Good morning. My name is Rob, and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation Third Quarter Fiscal 2019 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will 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 third 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.

Good morning. We will share our assessment of the third quarter and provide some thoughts on our outlook for the rest of the year. We'll then open up the call for questions. Our teams delivered strong results in the third quarter. We grew earnings per share 20% and generated our highest quarterly operating profit since 2015. We did this while continuing to confront dynamic market conditions and inflationary pressures. We continue to see a range of demand conditions. Our supplies-driven office furniture business is showing increased stability. Unlike the first six months of the year, we did not see major demand volatility in the third quarter. That market continues to evolve, but our trajectory is improving. One of the primary drivers of improvement is our e-commerce efforts, which continue to gain momentum and drive profit. In our contract business, we drove strong third quarter growth with organic sales up 12%. Given our second quarter order momentum and ending backlog, we expected that level of growth. In the mid-August timeframe, we saw small to mid-size project demand soften. This area of the market began seeing delays at an above-normal rate. The delays appear to be a reaction to macroeconomic uncertainty. Customer’s taking a wait-and-see approach. Our win rate in this area continues to improve indicating we are competing well. Large projects in day-to-day business have remained relatively strong. In total, we are seeing -- we are still expecting fourth quarter contract growth, but it will be lower than previously expected. In hearth we had a solid quarter. Hearth profit increased 8% on sales growth of 1%. Growth in new construction was partially offset by a small decline in retail products. Most of these businesses are showing positive recent trends. In new construction, we have seen three consecutive months of housing permit growth after eight months of decline. And our retail business is in the midst of its seasonal ramp-up and generating growth. In summary, our teams drove strong profit growth in the third quarter, while dealing with a wide range of conditions. With that, I will turn it over to Marshall for some additional financial details.

Third quarter consolidated organic sales increased 3.1% versus the prior year. Including the impacts of closures and divestitures sales were up 2.3%. In the office furniture segment, sales increased 3.8% organically. Within office furniture sales in our supplies-driven business decreased 2% and sales in our contract business were up 12% organically. Hearth segment sales increased 0.9%. New construction grew 2.1% and retail products were down 0.4%. Non-GAAP net income per diluted share was $1.08 compared to $0.90 in the third quarter of 2018. Compared to last year non-GAAP EBIT increased $7 million. The benefits from price realization and productivity net of investments were partially offset by lower sales volume and higher input costs. Jeff?

Thanks, Marshall. We expect to drive profit growth in the fourth quarter despite the slower contract environment I noted earlier. There are two key drivers to the quarter. First, we expect to drive $6 million to $8 million of benefit from productivity and cost savings net of investments. This reflects our team's disciplined approach to driving broad-based improvements. Second, we are expecting consolidated organic sales to grow in the mid-single-digit range. Similar to the third quarter, we are seeing a range of demand conditions. We expect supplies to grow low double-digits in the fourth quarter due to e-commerce momentum and lower prior year comps. Contract will be slower but we still expect to generate growth in the low to mid-single-digit range. And finally we are expecting our retail ramp, ramp-up to drive improved hearth results and the fourth quarter sales growth will be in the low to mid-single digits. I'll now turn it back to Marshall to provide some additional financial details.

Thanks, Jeff. In the interest of clarity, I'm going to provide both our full-year outlook and what that outlook implies for the fourth quarter. Our full year forecasted non-GAAP net income per diluted share has narrowed and is now in the range of $2.50 to $2.60. This implies non-GAAP EPS of $1.02 to $1.12 for the fourth quarter. We now expect full year consolidated organic sales to be up approximately 1%, which assumes fourth quarter consolidated organic growth of 5% to 8%. The impacts of closures and divestitures will reduce growth approximately 100 basis points for the year. In our supplies-driven business, we are expecting sales will be flat to down 1% for the year. This implies low double-digit growth in the fourth quarter. In our contract office furniture business, we expect full year organic sales will be up 3% to 4% with fourth quarter growth in the low to mid-single-digit range. In contract, the impacts of closures and divestitures will reduce our full year growth by approximately 300 basis points. In hearth, we expect sales for the year to be up approximately 1%, which implies fourth quarter growth in the low to mid-single digits. Jeff?

