HNI Corporation

operator today. At this time, I would like to welcome everyone to the HNI Corporation first quarter fiscal 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. It is now my pleasure to turn today's call over to Mr. Jack Herring. Please go ahead, sir. Good morning. My name is Jack Herring. I am Vice President, Corporate Finance and Treasurer for H&I Corporation. Thank you for joining us to discuss our first quarter fiscal 2022 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 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 financial news release 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 now pleased to turn the call over to Mr. Jeff Laringer.

Good morning, and thank you for joining us. Our members delivered solid results in the first quarter, despite record levels of inflation and a dynamic environment. Today, I will cover three key points around why we are optimistic about 2022 and beyond. First, our actions to drive profit improvement and address last year's headwinds are on track in delivering results. Second, top line growth and market demand in residential building products remains strong. And third, we are generating strong growth in workplace furnishings and the demand environment is improving. I will cover these points. Marshall will then go through our 2022 outlook, which is unchanged from what we presented in February. I will then conclude with some general comments. Finally, we will open up the call to your questions. Moving to our first key point. Our initiatives to improve long-term profitability are on track and delivering results. In February, on our fourth quarter call, we discussed two sources of pressure on our margins in 2021. First, price-cost negatively impacted profitability due to rapid input cost inflation. And second, constraints around labor availability and supply chain capacity shifted revenue out of 2021. We also discussed actions we were taking to address these issues, multiple pricing actions across our brands, the opening of a new seating facility in Mexico, moving multiple production lines to H&I facilities with better labor dynamics, and operational changes aimed at making our existing labor force more productive. These actions are all on track to deliver their expected benefits for 2022 and beyond. Specifically, price costs turned positive in the first quarter, driving sequential gross margin improvement from the fourth quarter. While inflationary pressures have recently intensified, we have quickly responded with additional pricing actions. We expect these actions to offset the additional inflation, keeping price costs on track to deliver significant profit improvement in 2022. Our actions to add labor capacity are also ramping up. Our new facility in Mexico is currently up in volume growth and long-term margin expansion.

I will now move on to my second key point. Top line growth and market demand in residential building products remains strong.

Segment revenue grew 13% organically with comparable strength in both the new construction and remodel retrofit channels. Incoming orders showed no indications of slowing with first quarter orders in the segment of 25% organically versus the year ago period. Our strong order rates and elevated backlog point to continued strength this year. Rising mortgage rates and decreasing affordability are concerns. However, our positive outlook is still supported by our growth initiatives, demographic trends, historically low housing inventories, and elevated builder backlogs. Finally, we expect acquisitions closed over the past 12 months to complement our robust organic growth in 2022. Our unique vertically integrated business model has unmatched product and channel reach with a regional distribution infrastructure that offers unparalleled customer service. I will finish with my third key point. We are generating strong growth in workplace furnishings, and the demand environment is improving. First quarter workplace furnishings revenue, adjusted for recent restructuring activity, increased nearly 25% versus the prior year period. Border activity continued to be strong with small to mid-sized customers. While contract customers, particularly those in larger cities, have been slower to ramp up, our second half contract funnel has strengthened in recent weeks and is now back above pre-pandemic levels. And we ended the first quarter with a backlog up more than 50% from the same period last year. Our strong dealer network, unmatched price point breadth, and multiple strategic growth initiatives have put us in a strong position to capitalize on the improving environment. As a result, in addition to margin expansion, we expect strong top line growth in workplace furnishings during 2022. Now I'll turn the call over to Marshall to discuss our outlook.

As Jeff previously mentioned, our revenue and margin enhancement initiatives are on track. As a result, the 2022 outlook we shared with you on our last call is unchanged. We still expect benefits from pricing actions and added capacity will drive strong revenue growth and profit improvement as the year progresses. In workplace furnishings, we expect pricing benefits, backlog normalization, and assumed market improvements will drive revenue growth rates in the high teens to the low 20s for the year. In residential building products, pricing benefits, revenue from acquisitions, and multiple growth initiatives are expected to fuel growth rates in the high teens. Our view on consolidated margins remains the same. We continue to expect improving price cost and volume growth will drive operating margin expansion in the second half of the year and for the full year. We expect to recapture much of last year's price cost gap, with price cost driving a net benefit to operating profit of $45 to $55 million. Our thoughts on seasonality are also unchanged. As a reminder, we historically generate approximately 70% of our full-year profit in the second half of the year. We expect 2022 profit to be more weighted to the second half, driven by the timing of price cost improvement, capacity additions, and first-quarter COVID impacts. Also, recall our second-half comps are less challenging than those in the first half. For the second quarter specifically, we expect profits to be near the levels generated in the first quarter of 2022. On a sequential basis, the benefits from additional workplace furnishings volume is expected to be offset by the seasonal step-down in residential building product sales. Finally, some brief comments on our financial position. We expect to maintain a strong balance sheet throughout 2022. Our modest increase in debt from the fourth quarter is consistent with our normal seasonal use of working capital. We expect to generate strong fee cash flow this year, which will provide capacity for continued investment, M&A, dividend payments, and share buyback activity. I'll now turn the call back over to Jeff.

