HNI Corporation (NYSE:HNI) Q1 2024 Earnings Call Transcript April 29, 2024

HNI Corporation beats earnings expectations. Reported EPS is $0.37, expectations were $0.18. HNI isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Thompson Research Group: Matt McCall - VP, IR and Corporate Development Jeff Lorenger - Chairman, President and CEO Marshall Bridges - SVP and CFO

Operator: Hello, and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the HNI Corporation First Quarter Fiscal 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Matt McCall. Please go ahead.

Matt McCall: Good morning. My name is Matt McCall. I'm Vice President, Investor Relations and Corporate Development for HNI Corporation. Thank you for joining us to discuss our first quarter fiscal 2024 results. With me today are Jeff Lorenger, 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 risks. 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 Lorenger. Jeff?

Jeff Lorenger: Thanks, Matt. Good morning, and thank you for joining us. During the first quarter, our teams continued to build upon the strong progress we have made over the past two years. We delivered earnings that were nearly triple the prior year period with operating margin and EPS reaching first quarter levels not seen since 2007. First quarter non-GAAP EPS of $0.37 was up 185% year-over-year. This was despite an 8% organic revenue decline which was primarily driven by continued housing market softness. Our strong results continue to be fueled by our legacy workplace furnishings profit transformation plan and the inclusion of Kimball International which combined to deliver the highest first quarter workplace furnishings operating profit margin since 2016.

At residential building products, our recent cost actions help support profitability despite a continued soft housing market. Longer term, we remain bullish about the prospects of the housing market broadly and our market-leading position specifically. Overall, we started the year on a very strong note. On the call today, I will highlight three key topics. First, our profit transformation actions continue to drive improvement in workplace furnishings. When excluding the benefits of Kimball International, legacy workplace furnishings non-GAAP operating margin expanded 560 basis points year-over-year. Looking forward, we expect profit growth and margin expansion to continue. Second, Kimball International delivered strong accretion. The addition of KII is already providing significant value creation to our shareholders and there is more to come.

We continue to expect annual cost synergies resulting from the combination with KII to total $35 million when mature. Third, residential building products posted solid profit despite ongoing housing market challenges. Recent cost reduction actions continue to support profitability and we expect revenue growth and margin expansion to return through the year. 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, our profit transformation actions continue to drive improvement in workplace furnishings. As I mentioned, first quarter non-GAAP operating profit margin for legacy workplace furnishings improved 560 basis points year-over-year.

That was the eighth straight quarter of year-over-year operating margin improvement in the segment and there is more to come as we expect additional benefits from our profit transformation plan during 2024 and beyond. As a reminder, our legacy workplace furnishings profit transformation plan consists of four primary actions. First, we are driving increased productivity. Second, benefits from price -- positive price costs are helping to drive improved profitability. Third, we have streamlined our cost structure. And finally, we continue to simplify our business. Some of these benefits of this plan are recognized in our results and have helped drive the recent strength in our margins. We also continue to see opportunity. Our operational investments, primarily in our new facility in Mexico, will help drive substantial productivity benefits as they mature over the next couple of years.

This will add to our continued lean efforts and help drive additional profit growth. Next, we expect continued net price cost benefit through the remainder of 2024 from pricing actions announced over the past 12 months. Finally, the rollover benefits from our corporate-wide cost savings program will provide an incremental profit support in 2024. All of this gives us line of sight to additional margin improvement. And as I said earlier, we expect year-over-year profit growth and margin expansion in workplace furnishings to continue in 2024 and beyond. Let's shift to workplace furnishings demand. Our view of the market is mostly unchanged from our last call. First quarter organic revenue was down 2.5% year-over-year, consistent with our expectations.

SMB again outperformed contracts. In the near term, demand remains choppy, but is stable within a range. SMB orders grew 1% year-over-year in the first quarter, on top of an 18% increase in the first quarter of 2023, which was positively impacted by price increase timing. This segment of our business continues to benefit from healthy dynamics, including population shifts to markets outside the top 10 and relatively higher office usage in those markets. We expect these factors, along with increasing preorder metrics, to continue to support SMB demand. Switching to contract demand, trends further improved in the quarter. Orders from contract customers were also up 1% in the first quarter on a year-over-year basis. The year-ago comp was also challenging in contract with first quarter 2023 order growth of 14%, which was also positively impacted by timing of price increases.

The two-year order trend is encouraging and is consistent with many of the other demand indicators. Our preorder activity and quoting remain elevated, return to office metrics continue to tick up and reached post-pandemic highs in recent weeks, lease churn is expected to accelerate as tenants take advantage of attractive lease economics and non-viable office space is repurposed and the need for companies to adapt their spaces for hybrid work will further support demand. In summary, we continue to see encouraging trends related to future demand, particularly given our unique market position and overall market coverage. However, as we have communicated for several quarters, our profit transformation plan does not require volume growth. Volume growth will only enhance our profitability.