Thanks, Marshall. Our teams continue to manage well and I would like to thank all of our HNI member owners for their continued commitment and hard work. With those comments complete, I'll open it up for questions.

[Operator Instructions] And your first question comes from the line of Matt McCall from Seaport Global. Your line is open.

Thanks. Good morning, everybody.

Good morning, Matt.

So I'll apologize first. I was not able to get in the call until after Jeff spoke, so I didn't hear much. So there might be some things that you have to repeat. But I guess the first one you talked about kind of the cyclical softness or the macro uncertainty I think is the way you referenced it. Can you talk about maybe how that transpired? What's showing up to give you that indication? And then -- well, I'll stop there and then -- and I've got a follow-up on that one.

Okay. You're talking about contract I take it, Matt -- more color on that?

I am, yes. Yes.

Yeah, yeah, yeah. Okay. Yeah. In about mid-August, we started to see what we classify as kind of small to midsize projects delay at a rate that was two to three times our normal rate. We always have some delay, but that was at a higher rate than normal. And if you think about it, we've got a lot of exposure to that. That's historically been one of our main areas. And those projects are more susceptible to uncertainty-driven delays. They're not quite -- they're not so large where they're cost-prohibitive, but they're large enough that if businesses get a -- we want to take a wait-and-see approach, when there's some uncertainty they'll do so. The day-to-day businesses held in reasonably well as customers continue to pursue their daily operating needs and the larger projects have also continued at relatively normal levels. When you think about the large projects the longer-term cycle of investment required for those makes it more difficult and costly to delay. So, what I'd say Matt is that started about mid-August. As the quarter has progressed, we have seen some recovery in the small to midsize projects, though it hasn't returned to a level that was end of the second quarter beginning of the third quarter.

And was there anything when you think about those projects, any consistency across customers? Was it -- I mean obviously, you're making a broader statement, so there must have been a bit of consistency. But can you talk about maybe end markets project types? Was there anything that was funky about it? Or was it a pretty consistent trend?

It was pretty consistent, Matt. I think we didn't -- it wasn't a particular region. It was --we've done a lot -- like I said, we've talked to a lot of -- our sales force is heavily engaged. I guess our win rate still is strong and improving. It was really kind of -- across the board it felt like a bit of a pause at that level of project where I just got the sense businesses were kind of saying, look, we're going to roll the big stuff because we're committed and the day-to-day business we've got to roll on, because it's not quite as heavy of a profile investment. But this next tranche of some of this mid-tier stuff, let's slow down a bit. Let's take a wait-and-see approach. And it was kind of broad-based and appears to be macro driven and the people we talk to are saying, look, we're just -- we're going to keep a little dry powder here for a bit and see how this develops. And like I said, it's come back some. We're still going to see some growth in the contract business in the fourth quarter. It's just not at the rate it was just given this one segment of our business.

Yeah.

And so, just to make sure I understand -- this is within contract. So when you think about supplies and the trends there, what kind of -- I don't know if you kind of compare and contrast the supplies trends with what you just referenced from a contract perspective, is there -- are there any similarities to what you're seeing? I know that the project types are different. But are there any things that would lead you to believe that that part of the business is seeing that same type of macro pressure?

No. Matt, the supplies business you recall, it was pretty dynamic early in the year when that -- and it's actually stabilized. And the order levels customers seem to be -- starting about midsummer, we started to see that -- earlier we had some pullback, but now we've started to see that come back. And candidly it's about what we expected and the fourth quarter looks low double-digit growth. I mean some of that's been driven by e-commerce platform business and some of it is being driven by a lower comparable. But as far as the crossover between the 2 they do operate quite differently in many respects.

Right. And is it to the point where you're enacting plans or efforts to combat the pressures the macro pressures either topline from a cost perspective? Or is it not to that point, yet?