Thanks, Marshall. You will notice a consistent theme across our comments this morning. Our initiatives and outlook remain on track despite inflationary pressures and a dynamic environment, and we are staying focused on our two primary objectives, improving the long-term profitability of our workplace furnishing segment by focusing on margin expansion and driving strong top-line growth in residential building products by leveraging our differentiated business model. We will now open up the call to your questions.

At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question is from the line of Bud Bugach with Water Tower Research. Your line is open.

Good morning, and this is a very, very nice and heartening report. Congratulations on that. I know it's not been an easy time. So just a couple of questions if I could. In workplace furnishings, you mentioned I think the larger customers slower to ramp up, but yet the funnel seems to be increasing. Can you give us a little bit more color on that, Jeff?

Yeah, Bud, you know, we're above pre-COVID levels, and, you know, across the board, the trends we look at are, you know, continuously improving, you know, day over day, week over week. You know, I would tell you the bid activity is nearly double. Our bid pricing activity is nearly double fourth quarter levels. We got continued strong activity in the small business. I didn't even ask about that, but And, you know, across the geographies, we're seeing, you know, improvement across pretty much every region of the country. Dealers are reporting, you know, they're having trouble keeping up with requests, design requests and pricing exercises, leasing activities up. You know, it just continues to build. And so we're confident that it's coming. Thank you.

And the order growth in RBP is consistent with what we have thought you would start to see. Can you talk about that in relationship to the market? Up 25% is a notable number. And I know that you also mentioned oil. that some affordability and mortgage issues might be dampering some of that demand further on. But I was curious of how you're seeing the heart business relationship to the overall market and whether you're seeing the primary demand in hearts starting to show some signs of growing.

You know, but look, the affordability question is out there and it's well known. And we're clearly keeping a really close eye on that as it's concerned. I would tell you on a macro basis, we still like the demographics and the inventory stock being low. But we also have a high visibility to our backlog right now. So we have a really large backlog in that business. And remodel, there's strength kind of across the board in the remodel. The MIRA index is up mid to high teens. And we continue to see momentum in our growth initiatives, many of which are focused on the remodel market. The electric category, which if you think about hits customers who sometimes are not necessarily gas buyers, is continuing to grow. It's up 44%. Our website traffic is up. Our gas insert program, which is focused on existing homes, is up. Category 1 issues, you know, are going well. We're really starting to reach customers. And as customers think about maybe not moving up, we are really bullish on the remodel side of our business. So it's a great question. We're going to stay focused on the new home construction, but we're still seeing growth there, and we've got big backlogs.

Okay, I guess every question in the last couple of quarters started on this with price cost, and you started there saying that it turned positive. Marshall, can you quantify for us what the positive was? And if I could be so bold just to maybe talk about that. You said you had another pricing action, I think, in the quarter, so maybe you could quantify some of that for us.

Yeah, but for the first quarter, price cost was positive $2 million, and that reflects $62 million of incremental price versus the prior year and about $60 million of incremental input costs versus the prior year period. As we look forward, we said in our prepared remarks that we expect price costs to be positive $45 to $55 million. And so what's happened over the last 60, 90 days is that we have seen an increase in input costs, so we're expecting that to run in the $240 million to $250 million range versus last year. But we've also offset that with price. We're expecting to have about $285 million to $305 million of incremental price. So both those have gone up. And, in fact, our price-cost outlook is slightly improved. They're certainly in the range of what we had before.

And how does that split between the six?

um you know if you look at the midpoint of that 45 to 55 million dollar range you made approximately 35 million of it would hit workplace furnishings with the balance hitting residents for building products that's uh that's very helpful and you still have you know great margins in uh in rvp so that's still um

Very helpful. Well, and last for me, you talked a little bit about the, you did increase debt a little bit in the quarter and working capital was in usage. So where do we see that? Do we see that debt coming back down at the end of the year and just normal pattern?

