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Good day, everyone, and welcome to the HNI Corporation Second Quarter Fiscal 2023 Results Conference Call. Today's call is being recorded. 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 Mr. Matt McCall. Please go ahead, sir.

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 second quarter fiscal 2023 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?

Thanks, Matt. Good morning, and thank you for joining us. Our second quarter results exceeded our expectations, demonstrating the momentum of our strategies, our market positions and our recent actions to streamline our businesses. On the call today, I will highlight three key topics. First, our profit transformation efforts in Workplace Furnishings are ahead of schedule and helped drive non-GAAP profit growth despite lower volume. Our Workplace Furnishings margins have been reset. Second, since closing the Kimball International acquisition, we have become even more confident in the benefits of the combination. In addition, we have signed an agreement to divest Poppin and anticipate closing in the third quarter. Once closed, the exit will increase our projected attrition and unmask the strength of Kimball International's core business. And third, we put actions in place to support near-term profitability and residential building products, while staying focused on our long-term strategic investments. Following those highlights, Marshall will review our outlook. I will then conclude with some general closing commentary before we open the call to your questions. Moving to the first topic. Our profit transformation efforts and workplace furnishings are ahead of schedule as we grew non-GAAP profit despite lower volume. When compared to the prior year period and excluding the Kimball International acquisition, non-GAAP EPS grew 6% despite 15% lower organic sales. Non-GAAP gross margin expanded 270 basis points and non-GAAP operating margin expanded 150 basis points. The profit improvement was driven by our transformation plan and workplace furnishings. That plan remains unchanged and consists of four primary actions, which are driving sustained margin improvement. First, we are driving increased productivity. Our productivity efforts have exceeded our near-term targets as reflected in our second quarter results, and we expect an even greater impact in the second half. We are also investing to make our operational footprint more resilient and efficient primarily through our new facility in Mexico. Our future results will greatly benefit from these investments as they mature. Second, we have streamlined our cost structure. We continue to expect $25 million of our previously announced cost savings initiatives to impact Workplace Furnishings this year. Third, we continue to simplify our business, -- our most attractive markets. The actions we took over the past year to divest our China business and rationalize our e-commerce offering are examples of simplification efforts that are currently improving our profitability. And fourth, our efforts to improve price costs continue to provide a benefit. As a result of these actions, second quarter non-GAAP operating margin in Workplace Furnishings expanded 550 basis points to 8.5%, excluding the impact of the Kimball International acquisition. That was the highest margin since the third quarter of 2019, and it was the fifth consecutive quarterly period of year-over-year non-GAAP profit improvement in Workplace Furnishings. Our profit transformation plan does not depend upon volume growth. However, we are encouraged by the demand trends in Workplace Furnishings. Segment orders for the first six months of 2023 grew approximately 3% year-over-year. We continue to see strong performance in the small to midsized customer segment, where we have an unmatched competitive position. Organic orders from the SMB customer group were up approximately 10% during the first half, while orders from contract customers declined at a mid-single-digit rate over the same period. The improving Workplace Furnishings order rates reflect trends associated with employment growth with small to midsize offices, population shifts to secondary geographies and increased furniture events driven by the adoption of hybrid work models and expiring leases. These trends all align with our strong market coverage and our product and price point breadth and depth, positions that will be further enhanced through our combination with Kimball International. Moving to my second topic. Since closing, we have become even more confident in the benefits of our combination with Kimball International. The addition of KII will strengthen our business. Together, we are strongly positioned to lead in the evolving workplace environment with an expanded presence in secondary geographies and leading positions in ancillary products. And the cultural fit between the organizations is strong, and both sides are beginning to identify and unlock new opportunities for profit growth. We now see the previously announced annual run rate synergy amount of $25 million as a floor with strong potential for more. Additionally, we have signed an agreement to sell Poppin, which was acquired by KII in 2020. Based on trailing 12-month results, the sale of Poppin is estimated to increase annual operating profit by $20 million, while reducing annual revenue by $56 million. The divestiture is expected to be closed during the third quarter. Poppin's operating losses have masked the strength of KII's core businesses, which collectively generated an operating margin over 10%. My third topic is we have put actions in place to support near-term profitability in Residential Building Products, while we stay focused on our long-term strategic investments. Our Residential Building Products segment continues to face volume pressure in line with the general weakness in the broader housing market. In response to the volume declines, we have expanded our cost reduction efforts to support segment profitability. Specifically, these actions will lower 2023 segment expenses by an additional $5 million to $10 million. When combined with our previous actions, our HNI-wide cost reduction efforts now total $40 million to $45 million, up from the $35 million previously announced, $15 million to $20 million, of which will impact Residential Building Products this year. Our cost reduction efforts, along with the return of normal seasonality patterns, will result in improved segment profitability beginning in the third quarter of this year. In addition, recent demand trends have shown improvement. Second quarter orders in this segment decreased 16% versus second quarter of 2022. This is a significant improvement from the minus 37% in the first quarter of 2023. Furthermore, comps get easier in the second half of this year, as we compare against the second half 2022, when orders were down 12%. Short-term, notwithstanding, the intermediate to long-term demand dynamics remain encouraging for this segment as we are well positioned for sustained revenue and profit growth. US housing is undersupplied, demographic trends point to robust future construction growth and their indications that renovation activity will accelerate as existing homeowners are less likely to relocate, given the current mortgage environment with many having attractive lower interest rates. In addition to strong market fundamentals, we have unique growth opportunities. We continue to invest in our initiatives aimed at expanding the market, including in the areas of category awareness, new product innovation, online capabilities and the expansion of our wholly-owned installing distributor footprint. The market strong fundamentals, our unique growth opportunities and our category-leading positions point to the return of strong growth beyond 2023. I will now turn the call over to Marshall to discuss our outlook. Marshall?

