HNI Corporation

My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the H&I Corporation fourth quarter and year-end 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, then the number one on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Mr. McCall. Please go ahead, sir.

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 fourth quarter and year-end fiscal 2023 results. With me today are Jeff Loringer, Chairman, President, and CEO of 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 now please turn the call over to Jeff Warringer. Jeff? Thanks, Matt.

Good morning, and thank you for joining us. Our members continued to deliver outstanding results and had a strong finish to the year. For the fourth quarter, non-GAAP earnings per share increased 56% versus the prior year period. This was despite a 6% year-over-year organic revenue decline during the quarter. which was primarily driven by continued housing market weakness. Overall, 2023 was an outstanding year for HNI. During the year, we completed the largest acquisition in our company's history with the addition of Kimball International to the HNI family, delivered on our plan to improve margins without the benefit of top-line support. Entering 2023, we anticipated a challenging demand year, and we built a plan to deliver earnings growth in the face of these challenges. We also generated significant cash flows to strengthen our business and provide returns to shareholders. This resulted in 2023 non-GAAP EPS that increased by more than 20% year over year, despite an organic revenue decline. This was on top of 35% non-GAAP EPS growth in the prior year. With our strong cash flow, we rapidly reduced debt following the acquisition of Kimball International and finished the year with a gross leverage ratio under two times. I'm extremely proud of the efforts our members put forward during the past year. Our plan delivered excellent results, and despite the uneven macro environment, we exited 2023 a fundamentally stronger company. On the call today, I will highlight four key topics. First, we delivered another quarter of significant margin expansion in workplace furnishings, and we expect continued year-over-year profit and margin improvement from here. Second, the integration and synergy capture associated with the acquisition of Kimball International are both ahead of schedule. And we now expect total associated synergies to be $10 million higher than the initial projection. The addition of KII is providing significant value creation to our shareholders. Third, we expanded margins in residential building products despite top line pressure from ongoing housing market weakness. And order trends improved during the quarter. And fourth, we strengthened our already strong balance sheet, and our gross leverage ratio is back below two times, only two quarters following the completion of the Kimball International Acquisition. Following those highlights, Marshall will review our outlook. I will conclude with some general closing comments before we open the call to your questions. Moving to the first topic, we delivered another strong quarter of significant margin expansion in workplace furnishings. When excluding KII results, fourth quarter non-GAAP operating profit margin for legacy H&I workplace furnishings was 7.2%. This represents an expansion of 480 basis points year over year and was the seventh straight quarter of year over year operating margin improvement as our profit transformation initiatives continue to drive results. Looking forward, we expect continued year over year profit and margin improvement from here. As a reminder, our legacy workplace furnishings profit transformation plan consists of four primary actions. First, we are driving increased productivity. Our focus on lean, cost reduction, and better efficiencies help drive our profit growth in 2023 while funding operational investments, primarily in our new facility in Mexico. Looking forward, our investments will help drive outsized productivity benefits as they mature over the next couple of years and add to our continued lean efforts. Second, price cost improvement continues to benefit our profitability. Our pricing strength continued to support profitability in the fourth quarter, and we expect continued net benefit in 2024 from pricing actions announced within the past 12 months. Third, we have streamlined our cost structure. We previously announced a $30 million corporate-wide cost savings program. However, we far exceeded this target. And as of the end of 2023, the program's run rate savings was $50 million across the corporation, with half of that total contributing to our workplace furnishings margin expansion in 2023. And finally, we continue to simplify our business as we focus our efforts on the most attractive markets. We divested Poppin', we divested our China business, and we rationalized our e-commerce offering. All in, we continue to see opportunity for margin upside in workplace furnishings. I will remind you our profit transformation plan does not require volume growth. However, we continue to see encouraging trends related to future workplace furnishings demand, particularly given our unique market position. In the near term, demand remains choppy, but it's stable within a range consistent with our commentary last quarter. Looking further out, we continue to see growth in the small to medium sized customer