HNI Corporation

If you'd like to ask a question during that time, please press star followed by one on your telephone keypad. Thank you. I'd now like to hand the floor 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 third quarter 2025 results. With me today are Jeff Loringer, Chairman, President, and CEO, and VP Berger, Executive 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? Thanks, Matt.

Good morning, and thank you for joining us. I'm going to divide my commentary today into three sections. First, I will provide some comments about our third quarter results. Non-GAAP earnings per share increased 7% year-over-year, driven by a record third quarter non-GAAP operating margin. Next, I will discuss our expectations for the fourth quarter of 2025. Our full-year earnings outlook is unchanged from what we provided on last quarter's call. We continue to anticipate a fourth consecutive year of double-digit, non-gap earnings improvement. And finally, I will provide additional detail about recent demand activity and how we see our markets playing out in the fourth quarter and as we move into 2026. Following those highlights, VP will provide additional color around our fourth quarter outlook. He will also comment on the strength of our balance sheet, both currently and what we anticipate after the completion of the pending acquisition of Steelcase. I will conclude with some closing comments, including some additional thoughts on our Steelcase transaction before we open the call to your questions. I'll begin with the third quarter. Our members delivered another strong quarter. despite ongoing tariff-driven volatility and continuing macro uncertainty. The positive momentum of our strategies, the benefits of our diversified revenue streams, our focus on items within our control, and the merits of our customer-first business model continue to deliver strong shareholder value. For the quarter, we delivered non-GAAP diluted earnings per share of $1.10. EPS grew 7% versus last year, which was modestly ahead of our internal expectations. Total net sales in the third quarter increased 3% organically over the same period a year ago, and profit margins in the third quarter were strong. Our non-GAAP operating margin expanded 10 basis points year over year, 10.8%. This non-GAAP even margin was the highest on record for the third quarter. In the workplace furnishings segment, organic net sales increased 3% year-over-year, fueled by growth across all major brands. We delivered similar organic growth rates in our brands focused on small and medium-sized businesses and on contract customers. From a profitability perspective, workplace furnishings non-GAAP segment operating profit margin expanded 40 basis points year-over-year and exceeded 12%. Third quarter profitability benefited from our profit transformation efforts, recognition of KII synergies, and modest volume growth. In residential building products, third quarter revenue was roughly unchanged versus the prior year period. New construction revenue was down slightly, while remodel retrofit sales grew modestly, both on a year-over-year basis. We delivered this top-line performance despite continued challenging housing market dynamics, as we continue to compete well and our internal growth investments are bearing fruit. Consistent with expectations discussed on last quarter's call, third quarter segment operating profit margin contracted year over year, driven by continued investment. However, segment operating margins still came in at a strong 18%. Despite expectations of ongoing uncertainty, we remain encouraged about the opportunities tied to the broader housing market and we continue to invest to grow our operating model and revenue streams. And the consistently strong profit margins in this segment are evidence of the business's unmatched price point breadth and channel reach, along with the benefits of its vertically integrated business model and overall operational agility. To summarize, our third quarter performance demonstrates the strength of our strategies and our ability to manage through varying macroeconomic conditions while remaining focused on investing for the future. We expect strong results to continue, driven by our margin expansion efforts and continued volume growth. That leads to my comments about our outlook for the fourth quarter. Overall, we expect our margin expansion efforts and continued revenue growth will support ongoing year-over-year EPS improvement, all while we continue to invest to drive future growth. In workplace furnishings, Segment orders increased 2% after excluding the estimated impact of prior quarter pull-forward activity and hospitality orders. We are again excluding hospitality from our adjusted order growth and backlog metrics as the business has experienced meaningful tariff-related volatility over the past two quarters, which has temporarily skewed results. Adjusted orders from contract customers perform better than those from small to medium-sized businesses. Our adjusted segment backlog at the end of third quarter was up 7% from the third quarter of 2024. I will discuss our outlook for our workplace markets, including hospitality, more in a moment. Moving to residential building products, orders in the third quarter increased 2% year-over-year. Remodel retrofit orders outperformed and were up mid-single digits from third quarter 2024 levels, while new construction orders were down low single digits. Overall, year-over-year segment order growth accelerated toward the end of the quarter. Builder sentiment has weakened in recent months and continues to reflect the impacts of elevated interest rates, ongoing affordability issues, and weaker consumer confidence. And housing trends have broadly followed builder sentiment with permits moving lower. Despite expectations of ongoing uncertainty and headwinds, we remain encouraged about the opportunities tied to the broader housing market and we continue to invest to grow our operating model and revenue