Thanks, Jeff. Let's start with demand, where we have seen trends generally improve over the past quarter. In Workplace Furnishings, we expect organic revenue growth rates in the low single-digits for the second half of 2023, that outlook is consistent with first half order patterns and excludes Kimball International. In Residential Building products, we expect year-over-year declines to moderate in the second half, due to lower prior year comparisons, improved trends in new construction and moving past the normalization of inventory in the channel. Specifically, we expect Residential Building products revenue to decline at a rate in the high teens during the second half of 2023, with the fourth quarter declining at a slower rate than the third quarter. Let's shift to the financial benefits expected from Kimball International. We expect KII to add $290 million to $320 million of revenue to the second half, excluding Poppin. We also project KII to add $0.10 to $0.15 to second half non-GAAP EPS, again, excluding Poppin. A few notes on that projection. First, it's based on our current view of purchase accounting, which is not yet final. Second, it includes the benefits of synergies, which we expect will be at an annual run rate of $10 million in the second half. And third, the non-GAAP EPS benefit is expected to be greater in the fourth quarter. Regarding Poppin, it will negatively impact non-GAAP EPS until the divestiture is finalized, which we expect to occur prior to the end of the third quarter. Specifically, we estimate Poppin will add $7 million to $9 million of revenue in the quarter, with an expected operating loss of $3.5 million to $4 million. I should note that Poppin will be included in our non-GAAP third quarter results like it was in the second quarter. All right. Let's shift to second half profit. We expect our profit transformation actions to continue to drive profit and margin improvement in our legacy Workplace Furnishings business. Those drivers and the net benefit of KII and Poppin that I just covered, are expected to more than offset the negative impact from lower volume in Residential Building products, that's being driven by the weaker housing market. Altogether, we expect profit growth in the second half of 2023 in the Workplace Furnishings segment, and for HNI overall. Let's now cover our third quarter outlook. We expect organic Workplace Furnishings revenue to be approximately flat to slightly up compared to the prior year. When including Kimball International and Poppin, we expect Workplace Furnishings revenue to be at a year-over-year rate in the low 40% range on a reported basis. In residential building products, we expect revenue to decline at a rate in the low to mid-20% range versus the third quarter of 2022. We expect non-GAAP EPS to be modestly below third quarter 2022 levels, primarily due to lower volume in residential building products, the normalization of variable compensation and the impact of Poppin. We expect those negative factors to be partially offset by continued profit improvement in Workplace Furnishings and benefits from KII. Shifting to the balance sheet. We ended the second quarter with debt to EBITDA of 2.3 times as calculated under our existing credit agreements. However, the definitions governing debt and EBITDA will change if we repay our private notes. Under those new definitions, our leverage at the end of the second quarter would have been an estimated 1.6 times, we had the capacity to repay those notes which totaled $100 million. Regardless of the definition, we have a very manageable level of debt and we have a history of generating strong free cash flow through a variety of economic conditions. The combination with Kimball International will further strengthen our cash flow, our reasonable leverage and cash generation will provide flexibility for the dynamic environment and continued investment. I'll now turn the call back over to Jeff.

