HNI Corporation

Good morning, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the H&I Corporation third quarter fiscal 22 results 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press star one again. Thank you, Mr. McCall. You may begin your conference.

Good morning. My name is Matt McCall. I am Vice President, Investor Relations and Corporate Development for H&I Corporation. Thank you for joining us to discuss our third 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 risk 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 Jeff Loringer. Jeff? Thanks, Matt.

Good morning, and thank you for joining us. Our members delivered strong earnings growth in the third quarter, despite softer demand tied to the weaker macro environment. On the call today, I will cover three key points. First, despite the softer volume environment, we delivered strong earnings growth in the quarter. Second, our residential building products business posted double-digit organic revenue and earnings growth in the quarter. And third, We are prepared for a difficult near-term environment and remain committed to our core strategies. Following those comments, Marcel will go through our updated 2022 outlook. I will then conclude with some general closing commentary. Finally, we will open the call to your questions. Moving to our first key point, we delivered strong earnings growth in the quarter driven by positive price cost and improving product mix. Despite the softening demand environment, We generated solid year-over-year margin expansion and 65% year-over-year non-GAAP earnings growth in the third quarter. Consolidated gross and operating margins improved sequentially and on a year-over-year basis, supported by favorable price costs. We continue to make significant improvement with price costs, and by the end of this year, expect to fully recover last year's shortfall that was driven by rapidly rising inflationary pressures. In workplace furnishings, we made progress on our strategic objective of expanding operating margins. Segment operating margins expanded 150 basis points compared to the prior year, driven by favorable price cost and benefits tied to actions made over the last year to improve product mix. Organic revenue growth was flat in the quarter. However, when excluding the impacts of the recent restructuring in one of our e-commerce businesses, segment shipments grew 7% driven by price realization. Although that restructuring negatively impacted our top-line growth, it contributed to our margin expansion, reflecting our commitment to improving profitability in workplace furnishings. I will now move on to my second key point. A residential building products business delivered double-digit organic revenue and earnings growth. Segment revenue grew 10% organically versus the same period last year. We generated revenue growth in both new construction and remodel retrofit, with both channels growing at similar rates during that quarter. While third quarter orders were down modestly on a year-over-year basis, and while we expect and are prepared for near-term challenges in the housing market, our category-leading positions and favorable housing demographics continue to reinforce our long-term bullishness for this high-margin, high-return business. Segment profitability was robust in the quarter. Operating profit increased 19% year-over-year, and operating margin expanded 50 basis points to 17.7%. Positive price cost accounted for the majority of the profit improvement. Our long-term strategic focus in this business is unchanged. We will grow revenue by expanding the category and taking advantage of our strong competitive positioning and attractive long-term market dynamics. while at the same time maintaining our margins. Our competitive position is unique, and we have a track record of outperforming the market, including during periods of weakening housing demand. There are several factors that differentiate us. First, our vertical integration provides the benefits of a stacked margin and better control of our marketing message and service levels. Continued vertical integration through pursuit of organic and inorganic opportunities will remain an important part of our long-term growth strategy. Second, our regional distribution footprint provides unmatched customer service and limits the need for working capital investments by our channel partners. Third, our price point breadth, product depth, and channel reach are unique in the industry and allow us to address the needs of customers of all sizes in all markets. Finally, our lean manufacturing and product development capabilities are unparalleled in the industry and allow us to continue to expand our competitive differentiation. We'll finish with my third key point. We are planning and prepared for a difficult near-term environment, and notwithstanding, we remain committed to our core strategies. Broader macro indicators point to increasingly challenging operating conditions as we move into 2023. In workplace furnishings, the outlook for corporate profits is softening, and executive sentiment is at recessionary levels. As a result, we are seeing companies be more cautious with spending. In residential building products, we are expecting top line declines in 2023. Higher mortgage rates are negatively impacting affordability, which is pressuring new home construction and remodel retrofit activity. During the quarter, in response to the softer demand trends, in anticipation of weaker macro conditions in 2023, and as part of ongoing efforts to improve long-term profitability, we initiated a corporate-wide cost reduction plan. While these actions will strengthen our earnings and cash flow during what is expected to be a weaker economic period in 2023, they also will provide another source of support as we work toward our core long-term strategy of expanding margins in workplace furnishings and for the corporation overall. When fully implemented, the permanent savings associated with these actions are estimated to be $30 million on an annual basis. Our team is experienced and will stay focused on our long-term core objectives, despite macroeconomic headwinds. Before I turn the call over to Marshall, I want to comment on recent market dynamics in workplace furnishings, specifically what we are experiencing and what our research tells us, and why both provide encouragement about future demand trends. During the third quarter, we faced a wide range of demand patterns in workplace furnishings. Orders from larger contract customers in major markets remained subdued as business leaders appeared increasingly hesitant to spend given weakening economic conditions. In addition, many of these customers continue to struggle with how to effectively execute their office reentry objectives. In general, larger customers are active and engaged with us to understand what working model and furniture applications best fit their objectives. This has resulted in a more complicated sales process, and as these customers iterate and evaluate multiple possibilities. They're also taking longer to reach decisions, and in many cases, deferring decisions. At the other end, smaller transactional activity sold through national supply dealers and wholesalers was also weak throughout the third quarter. Historically, this part of the market tends to react quickly to macro uncertainty and consistent with what we are currently experiencing and what we shared with you on our last earnings call. Unlike those two areas of softness, demand from the mid-market, where we hold a leading position, shows strength in the quarter. When compared to contract customers in larger markets, we are finding mid-market customers are more likely to be back in the office utilizing either traditional in-person or hybrid working models in which employees split time at home and in the office. The positive mid-market activity is indicative of underlying demand tied to return to office and adoption of hybrid work. That demand is driving growth in the mid-market, even in the face of increasing economic doubt. We are encouraged by this trend as it illustrates the underlying strength in demand that will emerge more broadly once the economy stabilizes and as more customers implement office reentry plans. To that point, our research indicates several trends have developed over the last two to three quarters. First, full-time remote work is becoming less favored by both employers and employees, with both increasingly realizing the long-term shortcomings of zero face-to-face interaction. Second, hybrid working models continue to grow in popularity. Again, both employers and employees increasingly see the benefits of this balanced approach. And importantly, our research and our recent experiences Both indicate the shift to hybrid comes with a need and willingness to spend more on furniture. While activity with some customers may be paused given current conditions, we believe we are well positioned from a market, product, and price point perspective to benefit from the eventual market recovery. I will now turn the call over to Marshall to discuss our outlook for the remainder of the year. Marshall?