HNI Corporation

Good day, everyone, and welcome to the H&I Corporation's second quarter fiscal 2023 results conference call. Today's call is being recorded. 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 1 on your telephone keypad. And if you would like to withdraw your question, please press star 1 again. I would now like to turn the conference over to Mr. Matt McCall. Please go ahead, sir.

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 second 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.

Thanks, Matt. Good morning, and thank you for joining us. Our second quarter results exceeded our expectations, demonstrating the momentum of our strategies, our market positions, and our recent actions to streamline our businesses. On the call today, I will highlight three key topics. First, our profit transformation efforts in workplace furnishings are ahead of schedule and help drive non-GAAP profit growth despite lower volume. Our workplace furnishings margins have been reset. Second, Since closing the Kimball International acquisition, we have become even more confident in the benefits of the combination. In addition, we have signed an agreement to divest Poppin and anticipate closing in the third quarter. Once closed, the exit will increase our projected accretion and unmask the strength of Kimball International's core business. And third, we put actions in place to support near-term profitability in residential building products, while staying focused on our long-term strategic investments. Following those highlights, Marshall will review our outlook. I will then conclude with some general closing commentary before we open the call to your questions. Moving to the first topic, our profit transformation efforts and workplace furnishings are ahead of schedule, as we grew non-GAAP profit despite lower volume. When compared to the prior year period and excluding the Kimbell International acquisition, Non-GAAP EPS grew 6% despite 15% lower organic sales. Non-GAAP gross margin expanded 270 basis points, and non-GAAP operating margin expanded 150 basis points. The profit improvement was driven by our transformation plan in workplace furnishings. That plan remains unchanged and consists of four primary actions, which are driving sustained margin improvement. First, we are driving increased productivity. Our productivity efforts have exceeded our near-term targets as reflected in our second quarter results, and we expect an even greater impact in the second half. We are also investing to make our operational footprint more resilient and efficient, primarily through our new facility in Mexico. Our future results will greatly benefit from these investments as they mature. Second, we have streamlined our cost structure. We continue to expect 25 million of our previously announced cost savings initiative to impact workplace furnishings this year. Third, we continue to simplify our business, focusing on our most attractive markets. The actions we took over the past year to divest our China business and rationalize our e-commerce offering are examples of simplification efforts that are currently improving our profitability. And fourth, Our efforts to improve price costs continue to provide a benefit. As a result of these actions, second quarter non-GAAP operating margin workplace furnishings expanded 550 basis points to 8.5%, excluding the impact of the Kimball International acquisition. That was the highest margin since the third quarter of 2019, and it was the fifth consecutive quarterly period of year-over-year non-GAAP profit improvement in workplace furnishings. Our profit transformation plan does not depend upon volume growth. However, we are encouraged by the demand trends in workplace furnishings. Segment orders for the first six months of 2023 grew approximately 3% year over year. We continue to see strong performance in the small to mid-sized customer segment, where we have an unmatched competitive position. Organic orders from the SMB customer group were up approximately 10% during the first half. while orders from contract customers declined at a mid-single digit rate over the same period. The improving workplace furnishings order rates reflect trends associated with employment growth with small to mid-sized offices, population shifts to secondary geographies, and increased furniture events driven by the adoption of hybrid work models and expiring leases. These trends all align with our strong market coverage and our product and price point breadth and depth, positions that will be further enhanced through our combination with Kimball International. Moving to my second topic, since closing, we have become even more confident in the benefits of our combination with Kimball International. The addition of KII will strengthen our business. Together, we are strongly positioned to lead in the evolving workplace environment with an expanded presence in secondary geographies, and leading positions in ancillary products. And the cultural fit between the organizations is strong, and both sides are beginning to identify and unlock new opportunities for profit growth. We now see the previously announced annual run rate synergy amount of $25 million as a floor with strong potential for more. Additionally, we have signed an agreement to sell Poppin, which was acquired by KII in 2020. Based on trailing 12-month results, the sale of Poppin is estimated to increase annual operating profit by $20 million, while reducing annual revenue by $56 million. The divestiture is expected to be closed during the third quarter. Poppin's operating losses have masked the strength of KII's core businesses, which collectively generate an operating margin over 10%. My third topic is we have put actions in place to support near-term profitability in residential building products while we stay focused on our long-term strategic investments. Our residential building product segment continues to face volume pressure in line with the general weakness in the broader housing market. In response to the volume declines, we have expanded our cost reduction efforts to support segment profitability. Specifically, these actions will lower 2023 segment expenses by an additional $5 to $10 million. When combined with our previous actions, our H&I-wide cost reduction efforts now total $40 to $45 million, up from the $35 million previously announced, $15 to $20 million of which will impact residential building products this year. Our cost reduction efforts, along with the return of normal seasonality patterns, will result in improved segment profitability beginning in the third quarter of this year. In addition, recent demand trends have shown improvement. Second quarter orders in the segment decreased 16% versus second quarter 2022. This is a significant improvement from the minus 37% in the first quarter of 2023. Furthermore, comps get easier in the second half of this year as we compare against the second half 2022 when orders were down 12%. Short-term notwithstanding, the intermediate to long-term demand dynamics remain encouraging for this segment, as we are well positioned for sustained revenue and profit growth. U.S. housing is undersupplied, demographic trends point to robust future construction growth, and there are indications that renovation activity will accelerate as existing homeowners are less likely to relocate given the current mortgage environment, with many having attractive lower interest rates. 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, online capabilities, 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. I will now turn the call over to Marshall to discuss our outlook. Marshall?