HNI Corporation

Thank you for standing by. My name is Amy and I will be your conference operator for today. At this time, I would like to welcome everyone to the HNI Corporation Third Quarter Fiscal 2024 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, Please press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and the number one. It is now my pleasure to turn the call over to Mr. McCall. Please go ahead.

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 third quarter fiscal 2024 results. With me today are Jeff Loringer, Chairman, President, and CEO, Marshall Bridges, Senior Vice President and CFO, and BP Berger, Executive Vice President. 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.

I'm going to divide my commentary today into three sections. I will start by providing some highlights on our third quarter results, which were strong. Non-GAAP EPS of $1.03. exceeded our internal expectations and was 11% higher than the prior year period, despite continued revenue pressure. Then I will discuss our expectations for the fourth quarter, where we expect the near-term demand pause to impact results. Finally, I will cover why we are confident in our ability to continue to drive profit growth in the upcoming years. Specifically, I will highlight three key points that underscore our positive outlook for 25 and 26. We have elevated EPS visibility through 2026. Our workplace demand outlook remains encouraging. And our unique position and strong long-term market fundamentals provide reasons for optimism in residential building products. Following those highlights, Marshall will review our outlook and discuss our strong financial position. I will conclude with some general closing comments before we open the call to your questions. Let's start with the third quarter. Our members again delivered strong profit growth. Our 11% non-GAAP EPS growth in the third quarter was on top of a very strong year-ago comparison when profit grew more than 30% year-over-year. Third quarter EPS has more than doubled in the past three years, and we delivered those results without top-line support. In the workplace furnishing segment, our profit transformation plan and acceleration of KII synergies drove segment non-GAAP operating profit margin to a 20-year high for the third quarter. In residential building products, despite ongoing housing market volatility, non-GAAP operating profit margin expanded year over year and exceeded 18% for only the third time in the third quarter. Our strategies, our dedicated member owners, our customer-first business model, and our proven ability to manage through all parts of the economic cycle again helped deliver strong results. Next, a few comments about the fourth quarter. We are optimistic about the opportunities that we see in both segments. However, in the very near term, we are seeing a pause in demand across our businesses. As a result, fourth quarter profit is expected to decline versus the same period of 2023. In workplace furnishings, we are seeing demand moderate with small and medium-sized customers. Within the SMB space, our transactional business has been particularly soft. As you may recall, our transactional business primarily flows through wholesalers and national supply dealers. This business can be volatile. The selling cycle is short. It typically involves smaller item purchases and historically has been very sensitive to changes in the economy and general business sentiment. Currently, economic and election concerns have small business leaders increasingly hesitant about discretionary spending. Indicative of this sentiment is the September Small Business Optimism Survey. The monthly uncertainty index hit a record high ahead of the U.S. elections. We expect business leaders' hesitation to moderate as we move past the elections and into next year. In the contract furniture space, we are seeing further project delays and continued lengthening of the selling cycle. Encouragingly, activity and dealer sentiment are improving. However, customers are still being cautious and our fourth quarter shipments will be negatively impacted. A recent Deloitte survey illustrates these concerns. Of 130 large company CFOs that were surveyed, only 12% said now is a good time to take greater risks. This is the lowest level in the past 10 years, even lower than the worst stages of the pandemic. But again, we view these pressures as temporary. Finally, in the residential building project segment, during the quarter, builder and homeowner sentiment was negatively impacted by interest rate volatility, ongoing inflation and affordability issues, and the same economic and political uncertainty that is impacting our workplace business. Reflecting these concerns, the housing market index fell to 39 in August after reaching a peak of 51 in March and April. As 2025 develops, we do expect interest rate reductions to eventually result. in increasing housing turnover and improved demand for our products in both new construction and R&R. Moving to my first point, highlighting our optimism beyond the fourth quarter. We have two initiatives underway, Mexico and KII synergies that by themselves will deliver 70 to 80 cents of EPS growth in 2025 and 2026. That represents approximately 25% of EPS growth on top of our already strong results. Even with the slower fourth quarter, we expect to generate record non-GAAP EPS in 2024, which will be our third consecutive year of double-digit non-GAAP EPS growth. This means that without help from the cycle, we expect our three-year double-digit earnings growth streak to extend through at least 2026. Remember, our workplace Furnishing's profit transformation plan does not require revenue growth, and our recent margin expansion has been achieved without cyclical top line support. In addition, we continue to adjust our cost structure in residential building products to align with the current demand environment. Early in the fourth quarter, we took actions that will lower our cost structure by approximately $5 million in residential building products. Most of that benefit will be recognized in 2025, further adding to our profit visibility. Before moving to my second point, I'll cover a few additional comments on KII and the recognition of synergies. KII continues to be highly accretive and was a major contributor to our strong third quarter profit. And total synergies expected to result from the Kimball International acquisition have increased another $10 million and now are expected to total $60 million, with $30 million to be realized in 2025 and 2026. KII is also providing us with new revenue growth opportunities and is highly complimentary. Kimball International's workplace offering improves our post-pandemic product and geographic positioning. And KII's hospitality and healthcare businesses are well positioned within attractive, expanding segments, and both are generating growth. Our confidence in the combination of strategic and financial benefits continues to prove out and accelerate. Moving to my second point supporting our optimism, the outlook for workplace furnishings demand remains encouraging. Segment orders have continued to improve early in the fourth quarter after growing 1% in the third quarter. I'll now comment on the order trends of SMB and contracts separately. Our SMB activity moderated in the quarter, consistent with small business sentiment trends and our exposure to transactional business. SMB orders declined 3% year-over-year in the third quarter against the challenging comp. In the third quarter of 2023, SMB orders grew 6% year-over-year. As you may recall, SMB has been an area of strength for us for some time. This segment of our business has generated consistent order growth over the past two years, and we remain bullish about the fundamental backdrop. Specifically, healthy dynamics including population shifts to secondary and tertiary geographies, and relatively higher office usage in those markets point to a return to growth in 2025. In our core contract business, we see growth on the horizon. The combination of contract and KII orders were up 5% on a year-over-year basis in the third quarter. We have seen large projects reactivate and continued strength in the hospitality space. As a result, orders over the past two months have improved However, most of these projects will ship next year. Further supporting our outlook, quarter ending workplace backlog is up 5% versus the prior year. Additionally, our contract sales funnel for 2025 continues to be encouraging and is up over 10% year over year. Looking out, we believe we are particularly well positioned to benefit as the workplace furnishings market continues to improve. We have unmatched product 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 broadly meet the needs of workplaces, schools, healthcare facilities, and hotels. Moving to my third reason for optimism, we continue to see positive long-term market fundamentals in residential building products. Single-family housing remains undersupplied, and demographics will support additional demand growth. Over the next year, we expect these fundamentals, combined with anticipated interest rate reductions, to eventually flow through, driving increased housing turnover and improved demand for our products in both the new construction and R&R spaces. In addition to the strong market fundamentals, we continue to invest in unique growth opportunities. These include new product innovation, such as electric fireplaces, efforts to become more intimate with builders, homeowners, and homebuyers, online capabilities, and the expansion of our wholly owned installing distributor footprint. I will now turn the call over to Marshall to discuss our outlook for 2024. Marshall?