HNI Corporation

Good morning, my name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the HNI Corporation first quarter fiscal 2023 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Mr. McCall, you may begin your conference.

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 2023 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 Jeff Loringer. Jeff?

Good morning, and thank you for joining us. Our first quarter results were better than expected, reflecting the momentum we have with our strategies, our market positions, and our actions to streamline our businesses. On the call today, I will highlight three key topics. First, our profit improvement actions in workplace furnishings continue to deliver results. Second, recent workplace furnishings demand trends are encouraging. And third, our residential building product segment is performing well, despite a period of weaker demand. Following those highlights, I will provide a brief update on the Kimball International transaction. Marshall will then review our outlook. I will conclude with some general closing commentary before we open the call to your questions. Moving to the first topic, our profit improvement actions in workplace furnishings are delivering results. The first quarter of 2023 marked the fourth consecutive quarter of year-over-year profit improvement in workplace furnishings. During the quarter, multiple drivers supported our profit improvement. Specifically, our annual net productivity savings returned following a year of elevated investment. Benefits from streamlining efforts and cost actions implemented in 2022 continued to deliver, and price benefits exceeded cost inflation. As a result, our first quarter seasonal non-gap operating loss in workplace furnishings narrowed by more than 40% on a year-over-year basis. and segment gross margin expanded 190 basis points from the prior year period. This was despite demand pressure associated with prior year backlog dynamics and weakening macroeconomic conditions. While macro conditions are still uncertain, we remain confident in our ability to drive workplace furnishings profit growth in 2023 and beyond. It is important to note that we are not dependent on volume growth and are driving four primary profit growth actions. First, We continue to simplify our business, focusing on our most attractive markets. The actions we took late last year to divest Lamex and rationalize our e-commerce offering are currently improving our profitability. Second, we have streamlined our cost structure. We continue to expect $25 million of our previously announced $30 to $35 million cost savings initiative to impact workplace furnishings this year. Third, our productivity efforts are driving profit growth. and our future results will benefit from our ongoing operational investments. And fourth, price costs will continue to be a tailwind through the remainder of this year. Moving to my second topic, recent workplace furnishings demand trends are encouraging. On our last earnings call, we discussed our expectations for soft first quarter volume. We were projecting first quarter organic sales to decline at a high team's rate year over year, driven by the unwind of backlog in the prior year macroeconomic conditions, and inconsistent office reentry patterns. Actual results were down only 11%. Shipments to small and medium-sized businesses and to contract customers both exceeded our expectations. Order growth was also better than expected. Organic orders in the workplace furnishing segment grew 13% versus the same period a year ago, reflecting improving market demand trends, our unique market positions, and the benefit of pull-forward activity driven by price increases implemented during the quarter. We are encouraged by the order trends. However, we still believe we're in a period of slow improvement that is being dampened by macroeconomic uncertainty. We believe the improving order rates reflect intermediate and long-term trends related to employment growth with small to mid-sized offices, population shifts to secondary geographies, increased furniture events driven by the adoption of hybrid work models, and more large corporate customers ramping up their return to office plans. These trends all align with our strong market coverage and our product and price point breadth and depth, positions that will only be enhanced through our combination with Kimball International. For my third topic, our residential building product segment is prepared for a period of weaker demand. Consistent with our previously discussed expectations, Weakening macroeconomic conditions and softer housing-related demand negatively impacted residential building products during the first quarter. However, productivity savings, cost reduction actions, and continued price-cost improvement offset nearly half of the volume-related pressure. As a result, segment operating margin remained in the mid-teens. This was the 11th straight quarter with an operating margin in excess of 15%. Not unexpectedly, segment orders softened in the quarter. As I previously mentioned, we are prepared for a slower near-term demand environment. We, however, remain bullish about our mid- to long-term growth, given the housing market's strong fundamentals. Housing is undersupplied, demographic trends point to robust future construction growth, and renovation activity will benefit from an aging housing stock. In addition to strong market fundamentals, we have unique growth opportunities. We continue to invest in our initiatives aimed at expanding the market, including in the areas of category awareness, new product innovation, including the electric category, online capabilities, including tools that assist home buyers in selecting the right fireplace for their home, and the expansion of our wholly-owned installing distributor footprint. The market's strong fundamentals, our unique growth opportunities, and our category-leading positions point to the return of strong growth beyond 2023. Before I turn the call over to Marshall, I wanted to provide an update on our combination with Kimball International. On March 8th, we announced an agreement to acquire Kimball International in a transaction currently valued at approximately $455 million. The transaction is cleared in a trust review and the vote of Kimball International shareholders is scheduled for May 31st. We expect the transaction to close in early June. The combination creates a market leader with pro forma revenue of approximately $3 billion and combined EBITDA of approximately $305 million, when including $25 million of expected synergies. Together, we will be strongly positioned for post-pandemic trends with an expanded presence in secondary geographies and leading positions in ancillary products. With that, Marshall will now discuss our outlook for 2023. Marshall?