Thanks, Marshall. In summary, our second quarter results in Workplace Furnishings showed the clear benefits of our profit transformation initiatives. And importantly, there are still many opportunities ahead. As we look through the remainder of the year, we expect continued year-over-year profit and margin improvement in Workplace Furnishings. The addition of Kimball International to HNI will strengthen our business and we are increasingly confident in the combination of strategic and financial benefits. KII enhances our position to lead in the evolving workplace environment and provides new opportunities for profit growth. And we have confirmed at least $25 million in annual synergies with a strong potential for more, none of which includes eliminating Poppin's $20 million annual loss. Finally, in residential building products, we have demonstrated the ability to grow profits over the long term, and we'll continue to invest in our growth strategies, even as we navigate near-term housing headwinds. The intermediate to long-term fundamentals of the housing market is strong. Our market-leading brands, product depth and price point breadth uniquely position us to drive high-margin growth through category awareness and product innovation, all while we've continued to leverage our owned installing distribution footprint. In closing, our strategies are unchanged and gaining momentum. We will continue to expand margins in Workplace Furnishings, deliver value creation through the KII combination and drive long-term revenue growth in residential building products. I would like to thank all our HNI members with the dedication and focus and continued effort as we pursue our strategies going forward. We'll now open the call to your questions.

Thank you. [Operator Instructions] We'll take our first question from Greg Burns with Sidoti.

Good morning. Can you just talk about maybe the demand trends you're seeing in Workplace Furnishings, particularly the order trends you've seen since the end of the quarter? And are you seeing any improvement in maybe activity in the contract side of the business with maybe work from -- return to office trends improving or anything of that nature that might be driving demand for the Workplace Furnishings business?

Yeah, Greg, I'd say since the start of the third quarter, we've seen solid positive orders in our Workplace Furnishings segment. Orders are running ahead of the first half rate, which was a 3% rate organically. So generally speaking, we're out of the blocks with some momentum, activity is picking up on a pre-buy basis. So I'd say it's cautious, but we're liking how we started.

Okay. And then for the Residential Building Products segment, is there a target margin that you're targeting for that business with the savings, or where do you think you could operate that business in the current demand environment?

Yeah, Greg, as you look at our seasonal profit pattern before the post-pandemic a couple of years there. The second quarter is always our lowest margin quarter. So we expect margins to increase from these levels due to natural seasonality. We also expect that the demand trends are improving. And then we've got this additional support from these actions we just took. So when you look at back half margins, we expect them to be much better than they were in the second quarter, and we expect to get into that mid to upper teens range.

All right. And we'll move on to our next question from Reuben Garner with the Benchmark Company.

Thank you. Good morning, everybody.

Morning.

So I guess to start the margin performance in the legacy workplace segment was really impressive. Can you talk about what's baked into the guide for the third quarter from a profitability standpoint in that segment? Any reason why you go backwards from the levels that you just put up? And, I guess, I'll stop there for a follow-up.

Yeah. Look, we're committed to expanding our margins in Workplace Furnishings, Ruben. If you look at the year-over-year improvement that we saw in the second quarter, roughly $20 million year-over-year. We'd expect similar improvement, maybe slightly less. The slightly less probably has more to do with the variable comp difference from a year-over-year perspective, which is a little more challenging. But, yeah, we don't intend to go backwards, although there may be some quarterly fluctuations, but the general trend should be upwards for a bit, lots of opportunity ahead of us to continue to expand margins, not only this year but in years to come.

And the big step-up that we've seen is -- how much of that is -- is it pretty evenly divided price cost between the -- and the strategic initiatives that you put in place over the last nine to 12 months?

Compared to the prior year, our total profit improvement really is driven by about $25 million of price cost in the second quarter. We got about $10 million of benefit from our cost savings program, and we picked up about $11 million from just being more efficient in how we operate our business at the SG&A line, which kind of reflects our efforts to streamline things. So those are really what's driving it. And if you extrapolate that over to Workplace First, it's a pretty similar for drivers there, three drivers.