Yeah, but I think we have a pretty normal pattern. You know, as you know, we typically use cash in the first quarter and the first half and then generate quite a bit of cash in the back half, and we don't expect that to change this year.

Okay. All right. Well, great. Well, a very heartening report. Thank you very much, and good luck for the second quarter and the balance of the year.

Thanks, Matt. Thanks. Your next question comes from the line of Ruben Garner with the Benchmark Company. Your line is open.

Thank you. Good morning, everybody. Good morning. Maybe a follow up to the price cost question. I think you guys got back to price cost positive, maybe a little bit earlier than you were expecting. Last time we spoke, can you talk about when maybe you expect to be able to kind of recover the margin? If you can do it by by segment, that would be helpful.

Yeah, Ruben, we're more or less on track to what we said. We said we'd be roughly neutral in price-cost in the first half, and we were positive $2 million, so that's encouraging. But in the range of what we expected, we do expect very positive price-cost in the second half of the year, roughly $30 million to $35 million in the third quarter. Margin back, but we're looking at some healthy margin increases during those quarters. And it will be more in workplace furnishings than in residential building products because of just the margin differences between those businesses.

Okay. And then maybe you've got a lot of good commentary on kind of the drivers there and R&R and your internal initiatives. um there's been a lot of talk about the impact of rising interest rates and gas prices and everything else on the consumer can you just talk about what you guys saw more recently and maybe in march and april have trends held up your order rate for the first quarter is obviously very strong is it has it remained so or did you guys already kind of see an impact of you know from the consumer from an affordability standpoint

I mean, so far it's staying pretty solid, Ruben. So maybe a little bit of description behind that 25% growth rate that we had. Some of that's being driven by the trade partners ordering for delivery later in the year. So what it's doing is giving us a lot of visibility, more than we normally would have, to the growth rates we're going to see. And so basically we see we're very confident in what we've laid out here.

Okay, great. And the last one's for me. The workplace furnishings, the funnel versus the order commentary, is there any way to kind of give us an idea of just how – I mean, you said the funnel was back above pre-pandemic levels, I think you said. Can you just – what kind of growth rates does that point to from an order perspective as we move through the year? I know a lot can change between now and then, but is it directly – are we going to see an acceleration, a pretty big acceleration in your order growth as the year progresses? And is that mostly driven by the contract piece coming back, or is it across the board?

No, Ruben, it's driven by the contract improving. You know, the SMB business has shown some pretty steady growth, which we expect to continue. But what we've seen throughout 2022 is that the contract side of workplace furnishings started pretty slow. And here recently, the order rates have converged. And we expect contracts to continue to accelerate significantly. partly just due to the lower comps, but partly due to the increasing activity you see in the major metros. And so we're pretty excited about the growth prospects in the contract as we enter the rest of the year.

Yeah, Ruben, we see the SMB business probably hanging in there. It's, you know, typically – now, this isn't a typical cycle, but typically those – Those are early market indicators, and we see those hanging in through the year, and the contract kind of, like Marshall said, merging and increasing above those rates as we go throughout the year.

Great. Thanks, guys.

Your next question is from the line of Craig Burns with Sedoti. Your line is open.

Good morning. So on the residential building products, it was a lot stronger this quarter than I was expecting. I think historically you would see like kind of a sequential decline into the first quarter from the fourth quarter, and obviously that wasn't the case here. So was there any degree of, you know, pull forward or, you know, anything unique there to call out that would, you know, not be sustainable like going forward, you know, I'm just trying to figure out how we should model off of the first quarter.

Yeah, Greg. We did see a more seasonally strong pattern in residential building parks in the first quarter. I think we're up roughly 5% versus the fourth quarter. That's a little bit above what we normally see where we'd see a little bit of a decline. I think this just reflects the strong backlog we had and the fact that we were – hitting some capacity constraints in the fourth quarter, and so that volume moved to the first quarter. We don't see that as a pull forward. We absolutely are seeing some good growth in that segment, expected to continue through the year.

And then with energy prices going up, are you seeing an increased demand in wood stoves, pellet, the pellet side of that business? And can you just remind us maybe how big that business is currently for you and maybe, you know, where it peaked out at the last kind of time.

Yeah.

Yes, Mike.