streams. I will finish by making a few comments about our markets and provide additional detail around our elevated EPS growth visibility. On our last few calls, we highlighted an increased focus on investing to drive growth in both segments. Our 2025 to-date revenue strength and encouraging leading indicators have provided added support for our growth initiatives and investments. As we look at our workplace furnishings segment, we are encouraged about the developing fundamentals of this business. The macro and industry backdrops have shown consistent improvement in recent months. Return to office data appears to be indicating an inflection. The council card swipe data following Labor Day reached post-COVID highs, with Class A buildings in the top 10 markets approaching 98% peak day occupancy. Further, in a recent KPMG survey, nearly 80% of CEOs surveyed now expect employees to be full-time in office over the next three years. This is up from fewer than 40% in the April 2025 survey. And according to CBRE, non-viable space is being converted at record levels. This positively impacts our business in two ways. First, it results in more forced moves as landlords encourage current tenants of this non-viable space to relocate. And second, it will accelerate the expected Class A square footage shortage, which will either drive the addition of new space or increased investment in upgrading existing Class B space. Each of these dynamics result in more furniture events. Finally, calendar year 2025 is expected to see the highest net absorption of office space since 2019. Historically, absorption has been an important indicator of office furniture demand. JLL estimates more than 6 million square feet was absorbed on a net basis in the third quarter of 2025 alone. This compares to total negative net absorption of more than 150 million square feet over the past five years. Office vacancy rates are falling for the first time in seven years as we enter what JLL has deemed a new office growth cycle. In New York City alone, businesses leased 23 million square feet of additional office space during the first nine months of 2025. This is the largest amount of new workspace rented for that period in two decades. And in total, 18 of the largest US markets are exceeding pre-pandemic leasing activity over the past year. The macro and industry backdrops are clearly improving. And we expect our contract business to disproportionately benefit from these trends as much of the industry growth cycle to date has been in secondary and tertiary markets. Finally, I will comment on our hospitality business. As I mentioned earlier, compared to our other businesses, this vertical has seen more tariff-related demand volatility over the past two quarters. Despite this pressure, we expect revenue in this business to be relatively flat in 2025 overall. We have seen recent improvement in pre-order activity, and our pipeline continues to build pointing to a solid growth year in 2026. Looking ahead, we believe we are particularly well positioned to benefit as the workplace furnishings market continues to improve. We have strong market positions and offer compelling value to our targeted customers with a diversified portfolio of brands. Moving to residential building products, we believe in the positive long-term market fundamentals. We continue to perform well despite an ongoing soft new construction environment, and we acknowledge a market-driven revenue recovery will take some time. We are, however, optimistic about our opportunities to increase revenue through our growth initiatives. Specifically, we continue to invest in developing market-leading new products that offer customers more options and features. We are driving new programs to increase homeowner and homebuyer awareness of their fireplace options, ensuring our products are considered in all remodel and new construction projects. And we are strengthening our already strong relationships with builders across the country, helping them deliver the best overall value to the homeowner. Encouragingly, we are outperforming the market in this segment, despite still being in the early days of each of these initiatives. And while we invest in growth, we will continue to deliver high margin results and strong profits in this business. Longer term, single-family housing remains undersupplied, and demographics will support additional demand growth. The results of our ongoing investments, which will enhance our connection to customers and build on our leading brands, will fortify our position of strength in the industry. Finally, and importantly, we continue to have elevated earnings visibility this year and next. Our outlook for 2025 revenue continues to include full-year growth in both segments, Our outlook for 2025 earnings reflects expectations for mid-teens percent EPS growth. In addition to increased profits and volume growth, KII synergies and the ramp of our Mexico facility are expected to continue to drive significant savings. These two initiatives are expected to contribute a total of 75 to 80 cents of EPS in 2025-2026 period. I will now turn the call over to VP to discuss our outlook for the remainder of 2025 and our balance sheet. VP?

Thanks, Jeff. I'll start by discussing our outlook for revenue and profit. Beginning with the top line, fourth quarter revenue in workplace furnishings is expected to increase at a high single-digit rate year-over-year organically. The impact of divestitures is expected to reduce the year-over-year organic revenue growth rate in workplace furnishings by a little less than 100 basis points. The benefits of our order and backlog growth along with an extra week in our fiscal year, are expected to drive solid revenue growth in the fourth quarter. For residential building products, fourth quarter net sales are also projected to increase at a high single-digit rate compared to the same period in 2024. Pricing actions are expected to be the primary driver of growth. However, we also expect