Okay. And then moving on to open or the Poppin decision. Can you just talk about what kind of went into that? Is it just as simple as you guys maybe already have products or a way to surge that market? Was there just no path long-term to kind of getting that business to be in profitable as the rest of your business? Any kind of background color you could give would help?

Yes, Reuben, it's a good question. I mean, as we pointed out, part of this is stream -- we've been streamlining our business for profit where we compete best in the most attractive markets. And we've right-sized our e-com business coming into this. We dispossessed our China business. And this is along the same lines. We looked at it, and it's -- it's got a good brand. It's doing its thing. But it really frees up the strength and profitability of the core KII business. And so that was really -- that was really the reason we did it is it kind of fits that bill like we've been managing the business to this point.

And Reuben, I'd like to maybe point out that it also kind of reveals the value of our investment in KII. When you look at our multiple enterprise value divided by EBITDA and you subtract out the losses that Poppin had and add in the $25 million of synergies that we expect and see potential for more. You're looking at a valuation multiple in the mid-5s, which we see is very attractive.

Very helpful. Last one for me. I'm going to sneak one more in. The residential building product outlook, we've seen new construction to try and kind of stabilize or even improve over the last three months to six months. Is the kind of near-term weakness you're still seeing into the third quarter, is that driven more by what we're seeing on the repair and remodel side of the equation?

Yes. Reuben, we have seen the single-family permits trend a bit better here late in the second quarter. I mean, typically, we kind of see pretty good correlation between single-family permits and our activity 90 days later. So look at the first quarter, single-family permits were down 32%, kind of in line with where we were in our second quarter. We did see single-family permits really get a lot less bad in June, but we think that's probably going to play out more in the fourth quarter than the third. And that's one of the reasons we're expecting our declines to moderate as we move into the back half. And if that trend continues, there is some benefit to our -- what we projected some upside to it.

Okay. Great. Thanks. Congrats again on the strong results and good luck.

Thanks.

We'll take our next question from Budd Bugatch with Water Tower Research.

Good morning and thank you for taking my questions as well. I guess my first two questions are just going to follow up with some comments that Marshall, you and Jeff made. You said, I think, in RVP, you expect margins to get back to mid to upper teens. Is that the second half of this year, is it mid NIM in the third quarter and upper teens in the fourth, or is that a longer-term aspiration?

That comment was meant to be for the full year 2023, Budd.

Okay. For the full year, including the second quarter?

Correct.

…because those margins were as low I think they've been six years ago or so?

Yeah. We believe that we're going to see much margin improvement sequentially from the second quarter in this year.

And the full year will be mid to upper teens?

Yeah. I mean, we're talking in like 16%, 17% range.

Okay. That's fine. And Jeff, you said out of the blocks, third quarter is better than the second quarter. Is that contract versus SMB, or is that how do you characterize that?

Yes. I think it's mostly SMB when you're comparing Q3 to out of the blocks to Q2. That's where the relative strength continues, Budd. Orders are still down year-over-year mid-single digits in contract, but the funnel continued to show -- is showing the growth and activity metrics are picking up for sure.

So -- orders are still down year-over-year, but narrowing to getting close to breakeven?

Yeah. I would say that's a fair assessment, but that's a fair assessment for sure.

Okay. And I don't want to beat this dead horse too much, but I see on some of the comments on social media kind of things, some raised eyebrows on the Poppin decision. Can you kind of maybe go over how that decision was made or when that decision was made? Was it made prior to the closing of the acquisition, or was it something you're excited as you got deeper into it after the acquisition closed?

Yeah. Budd, I mean, I haven't -- I don't know what -- I don't really follow a lot of social media, but I would tell you it was made after and we take all this stuff very seriously, and we looked at it in the context of how we're managing the overall portfolio and business. And it kind of fell into that camp of streamlining our business to markets where we believe we have attractive long-term profitable growth prospects. And that really resulted in the decision it's not much more complicated than that.

Okay. That's fair. And the conditions of the sale agreement, you evidently must have found already buyer forward. Are there any conditions that could cause that to go off the rails is there financing conditions or something like that, that could cause it to be delayed or deferred or canceled?

No, Budd, we don't see that -- it's a pretty straightforward transaction.

I got you. Okay. And I'm a little -- and this is my own failings. The accounting, you got it held for sale. Is there a reason why it's discontinued ops or how does that work, Marshall?

