HNI Corporation

Good day and thank you for standing by. Welcome to the HNI Corporation first quarter fiscal 2021 conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speakers today. Matt McCall, please go ahead.

Thank you. Good morning. My name is Matt McCall. I'm Vice President, Investor Relations and Corporate Development for H&I Corporation. Thank you for joining us to discuss our first quarter fiscal 2021 results. With me today are Jeff Loringer, 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 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 this call. I'm now pleased to turn the call over to Jeff Lawrence.

Jeff? Good morning, and thank you for joining us. This quarter, our members again demonstrated much of what is unique about H&I. We delivered substantial profit improvement, showing the power of our diversified revenue streams, our ability to react quickly to changing market dynamics, and our strong operational capability. As we look to the remainder of 2021 and beyond, I'm increasingly 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, multiple secular trends, and numerous H&I specific growth initiatives. We have a track record of effectively deploying capital, driving annual productivity and cost savings, and clear opportunities to drive shareholder value. On today's call, I will cover three highlights of the first quarter. I'll go into each in more detail in a moment, but in summary, they are. First, our residential building product segment is hitting on all cylinders and we expect the strong performance to continue. Second, demand in workplace furnishings, while down versus last year, is recovering. And third, our incremental profit margins in the first quarter demonstrate the strength of our model. After covering the detail of those highlights, Marshall will then provide some color around our second quarter outlook. I will conclude with some general comments. Finally, we will open up the call to your questions. The first highlight is profit in our residential building product segment nearly doubled from year-ago levels. Our members responded to stronger than expected demand while maintaining our high levels of service and delivered strong incremental profit. We generated 37% year-over-year revenue growth in the first quarter, or 39%, including the impact of acquisitions. Operating margins in this segment expanded 600 basis points from prior year levels, which drove year-over-year operating income growth of more than 90% in the quarter. Remodel retrofit sales grew 55% versus the prior year as we continued to capitalize on strong activity in this market, drive our growth initiatives, and leverage our supply chain strength. New construction sales were also strong, growing 24% year-over-year on an organic basis. Again, our value propositions, growth initiatives, and supply chain strength continue to resonate with homebuyers and builders. As the first quarter progressed, activity accelerated. As a result, our first quarter growth rates in this segment were higher than we expected. Specifically, normalized orders grew at a 40% year-over-year rate in the first quarter and strengthened as the quarter progressed. As we look forward, there's a lot to be optimistic about. We have a strong competitive position. Our vertically integrated business model, unmatched product depth and pricing breadth, strong builder relationships, and regional distribution infrastructure all provide differentiation for this business. We are currently benefiting from a historically strong housing cycle supported by long-term demographic trends and a persisting housing supply-demand imbalance. We're also seeing secular support tied to nesting and de-urbanization trends. and we have an outstanding opportunity to grow the category in both new construction and remodel retrofit. As a reminder, in new construction, two-thirds of homebuyers see having a fireplace as a must-have feature of the home, but less than 40% buy one. And on the remodel retrofit side, we estimate that less than 3% of all remodeling projects involve a fireplace. To take advantage of these opportunities, we are driving a better connection with the homebuyer and homeowner and are making investments to influence their home purchase or remodeling journey. We continue to invest in enhanced direct and digital marketing. We continue to partner with social influencers and targeted media to drive overall awareness demand. And we continue to develop visualization tools to help guide homeowners as they explore options. By combining these new efforts with our unique and differentiated model, we are competing better than ever in this space. Our revenue growth and margin expansion in the quarter reflect the power of this business and make us optimistic about the future. Our second highlight for the quarter was in our workplace furnishing segment, which is showing multiple signs of improvement. On an organic basis, net sales in the segment declined 12% and orders declined 10% versus the prior year period. These were the lowest rates of decline since the beginning of the pandemic and orders over the past five weeks were above prior year levels. The order improvement was led by our business focused on small to mid-sized customers. We are seeing momentum in the public sector, with national supplies dealers, and in smaller markets. We are driving growth in our e-commerce and international businesses, which generated double-digit order growth in the first quarter versus the prior year. In contrast to those areas of improvement, the contract market continues to be impacted by the pandemic. Orders in our contract businesses were down over 20% from the first quarter 2020 levels. As we look ahead, although conditions remain dynamic, we believe we are turning the corner in workplace furnishings and expect to drive revenue