Moving to my second topic, Kimball International delivered strong accretion. KII generated an operating profit margin of 9.3% and added an estimated $0.10 to non-GAAP EPS in the first quarter. We continue to expect annual cost synergies to reach $25 million in 2024 and total synergies are expected to reach $35 million when fully mature. From a revenue perspective, KII solidly outperformed the expectations we shared with you last quarter. The upside came from the hospitality segment. Hospitality has been performing well. However, entering the quarter, we had expected revenue recognition to be negatively impacted by shipping delays related to disruption in the Red Sea. Those delays did not materialize, which helped drive hospitality revenue above our expectations.

We continue to be encouraged by the complementary nature and attractive post-pandemic positioning of KII's offering. The addition of KII is providing significant value creation. As we have highlighted, Kimball International is complementary from a product, market and cultural perspective. KII strengthens our 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 combinations strategic and financial benefits continues to prove out and accelerate. My third topic, residential building products, posted solid profit despite ongoing housing challenges. Recent cost reduction actions continue to support profitability.

Segment non-GAAP operating margin for the first quarter was 14.4%. This represents the seventh consecutive year with first quarter segment non-GAAP operating margin at or above 14%. We were able to extend this level of performance in '24, despite a 17% year-over-year revenue decline as housing market weakness continued to pressure demand trends in the quarter. Let me provide some color on the first quarter revenue decline in residential building products. First, the year-over-year rate has some noise in it. We are comparing against the prior year period that benefited from unwinding demand that had built up during the back half of 2022. Our first quarter revenue and order growth rates are somewhat distorted due to that issue. Second, consistent with broader housing trends, R&R performed worse on a year-over-year basis than new construction.

And third, the year-over-year revenue decrease was modestly worse than expected, primarily due to slower new construction which was negatively impacted by weather early in the quarter and more recently by incrementally higher interest rates and inconsistent builder sentiment. Looking forward, year-over-year single-family permits and starts are showing healthy growth, which supports new construction improvement going forward in 2024. Segment orders showed improvement consistent with the broader market indicators in the first quarter. Orders in new construction outperformed remodel retrofit with new build orders down only low single digits year-over-year. Despite some near-term headwinds, we are bullish on the intermediate to long-term dynamics for the business.

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 in our residential building products segment improved during the quarter and the intermediate to long-term demand dynamics continue to remain encouraging for this business. Looking through the remainder of 2024, we expect growth and margin expansion to return through the year. I will now turn the call over to Marshall to discuss our outlook for 2024. Marshall?

Marshall Bridges: Thanks, Jeff. Let's start with our demand outlook. We expect 2024 organic revenue and workplace furnishings to grow at a low single-digit rate year-over-year. That outlook is unchanged from what we communicated on our last call. We expect demand conditions to remain generally in line with those experienced over the last nine months, and we continue to expect demand will be choppy, but stable in a range. In residential building products, revenue trends are expected to improve as the year progresses, with year-over-year growth returning in the second half. For the full year, residential building products revenue is expected to be flat to slightly down versus 2023 levels. All right, let's shift to our outlook for 2024 earnings.

We expect full-year EPS to strongly increase from 2023 levels, primarily due to continued margin expansion in workplace furnishings and the full-year benefit of accretion from KII. Looking at the second quarter of 2024, we expect earnings per share to solidly increase year-over-year. Again, we expect the benefit of Kimball International and continued profit transformation and legacy workplace furnishings to drive the increase. I would like to point out that we are now facing increasingly difficult year-ago comps as the second quarter of 2023 showed noticeable benefits from our profit transformation initiatives. We expect second quarter workplace furnishings organic revenue to be down slightly versus the same quarter of 2023. Moving to Kimball International for the second quarter of 2024, we expect KII to be accretive to non-GAAP EPS, generally in line with first-quarter results.

KII is expected to add $75 million to $80 million of incremental revenue to the second quarter. As a reminder, this is reflective of two months of incremental revenue as we anniversary the closing of the transaction in June. Finally, in residential billing products, year-over-year declines are expected to moderate with second-quarter revenue down in the low single-digits versus the year-ago period. This reflects new construction growth and moderating declines in R&R. Shifting to the balance sheet, we maintained our strong financial position. Our gross leverage ratio of 1.9 times remained below 2 times for the second straight quarter as higher profit offset a modest seasonal increase in debt. Looking forward, we expect to modestly reduce leverage and improve our already strong balance sheet over the rest of the year.

In addition, during the quarter, we accelerated our share repurchase activity. While the total outlay during the quarter was modest, our ability to hold leverage steady while deploying cash speaks to our strong cash flow characteristics. Our low leverage and consistent cash flow generation provide substantial financial flexibility and ample capacity for capital deployment. Our current priorities for cash deployment remain reinvesting in the business, funding dividends and pursuing share buybacks and M&A opportunities. All right. I'll now turn the call back over to Jeff.

Jeff Lorenger: Thanks, Marshall. We had an excellent start to 2024, as our strategies continue to deliver outstanding earnings growth. We are committed to expanding margins in workplace furnishings and driving long-term revenue growth in residential building products. Our results to begin 2024 reflect the dedication of our member owners, the strength of our business model, and our ability to manage through all parts of the economic cycle. And we anticipate another strong year in 2024. We will now open the call to your questions.

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