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HNI Corp (NYSE:HNI)
Q3 2019 Earnings Call
Oct 24, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. [Operator Instructions]. Thank you, Mr. Herring, you may begin your conference.

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

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.

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Good morning. We will see 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 [Phonetic] 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 expect it that level of growth. In the mid-August time-frame, we saw small-to-mid-size project demand soften. This area of the market began seeing delays at it above normal rate. The delays appear to be a reaction of macroeconomic uncertainty, customers' taking a wait and see approach. Our win rate in this area continues to improve, indicating we are competing well. Large projects and 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 at a 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. Both 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 in the -- 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.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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 the price realization and productivity net of investments were partially offset by lower sales volume and higher input costs.

Jeff?

Jeffrey Lorenger -- President, Chief Executive Officer and Director

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 a retail ramp -- ramp up to drive improved Hearth results in 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 details.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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?

Jeffrey Lorenger -- President, Chief Executive Officer and Director

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.

Questions and Answers:

Operator

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

Matt McCall -- Seaport Global Securities LLC -- Analyst

Thanks. Good morning, everybody.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Morning, Matt.

Matt McCall -- Seaport Global Securities LLC -- Analyst

So, I want to apologize, first, I was not able to get into the call until after Jeff spoke, so 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.

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Okay. You're talking about the contract, I take it [Phonetic] , Matt.

Matt McCall -- Seaport Global Securities LLC -- Analyst

I am-Yes.

[Speech Overlap]

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Yeah, yeah. Okay. Yeah, in about mid-August, we started to do -- see what we classify as kind of small to mid-size projects delay at a rate that was 2 times to 3 times our normal rate, we always have some delay, but that was -- that was at a higher rate than normal. And if you think of 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 of businesses get to -- want to take a wait and see approach, when there is some uncertainty, they'll do so. Day-to-day business has held in reasonably well, as customers continue to pursue their daily operating needs, in the larger projects, they have also continue at relatively normal levels.

When you think about the large projects, the longer-term cycle of investment required for those make some 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 mid-size projects, though it hasn't returned to the level that was end of the second quarter, beginning of the third quarter.

Matt McCall -- Seaport Global Securities LLC -- Analyst

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, or was there anything that was funky about it, or was it a pretty consistent trend?

Jeffrey Lorenger -- President, Chief Executive Officer and Director

It was pretty consistent, Matt. I think we didn't -- it wasn't a particular region. It was -- we've done a lot of -- like I said, we've talked to a lot of -- our sales force is heavily engaged, I guess their win rates still is strong and improving. It was really kind of across the board, 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 got to roll on the big stuff, because we're committed and the day-to-day business, we got to roll on, because it's not quite as heavy of 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 in the people we talk to, say, and look, we're just -- would keep a little dry powder here for a bit and see how this develops. And like I said, it's come back some. And we're still going to see some growth in that, 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.

Matt McCall -- Seaport Global Securities LLC -- Analyst

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 the project types are different, but are there any things that would lead you to believe that part of the business is seeing that same type of macro pressure.

Jeffrey Lorenger -- President, Chief Executive Officer and Director

No. You know Matt, the supplies business -- you recall, it was pretty dynamic early in the year and when that -- and it's actually stabilized and the order levels, customers seem to be starting about mid-summer, we started to see that, the early year we had some pull back. But now we've started to see that come back.

And it 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 that's been driven by a lower comparable. But as far as the crossover between the two, they do operate -- they do operate quite differently in many respects.

Matt McCall -- Seaport Global Securities LLC -- Analyst

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

Jeffrey Lorenger -- President, Chief Executive Officer and Director

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.

Matt McCall -- Seaport Global Securities LLC -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Yeah. For the third quarter, we did have favorable price/cost, Matt. I think it really was driven by a little bit softer input costs and some timing related to when those costs 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 for third quarter and also expanded margin.

Matt McCall -- Seaport Global Securities LLC -- Analyst

And what's baked into the guidance for Q4?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Matt McCall -- Seaport Global Securities LLC -- Analyst

Okay. And then, the last question I have, maybe a jump over to Hearth 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 [Phonetic] outlook or -- you put near-term and as we move out to next year?

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Yeah, Matt. I think we're encouraged and [Phonetic] the new construction, we're seeing improvements in single family. The last three consecutive positive numbers and permit data, in the last 8 -- I'm following 8 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 the nice growth on our retail products business. And that's also consistent what we're hearing from our key channel partners of the market as well.

