HNI Corporation

Thank you for standing by. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the H&I Corporation second quarter 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 again, please press star one. Thank you. 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 second quarter fiscal 2024 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 members once again demonstrated the organization's ability to deliver strong profit growth in the second quarter. Non-GAAP EPS of 79 cents exceeded our internal expectations and was 44% higher than the prior year period. It was also a record result for the second quarter. In workplace furnishings, the combination of our profit transformation initiatives and the benefits from the Kimball International acquisition continue to deliver strong earnings growth with segment non-GAAP operating profit growing 67% year over year. In residential building products, we drove profit growth and margin expansion despite ongoing housing market challenges. Non-GAAP operating profit increased 17% year over year, demonstrating the strength of our business model. Overall, our strategies, our dedicated member owners, our customer-first mindset, and our proven ability to manage through all parts of the economic cycle helped us drive excellent results in the first half of 2024. Looking forward, we are increasingly optimistic about the future and the opportunities that we see in both segments of the business. On the call today, I will highlight five key points that underscore our positive outlook. First, workplace furnishings operating margin reached a multi-decade high for the second quarter. reflecting our continued commitment to improving the profitability in this segment. Second, our combination with Kimball International is generating strong results. Third, our residential building product segment posted profit growth and margin expansion despite ongoing housing-related softness. Fourth, we expect revenue growth in both segments in the second half of the year. And fifth, beyond 2024, we have elevated earnings growth visibility. 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 point, workplace furnishings operating margin reached a multi-decade high for the second quarter. Workplace furnishings non-GAAP operating margin expanded 370 basis points year over year to 11.9%, a second quarter level last seen in the late 1990s. This was also the ninth straight quarter of year-over-year operating margin improvement in the segment. The 370 basis points of margin expansion was on top of last year's strong result. Over the last two years, operating profit margin in workplace is up nearly nine percentage points. This year's second quarter margin improvement was primarily driven by strong productivity gains. Driving productivity is a key part of our workplace furnishings profit transformation plan. Our operations continue to become more efficient across the board, including significant gains in labor and material efficiency. And there's more to come as we have line of sight to additional margin expansion in the back half of 2024 and beyond. Recall, our profit transformation plan does not require demand improvement, and our recent margin expansion has been achieved without cyclical top line support. However, as I will discuss later, We believe the market is slowly improving and will add to our future profit growth. Moving to my second point, our combination with Kimball International is generating strong results. KII continues to be highly accretive and was a major contributor to our record second quarter profit. KII added an estimated $0.15 to our non-GAAP EPS in the second quarter, while generating an operating margin of 13.3%. And revenue and accretion surpassed the expectations we shared with you last quarter. Kimball International is providing us with new growth opportunities and strengthening our market positions. We remain very encouraged by the complimentary nature and attractive post-pandemic positioning of KII's workplace offering. Additionally, KII's healthcare and hospitality businesses are well positioned within attractive, expanding segments and both generating growth. As we announced in May, we now have line of sight to $50 million of cost synergies from the combination. I will talk more about this later, but those synergies will continue to fuel profit growth and margin expansion over the next couple of years and, again, do not require demand growth. Our confidence in the combination's strategic and financial benefits continues to prove out and accelerate. Moving to my third point, residential building products posted profit growth and margin expansion despite ongoing housing-related weakness. Our actions to drive productivity and lower cost expanded operating margin to 13.8%. This was up 260 basis points year over year, despite overall housing market pressures. Looking forward, we remain bullish about the intermediate to long-term dynamics for this business, and we expect revenue growth to return in the second half of 2024. That leads me to my fourth topic, We expect revenue growth in both segments in the second half. I will start with some comments on expected back half workplace furnishings demand. Then I will follow those with some detail on second half residential building products revenue. We continue to see signs the workplace furnishings market is slowly improving. Pre-order activities remain elevated, but the translation to orders is continuing to take longer. For the second half of 2024, we expect workplace furnishings revenue to increase at a low single-digit rate year-over-year. That outlook is based on the supportive data points in SMB and KII and with contract. Our SME business continues to generate growth. SMB orders grew 2% year-over-year in the second quarter, on top of a 4% increase in the same period of 2023. This segment of our business continues to benefit from healthy dynamics, including population shifts to secondary and tertiary geographies, and relatively higher office usage in those markets. Kimbell International continues to perform well. KII orders grew over 3% year-over-year in the second quarter. As I mentioned earlier, the combination with KII has strengthened our workplace furnishings business and given us access to new growth opportunities. with strong market fundamentals, including healthcare and hospitality. Additionally, KII's product portfolio is well positioned to support the hybrid work environment. As companies reconfigure their spaces to better support hybrid, KII will benefit. In our contract business, we see growth on the horizon. Our pre-order metrics remained elevated, an indication of future growth. Our year-to-date quoting activity, contract sales funnel, and visits during design days to our Experience Center in Chicago, all are up double digits year over year. Looking out, we believe we are particularly well positioned to benefit as the workplace furnishings market continues to improve. We have unmasked products and pricing breadth and depth. We have products that work for customers, ranging from small businesses to the largest multinationals. Our brands are distributed widely across geographies, from tertiary markets to the top MSAs. and we can address the needs of all workplaces, schools, healthcare facilities, and hotels. We have adapted our product offering in anticipation of the new ways people are working and will work. Today, most knowledge worker tasks are supported by six activities, focus, mentorship, innovation, collaboration, socialization, and learning. And each of these tasks calls for unique furnishing applications. At design days in June, we introduced the intentional office, a philosophical approach to addressing the needs of today's office by designing environments that support each of these six activities. This approach to the market, our coverage of the market, and our unwavering focus on the customer have us well positioned to benefit from an improving demand environment. Let's shift to second half residential building products demand. Overall, demand remains choppy, but the trends are improving. For the second half, we expect residential building products revenue to grow at a mid single digit pace versus prior year period. This outlook is consistent with our improving order trends. When excluding changes we implemented to our early order program, normalized second quarter orders grew 4% year over year. This is the first quarter of order growth since mid 2022 when the housing correction started. Looking forward, we expect demand to improve from here. Supply-demand fundamentals for the housing market remain strong. Although recent housing inventories have ticked up, single-family housing remains massively undersupplied, while demographics support additional demand growth. In addition to the improving market dynamics, we continue to invest in unique growth opportunities. These include new product innovations such as electric fireplaces, efforts to better connect with builders, homeowners, and homebuyers, online capabilities, and the expansion of our wholly owned installing distributor footprint. Summarizing my fourth point, we are expecting top line improvement in the second half in both workplace furnishings and residential building products. That, along with continued margin expansion in both segments, will drive record EPS in 2024. Moving to my fifth and final point, we have elevated profit growth visibility through 2026. We expect KII synergies to total $50 million. This is double the estimate we provided when the acquisition closed. Additionally, the ramp-up of our facility in Mexico is expected to contribute an incremental $20 to $25 million to the bottom line. Both initiatives are currently underway and provide strong visibility to future earnings growth. Of the $70 to $75 million in total benefit, an estimated $45 to $50 million will positively impact the 2025 to 2026 period. This is equal to approximately 70 cents of EPS, or more than 20% growth from the current year consensus estimate. As we have communicated for several quarters, we can continue to grow profit without volume growth due to initiatives like these. Volume growth will only enhance our profitability. I will now turn the call over to Marshall to discuss our outlook for 2024. Thanks, Jeff.