growth next quarter and through the remainder of the year. That outlook is based on the combination of our agility and our competitive position with small to mid-sized customers, generally improving demand trends and easier comps. In our contract businesses, we are seeing initial signs of recovery in our pre-order metrics and dealer activity. However, we expect demand from larger contract customers to recover more slowly than other parts of the business. We believe the contract recovery depends on the timing of office reentry in major markets. That timing remains somewhat uncertain and likely tied to vaccination rates and school reopenings. Most customers continue to indicate activity will ramp sometime in late Q2 through Q3. As a result, we expect year-over-year revenue growth in our contract businesses to accelerate in the second half of the year. Our differentiation of workplace furnishings business model positions us well to compete as the market recovers. Our workplace furnishings businesses have unmatched price point breadth, channel access, and market reach. These differentiators position us well to benefit from office reentry, work from home, and de-urbanization trends. As a result, we expect to continue to outperform the market. Our third highlight for the quarter was our strong incremental margins. We reported a total company year-over-year incremental operating margin of 60% in the first quarter on a non-GAAP basis. This strong performance was driven by volume leverage in residential building products, the benefit of our annual cost savings and net productivity initiatives, and from permanent cost actions taken last year to combat pandemic pressures. Our first quarter incremental profitability demonstrates the long-term potential of our business model. I will now turn the call over to Marshall to provide some additional detail around our first quarter and our outlook. Marshall? Okay, let's start with our second quarter outlook for the residential building product segment. Recent order trends, housing construction activity, and expected benefits tied to our multiple growth initiatives all suggest second quarter growth rates in excess of 30% from the prior year quarter. We continue to see strong momentum with both remodel retrofit and new construction. Let's shift to our outlook for workplace furnishings. For the second quarter, we're expecting revenue growth driven by improving order trends to small to midsize customers, public sector activity, and a low prior year comparable. For the segment overall, we expect a second quarter revenue growth rate in the low teens on a year-over-year basis. That growth expectation includes the impact of the design public acquisition, which will add approximately 2.5 percentage points to our second quarter growth rate in the segment. Next, let's move to second quarter profitability. Overall, we expect second quarter non-GAAP ETFs to be up over prior year levels, despite inflationary pressures, growth investments, and return of temporary cost actions taken in the prior year. Higher volume levels and net productivity will more than offset those headwinds. However, the mix of these factors will result in a low incremental margin for the second quarter. We do expect incremental margins and operating profit growth to accelerate nicely in the second half. As workplace furnishings volume improves, the anniversary, our temporary prior cost actions, and our price increases implemented in response to recent inflationary pressures become effective. Finally, some comments on our cash flow and balance sheet expectations. We ended the first quarter with $176 million of total debt. That was mostly unchanged from last quarter and down from $230 million in the first quarter of last year. Our quarter-ending cash balance was $94 million, which represents an increase of $59 million from the first quarter of 2020. Our gross leverage ratio of 0.9 was slightly improved from last quarter and last year. We expect free cash flow to continue to be strong this year, which will provide ample capacity for continued growth investment, dividend payments, and optimistic M&A and buyback activity. I'll now turn the call back over to Jeff. Before we take your questions, I want to highlight our recently published Corporate Social Responsibility Report. Last quarter, we discussed our 2018 CSR report and our initial ESG goals. Our new report announced multiple new targets, including, among others, our goals for To achieve 100% supplier compliance with H&I's code of conduct by 2022. This includes requirements related to ethical and sustainable material sourcing. To use 100% recyclable packaging by 2025. To achieve zero waste landfill for all facilities by 2030. and to reduce our energy intensity 50% from a 2018 baseline and reduce Scope 3 greenhouse gas emission 40% per ton of goods by 2035. In addition, we will continue to source 100% renewable electricity across our global footprint. And annually, we will continue to donate 1% of our pre-tax profit to improve the quality of life in the communities in which we operate. I'm impressed by the desire of our members to enthusiastically embrace these initiatives for the betterment of the organization, our communities, and our world. Let me wrap up by saying that as we look forward, we are increasingly optimistic and expect accelerated profit growth as we progress throughout the year. We have two differentiated business segments, each well-positioned to benefit from a recovery of the cycle, secular trends, and H&I-specific growth initiatives. We are well positioned to grow revenue, expand margins, and generate and effectively deploy cash over the long term. I would like to conclude by stating I'm extremely proud of and grateful for the efforts of all H&I members. We will now open up the call for your questions.