No. I think -- look Matt we are always -- we're diligent on our broad-based cost initiatives all the time and it's -- I wouldn't say, it's at that point. We're still investing in the business. We like the platforms we have. We're still seeing growth. And so no this isn't a -- it's not at that point. Like I said, the day-to-day business even on the contract side is strong and the large projects are relatively stable as well. So we're not doing anything evasive. Put it that way.

Got it. That's actually really encouraging to hear. So, maybe a couple of quick ones. Marshall, can you talk about the price-cost environment and overall pricing, the mix impacts, tariffs just some of the puts and takes from a margin perspective in the quarter?

Yes. For the third quarter we do have favorable price-cost, Matt. I think it really is driven by a little bit softer input costs and some timing related to when those cuts hit including the tariff. So we were approximately $15 million favorable in the third quarter on price-cost. So we are seeing a variety of other factors, but we did increase our profit in the third quarter and also expanded margin.

And what's baked into the guidance for Q4?

For the fourth quarter, we're expecting price-cost to be positive in the $8 million to $9 million range.

Okay. And then the last question I had maybe jump over to hearth for a second. Maybe give us your updated thoughts some trends you're seeing the conversations you're having with some of the builders what would be your kind of new outlook and your R&R outlook or near term as we move out to next year.

Yes. Matt I think we're encouraged in the new construction. We're seeing improvements in single-family, the last three consecutive positive numbers in permit data the last -- following eight months of decline. So we're expecting modest growth in new construction for the fourth. On the retail side, we're seeing an active remodel market which we expect to translate to nice growth on our retail products business. And that's also consistent with what we're hearing from our key channel partners and the market as well.

Okay. Perfect. Thank you all.

Thanks Matt.

And your next question comes from the line of Greg Burns from Sidoti. Your line is open.

Hi, just in terms of the $6 million to $8 million you're targeting in cost savings for the fourth quarter you had a number a $10 million to $15 million number for the second half of the year. Is that incremental to that? Or is that part of that $10 million to $15 million?

Thanks Greg. No that's part of it. And as we sit now we've narrowed that range to $10 million to $12 million for the full year and that includes the $6 million to $8 million for the fourth quarter.

And then in terms of your supplies business I know, there's some disruptions with the wholesale channel and you're making investments also directly could shift. And other things like that. So, where do you stand in terms of those investments? Is the supplies business from a go-to-market or customer fulfilment perspective where you want it to be? Or is there any other, improvements you can make?

Yeah Greg, I think, where we're at is we've made those investments. And they're delivering as expected. But the supplies channel in general with the wholesaler has just kind of stabilized recently. So we're kind of -- we like where we're at, but we're obviously always tuning our model to best meet customers, where they want to be met, and how they want to be met. And so, we did the first tranche, I would say. And we like how that has played out. And at the same time, the dynamics in that channel have stabilized. And so, we continue to work well with our partners there, and, to attack the market on both fronts, so to speak.

Thanks. And so it sounds like, you said that channel stabilized a little bit, but there has been, some consolidations. Would you see any maybe risk of another step lower going forward as -- and some of your other customers, rationalize their businesses following those?

I think we've seen some of that already, Greg. And there's always risk out there. What I would say is, as people consolidate that, sometimes that's a benefit as well, because that stuff rolls into a platform, that's got more power, more just market access and more capability. So, it kind of depends. I can't see a big disruption at this point. But I'm not -- I mean, it won't happen. But I don't see anything -- like I said, I think, it's pretty steady as it goes right now.

And just to add a little color Greg, the wholesalers as a group are -- they're much smaller part of our business these days. So it's less than 5% of our total consolidated sales. So the impact of any unforeseen event might be smaller, now than it was two years ago.

Okay. Thanks.

And your next question comes from the line of Budd Bugatch from Raymond James. Your line is open.

Good morning. This is Alessandra Jimenez on for Budd Bugatch. Thank you for taking my questions. I just wanted to quickly follow-up on the softness in the contract business. What was order growth during the third quarter?

Yes. Our third quarter contract business was up 12%, versus prior year.