Yes. Budd, it qualifies as held for sale, it would not qualify for discontinued ops since it's being sold. And you see it on the balance sheet there. There's another asset in our held-for-sale category as well as Poppin. So there's two things in there.

I got you. And so -- okay. And tax rate for guidance, what are you looking for tax rate for the second half or the full year

For the full year, we expect non-GAAP tax -- the effective tax rate to be close to 23%, it probably be closer to 23% in the third quarter, but -- then the different, right, because of the deductibility of the -- some of the transaction expenses

We'll take our next question from Steven Ramsey with Thompson Research Group.

Got you. Okay. And then are delivery time lines of orders being placed for the Workplace segment, are those delivery time lines pretty normal now, or are customers still deferring some of that delivery?

I think they're normal in the -- once they place the order. I mean, there's still a group of customers that continue to wring their hands and look and look at where their lease terms are expiring and try to figure out what their play is going to be, but those who have been spurred into activity, those -- that group has -- looks like it's normalized.

Okay. Helpful. And then definitely interesting color on legacy HNI margin being 300 bps lower than Kimball ex pop in the second quarter. Is there anything irregular there, the moves you're making in the legacy Workplace segment? Is that expected to close that margin gap into the high single-digit, low double-digit range, something that happens in the next 6 to 12 months?

Steve, we're absolutely committed to expanding margins in our legacy Workplace Furnishings business. It's one of our core efforts. As Jeff said in his prepared comments, we've got kind of a four-point plan to make that happen. So as I said earlier, we're expecting continued margin expansion there. I don't know that our goal is to close the gap. We'd like to see margins expand in both KI and legacy HNI, but we certainly are going to improve margins in legacy HNI.

Helpful. Thank you.

We'll take a follow-up question from Budd Bugatch with Water Tower Research.

Yeah. I just wanted to go over a couple of other quick things. On the last two calls, if I remember correctly, you made points about the seasonality of earnings over the year. And I'm just curious, if you had any expanded comment on that that relationship, I think the store you shut if I remember, for this year.

Yeah. Budd, I think we're expecting it to be in that range, that the pre-2022 average is kind of one-third first half, two-thirds second half. And I think we're going to be relatively close to that this year.

Okay. And last for me, in RVP, you talked a little bit about some improvements seen. And I think previously you said new housing was weaker than remodel/retrofit. And I'm curious, if you're seeing that improvement primarily coming out of new housing versus remodel/retrofit and whether there's any color on the incidence of attachment, which has been an issue with new houses.

We're seeing improvements in the order and projected revenue rates in both, new construction and remodel/retrofit. Remodel/retrofit was off more of a new structure in the second quarter. And a lot of that had to do with this inventory correction that we saw that the trade underwent in the second quarter. Some of that will happen in the third. But as we get into the back half, that's going to be behind us can help us see better rates there. New construction, as I said earlier, the single-family permit data, the general new construction activity is trending better, and we're starting to see that flow through, although it's probably more of a fourth quarter phenomenon and then a third quarter phenomenon.

Yeah, Budd I think your comment…

And is there…

Oh sorry, Budd go ahead.

Go ahead. I'm sorry, Jeff.

Well, I was just going to say, attachment rates are about where we've been running. I mean those are stable, and actually, we're focused on that as well. But those are holding up like they have been, last couple of years.

You've had some wonderful initiatives trying to get back to reverse the longer-term trend. And I'm curious, whether or not we're seeing any of that bottoming and starting to maybe get to the bottom of the smile curve and back up the other side.

Yeah, I think we're clearly seeing that bottom, Budd. So I think we're bullish on our ability to turn that given some early indications we have with our customer journey work and with our category expansions into electric, et cetera.

Yeah, I was wondering whether in fact it was coming primarily from electric or some of the other expansions.

Yes. It's kind of across the board, actually. It's really category awareness and getting the homeowner and the home buyer and their buying journey, when making them aware of their options and educating them earlier in the process.

Okay. Thank you very much. It's a so wonderful business. So the fact that you can expand that would be great. Thank you.

Great. Thanks Budd.

There are no further questions at this time. I'd like to turn the call back over to Mr. Lorenger for closing remarks.

Great. Appreciate everyone's interest in HNI today. Thank you for joining us and having a dialogue. Have a great day.