segment where we have an unmatched competitive position. Legacy SMB orders grew 6% organically year over year in the fourth quarter and were up 8% in 2023 overall. In general, this segment has benefited from healthy dynamics. Small and mid-sized firms have accounted for nearly 85% of all post-pandemic hiring. The segment has also benefited from population shifts to smaller secondary metros where office visits are nearly back to pre-pandemic levels. We believe this segment will continue to outperform. Switching to contract, trends improved in the quarter and we are seeing encouraging signals. Orders from legacy contract customers were down 2% for the year, but were approximately flat in the fourth quarter on a year-over-year basis. The full year results are consistent with lower return to office rates in the larger markets and the lagging hiring activity by large companies I just mentioned. Encouragingly, some return to office metrics continue to tick up and have reached post-pandemic highs in recent weeks. This, along with the predicted acceleration of lease expirations and the need for companies to adapt their spaces for hybrid work, support a projected increase in furniture events and should bode well for contract demand patterns going forward. Orders for KII's workplace and health business also increased at a mid-single-digit pace on a year-over-year basis. We continue to be encouraged by the complimentary nature and attractive post-pandemic positioning of KII's offerings. Across all of our major workplace brands, year-over-year order trends were uneven during the quarter, but were strongest and grew in December. And first quarter 2024 to date has seen a continuation of these trends, generally positive but still choppy. Moving to my second topic, both the integration and synergy capture associated with the acquisition of Kimball International are ahead of schedule. KII added approximately $0.07 to non-GAAP EPS in the quarter, and delivered a strong non-GAAP operating profit margin of 10.7%. In addition, we now expect to achieve total annual cost synergies of $35 million. This is up from previous expectations of at least $25 million, and the $25 million run rate is now expected to be achieved in 2024. This is well ahead of the initial communicated timeline. The increase is primarily tied to higher than anticipated procurement savings. Kimball International is complementary from a product, market, and cultural perspective, and the addition of its brands strengthens our workplace furnishings' exposure to several important trends and markets, namely ancillary products, secondary geographies, healthcare, and hospitality. Each provides new opportunities for profit growth, and our confidence in the combination of strategic and financial benefits continues to accelerate. My third topic is we expanded margins to near record levels in our residential building products business despite continued cyclical top line pressure. Segment non-gap operating margin in the fourth quarter improved to more than 22%. This represents a 240 basis point improvement from levels reported in the year ago period as our recent cost reduction actions continued to support profitability. We delivered margin improvement despite a 13% year over year revenue decline as housing market weakness continued to pressure demand trends in the quarter. Importantly, the housing macro backdrop continued to improve in the fourth quarter, specifically as it pertains to single new family construction. Year-over-year single family permits and starts showed healthy growth in the fourth quarter, which supports further new construction improvement in 2024. Remodel retrofit demand remains soft. However, the declines are moderating. Overall, segment order trends improved during the quarter. Fourth quarter orders were 3% below year-ago levels. This represents an improvement compared to rates seen in the third quarter of minus 18%, and in the first half when segment orders declined 29% year-over-year. Despite the near-term headwinds, we are bullish on the intermediate to long-term dynamics for the segment. The demand fundamentals remain strong, U.S. housing is undersupplied, demographic trends point to robust future construction growth, and renovation activity will benefit from an aging housing stock and increased housing turnover. In addition to the solid long-term market fundamentals, we have unique growth opportunities and continue to invest in the areas of category awareness, new product innovation, online capabilities, and the expansion of our wholly-owned installing distributor footprint. In summary, order trends improved during the quarter, and the intermediate to long-term demand dynamics remain encouraging for the segment. Finally, my fourth key point from the quarter. We further strengthened our already strong balance sheet. We repaid $73 million of debt in the fourth quarter and $162 million in the second half of 2023. As a result, we ended the fourth quarter with $436 million in total debt and a gross leverage ratio of 1.9 times. Our gross leverage ratio is back below two times, only two quarters following the acquisition of Kimball International. This speaks to the strong cash flow characteristics of our company, continues to provide us with substantial financial flexibility. Following those 22 summary comments, I will now turn the call over to Marshall to discuss our outlook for 2024. Marshall?