Okay. And then can you define the small to midsize project size, like approximately what was that?

Yeah. And that's a little bit in the ID holder. But we kind of tend to look at that as about $150,000 or $400,000 net project size.

Okay. And then could you define the lead times you're experiencing now versus what they typically are?

There's been no significant change in lead times.

Okay. And then, are there any new incremental investments to new products? And if so, what kind of size of that investments?

No. We talked about this productivity net of investment. So we're on track to spend approximately $15 million to $20 million in investments this year. They're not different though. It's the same investments we've been talking about all year. And they're in a wide range of categories including new products and other go-to-market initiatives. Digital and data analytics is a big category as well as operational improvement.

Okay. And then do you have any gauge on 2020 on the incremental investments there?

We don't have a view yet of 2020. Clearly, we're going to need to keep investing in our business. We don't have a number for you at this point.

Okay. Thank you so much and good luck on the balance of the year.

Thank you.

Your next question comes from the line of Steven Ramsey from Thompson Research. Your line is open.

Thanks for taking my question. I guess to start in supplies how much of supplies is now e-commerce-driven? And I guess kind of on what's been achieved to date and where it's going what is the e-commerce percentage of contract sales? And then will the margin structure fundamentally get better as the shift plays out? Or is it already fundamentally better?

Yes. A lot there. Let me kind of take them in order. First of all, e-commerce it today represents about 5% of our total business. It has been growing nicely and it's largely complementary to our existing core business. It primarily reaches a customer segment that we previously did not reach. Other questions?

Steven it is primarily almost completely within the supplies numbers that we quote, so it's not in contract.

Got you. Got you. And so on the supplies business solely is the margin -- are margins better with this e-commerce channel?

The margins are similar. The business model is different of course. And that's a rapid growth business that we're clearly investing in, but if you think about incremental margins it's pretty similar to the other parts of the supplies business.

Yes, and I think we're investing heavily right now in that business too. We're growing it. We saw 30% growth rates in the first half of the year and we continue to -- it will continue to contribute. And those investments will lever even more as we go on.

Excellent. And then on freight distribution costs down slightly while sales up slightly, how much of that is just inflation in transportation was so much worse last year? Or is this a fundamental shift in the business?

I think we're making really good progress on our productivity initiatives. In the third quarter a really large chunk of our productivity was in freight and distribution. So, I think it reflects what we're trying to do. And there's some inflationary there, but we're -- inflationary pressures. We have offset that with the productivity and lower costs in general.

And then on -- kind of switching to hearth. I guess I was surprised and maybe don't quite understand from the top on the call thus far how hearth was able to show improvement kind of prior to permits and starts picking up. Maybe just kind of talk to how your improvement led what kind of the macro data is showing.

We were up 2.1% in new construction in hearth during the quarter and that includes some price realization. So, if you think about non-price growth, we were pretty similar to the permit data. So I'm not sure that we're really much different from the overall market. Now we have a lot of initiatives underway to add growth and we did a nice job of managing our costs in the quarter so we were able to expand profit in that business. But top line I think is tracking pretty much with the market at this point maybe a little bit better because of our initiatives.

Excellent. Okay. And then lastly for me. I guess on the international front, how much does international compose of contract sales? And I guess I'm interested to know current demand, but would be more interested to learn kind of where you are in the long-term build-out of the international business and kind of where you see it going over the medium to long-term?

Yes. Today that business represents about 7% of office furniture and 5% of the total portfolio. The platforms are growing nicely. We grew that business last year at a rate of 11%. It's grown the same rate in the first half of this year 11% and we're seeing momentum accelerate in the back half. So we like those platforms both in PRC and in India and investments continue to be made there. We have strong momentum. And we like the prospects of both those platforms to support both in-market business and also our HNI global account business that works closely with those teams.

Perfect. Thank you.

Thank you.

There are no further questions at this time. Mr. Lorenger, I turn the call back over to you for some closing remarks.

Well thank you. We appreciate everyone's continued interest in HNI and for spending some time with us this morning. Have a great rest of your day. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.