms of M&A, we're always looking for opportunities, I think our actions in 2020 speak to what -- where we're going that we acquired three smaller distributors and we continually look out for other ways to create value, but that's kind of the thing we'd be looking for.

Okay, great. And then thinking on Workplace e-commerce demand, is work from home still the main driver of e-commerce demand? Do you expect that to still be the case as things play out or do you think more contract type office demand will support the e-commerce channel in a more meaningful way going forward?

Yes. I think that work from home is clearly still I think in the early innings. What I would tell you as to this point though, we have got a pretty large position in the gaming segment. So call out why not work from home, it's from home, a lot of it, but it's not probably work from home, although maybe it will turn into that. So I think that it's -- that -- we're well positioned there, we got price point breadth, we've got product steps and we've got distribution reach and operating model reach. So we are in that business and where we were -- our e-commerce was strong before pre-pandemic and has accelerated post pandemic.

Great. That does it for me. Thanks.

Thanks.

Our next question is from Greg Burns with Sidoti. Your line is open.

Good morning. Could you just highlight or touch upon anything that you're seeing that gives you the optimism or confidence in that kind of broader reopening of the workplace as we get to the middle part of the second half of this year?

Yes, Greg, that's -- we are seeing some uptick in activity, I would say. The bid -- RFP requests, the conversations are starting to ramp up. I mean it's early, for sure, but that gives us -- go back three months even four months ago, the levels are higher than they were. And so we're -- we think that it's real and people are -- have been thinking about it and are starting to seriously engage in processes to re-enter and any time there is a re-entry point changes that's a furniture event and it's all over the map, I would tell you the conversations we're having, it's pretty clear that one -- we're going to avoid a one size fits all approach. I think every business enterprise is different, it's going to depend on their culture and how they create value for all their stakeholders, et cetera, but it's no doubt going to lead to a variety of outcomes for the office, all of which are -- we're well positioned for and those are furniture event, so that's good.

Okay. And obviously, a lot of moving pieces on the cost side of the equation. How much voided cost do you expect to come back in P&L in '21 and maybe if you could just -- you get the nice guidepost for the first quarter, but if we think about the full year, how should we think about incremental margins or the potential for margin improvement in '21?

Yes, Greg, last year in 2020, we reduced our cost by approximately $90 million, and of that $90 million, about $18 million of it had to do temporary measures, salary reductions and furloughs were the main contributors there. So that $18 million will come back -- but there is multiple moving parts, so that's not the only sort of cost or positive that will hit the P&L in 2021. So we're going to add to our productivity, we had a very strong productivity year in 2020 and we expect another good year in 2021 and we also have some other cost normalization around variable comp and insurance costs. So all that's going to net together, it's be roughly neutral at this point, of course we had the rising input cost to deal with. So it's kind of hard to see how well that plays out but the $18 million doesn't flow through directly, it goes into other multiple moving parts.

Okay. All right, thanks. And then what is the split of revenue in the residential building products between new construction and residential remodel?

It's approximately evenly split between the two.

Okay, all right. Thank you.

Our next question is from Reuben Garner with Benchmark Company. Your line is open.

Thanks, guys. Just a couple quick follow-ups, the -- Marshall you mentioned price cost would -- maybe be a drag in the first quarter, can you quantify that? And then do your pricing actions and your cost initiatives assuming the current levels of inflation kind of persist, do they get you back to neutral starting in the second quarter or is that more of a -- it will progress through the year kind of thing?

Yes. Ruben, we've seen these rapid increases especially steel basically double what it was last August, actually more than that. So we're going to see some negative price cost in the first quarter. And by the second half, our pricing actions and our cost initiatives will be in place, so we roughly neutral on a cost -- price cost basis, but we do expect some headwind in the first quarter and a little bit less during the second quarter.

Okay. And then, a follow-up to Greg's full year incremental margin or margin outlook. So a lot of those puts and takes come out to neutral does that mean whatever kind of volume growth we think that the business is going to have, we would apply kind of normal contribution margins maybe less the price cost pressures that you have in the first part of the year?

Reuben, that's a reasonable assumption. I would point out to you that, over the long term, our goal is to expand margins in Workplace Furnishings and depending on the volume situation that will hopefully begin in 2021. In Residential Building Products, our goal is so much to expand margin there, we talked about the investment levels and the growth opportunities we have. Our goal there is to really drive the top line. And hold the margins, very strong margins that we have.

Yes got it. Thank you Marshall. I appreciate it.

And there are no further questions at this time. Jeff Lorenger, I will turn the call back over to you.

Thank you. Thanks everybody for joining us today. Have a great day and a great week. See you next time.

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