Matt McCall -- Seaport Global Securities LLC -- Analyst

Okay, perfect. Thank you all.

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Thanks Matt.

Operator

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

Greg Burns -- Sidoti & Company -- Analyst

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 of $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?

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Thanks, Greg. No, that's a 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.

Greg Burns -- Sidoti & Company -- Analyst

And then in terms of your supplies business, [Indecipherable] there's some disruptions with the wholesale channel and you're making investments. [Indecipherable] directly, quick ship 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 fulfillment perspective where you want it to be, or is there any other improvements you can make?

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Yeah, Greg. I think where we're at is we've made those investments and they're delivering as expected. The supplies channel, in general with the wholesalers, is 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're -- 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.

Greg Burns -- Sidoti & Company -- Analyst

Thanks. And so, it sounds like you said that channel stabilized a little bit, but there has been some consolidation. So, do you see any maybe risk of another step lower going forward as sellers [Phonetic] and some of the other customers rationalize their businesses following those [Indecipherable] ?

Jeffrey Lorenger -- President, Chief Executive Officer and Director

You know, 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 claiming, it won't happen, but I don't see anything like I said, I think it's pretty steady as it goes right now.

Marshall Bridges -- Senior Vice President and Chief Financial Officer

And just to add a little color, Greg. The wholesalers as a group are -- they are 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 2 years ago.

Greg Burns -- Sidoti & Company -- Analyst

Okay. Thanks.

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Thanks.

Operator

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

Alessandra Jimenez -- Raymond James & Associates, Inc. -- Analyst

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?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Alessandra Jimenez -- Raymond James & Associates, Inc. -- Analyst

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

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Yeah. And that's a little bit in the [Indecipherable], but we kind of tend to look at that as about $150,000 to $400,000 [Phonetic] net project size.

Alessandra Jimenez -- Raymond James & Associates, Inc. -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

There's been no significant change in lead times.

Alessandra Jimenez -- Raymond James & Associates, Inc. -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

No. We talked about this productivity net of investments. 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 are 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.

Alessandra Jimenez -- Raymond James & Associates, Inc. -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Alessandra Jimenez -- Raymond James & Associates, Inc. -- Analyst

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

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Thank you.

Operator

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

Steven Ramsey -- Thompson Research Group -- Analyst

Thanks for taking my questions. 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?

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Yeah. 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's been -- it has been growing nicely. And it's largely complementary to our existing core business, it primary reaches a customer segment that we previously did not reach. Other questions?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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

Steven Ramsey -- Thompson Research Group -- Analyst

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

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Steven, 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 I think about incremental margins is pretty similar to the other parts of the supplies business.

Jeffrey Lorenger -- President, Chief Executive Officer and Director

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

Steven Ramsey -- Thompson Research Group -- Analyst

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

Jeffrey Lorenger -- President, Chief Executive Officer and Director

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, we're trying to do and there is some inflationary there, but we're -- inflationary pressures, we're able offset that with the productivity and lower costs in general.

Steven Ramsey -- Thompson Research Group -- Analyst

And then, on kind of switching to Hearth, I guess I was surprised and maybe don't quite understand from the talk on the call thus far. How Hearth was able to show improvements 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?

Marshall Bridges -- Senior Vice President and Chief Financial Officer

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 under way to add growth and we did a nice job of managing our costs in the quarter, we're 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.

Steven Ramsey -- Thompson Research Group -- Analyst

Excellent. Okay. And then, lastly for me, I guess on the international front, how much does international composed 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?

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Yeah. That's -- today that business represents about 7% of office furniture and 5% of the total portfolio. The platforms are growing, growing nicely. We grew that business last year at the rate of 11%. It's growing 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 end-market business and also our HNI global account business that works closely with those teams.

Steven Ramsey -- Thompson Research Group -- Analyst

Perfect, thank you.

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Thank you.

Operator

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

Jeffrey Lorenger -- President, Chief Executive Officer and Director

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.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

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

Jeffrey Lorenger -- President, Chief Executive Officer and Director

Marshall Bridges -- Senior Vice President and Chief Financial Officer

Matt McCall -- Seaport Global Securities LLC -- Analyst

Greg Burns -- Sidoti & Company -- Analyst

Alessandra Jimenez -- Raymond James & Associates, Inc. -- Analyst

Steven Ramsey -- Thompson Research Group -- Analyst

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