Yeah, the pellet's doing well. It is, along with all of our stove businesses, you know, we're seeing really big backlogs, longer lead times there. The growth is somewhat constrained by our capacity there. We're certainly, you know, at those levels.

So we're excited about it, and I think what it does is it gives us confidence in that Ramal retrofit, which is, you know, pellets included in that, is going to do well this year, and it is consistent with the growth outlook that we said.

It's not going to be the major growth.

No, it's not. I mean, but, you know, You know, it's being – the overall category, Greg, is up just because all types of units are up.

And as Marshall said, our lead times are stretched out there. Now, the recent spike in, you know, gas and fuel, oil, and other things, you know, we probably haven't seen if there is going to be a bump off that, but you're right. Historically, there is some bump, but it's too early to tell – if that's going to add to the already strong category, you know, going forward. Okay. And then lastly, sticking with the residential building products, in terms of the new home construction, I know you've been doing a lot of category awareness, kind of trying to grow the category initiatives. So have you seen any change there? where, you know, attach rates are increasing, where maybe even if we do see a slowdown because of affordability, you know, you're making it up because you're getting higher attach rates. What are your thoughts there? Yeah, Greg, I think intuitively we are.

You know, we are, we definitely see, and we put this, the web continues to grow.

It's on HD block and

We've got a lot of, we're driving a lot of awareness through that. And so, you know, these things take time to filter through, and some it's a little hard to track, but we believe that that's going to start to take hold in the new home site as well. We have a strong A&D program that we've tipped up that's driving additional specification with some of the builders.

And so, you know, Awesome. Thanks. Yep.

Your next question is from the line of Catherine Thompson with the Thompson.

One just focusing on Mexico and the prevailing theme that we're seeing with so many companies, the public and private is just

de-globalization and shifting operations, greater operations to the Americas, North America, with Mexico being one of the biggest beneficiaries. So against that backdrop, what is the longer-term impact of how this facility feeds H&I demand and also strategically how are you rethinking the global supply chain as you plan your business over the next three to five years?

Yeah, that's a great question. I think in the short term, as we've said, you know, Mexico was a pure capacity play for us, you know, relative to labor availability with what's happened the last couple of years. Now, as time goes on, you are correct that the The supply chains sure believe that's all going to be a positive. On the inventory side, look, we were kind of rotating through bringing stuff closer to home even before the pandemic hit. So I think what that has done is accelerate that. Now, you don't do that overnight. But as you look out three to five years, I think we're going to have shorter supply chains. Where we don't, we're going to probably carry some more inventory. and which we are already, you know, just to keep our lead times in check and make sure that we can service our customers. And we see that as a good trade on both fronts.

Okay. More on the quarter and margin improvements. It's good to see that. Can you give more of a breakdown, though, just in terms of segments? You know, how much is mix versus pricing actions? And how do we think about that trend as the year progresses for margins?

Yeah, Catherine, I mean, the big drivers in both segments are for the year and for the quarter are volume and price costs. Certainly the sequential margin improvement we saw earlier, We had a lot to do with price-cost. You know, mix was not a big play there, and then we got timing of SG&A. So I think the story to look for this year is the progression of price-cost as we laid out its second half weighted, and it's similar for volume. You know, as we bring that capacity online, as that Mexican facility ramps up, as the other initiatives get traction, we will get more output and volume will increase sequentially and drive profit improvement. Okay.

And in terms of backlogs, really looking more at the pace of orders and how our shipment levels versus – and part of this, too, with the pace of orders, we've seen in a couple different industries some choppiness, but some now we're seeing an acceleration and some not as much. What are you seeing in terms of their backlogs and, in particular, the pace of orders?

So I would say that we are seeing choppiness. If you look at workplace furnishings, our backlog is elevated. It's up about 50% over the same period last year. But that's down about 25%, 30% from its peak. And, you know, it goes to the really rapid order of growth that we had in the third quarter of last year, followed by a little bit slower order of growth in the fourth and first quarter. And it's picking back up again. So I think that reflects what's going on there. In residential building products, similar story. The backlogs almost doubled what it was last year. And I think that goes to the to what we talked about earlier, and that we've seen some of the trade partners were a little bit earlier than they normally would, and also reflects just the underlying strength in those markets.

Okay, great. Thank you for taking my questions today.

Thank you. There are no further questions at this time. I will now turn the call back over to Mr. Jeff Loringer.

Okay. Thanks, everybody, for joining us today, and have a great day the rest of the week. Thanks. Ladies and gentlemen, thank you for your participation.

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