HNI Corporation (NYSE:HNI) Q1 2024 Earnings Call Transcript

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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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Reuben Garner with The Benchmark Company. Please go ahead.

Reuben Garner: Thank you. Good morning, everybody.

Jeff Lorenger: Good morning.

Reuben Garner: So maybe to start with a big picture question. Earnings or margin performance in the last three or four quarters has been pretty remarkable. You mentioned difficult comps Marshall kind of starting in the second quarter. Can you talk about what’s left to go in terms of what you control in terms of earnings expansion as the year progresses and into next year?

Marshall Bridges: Yeah, Reuben. I think we still have the same primary drivers, productivity, cost control, and the SG&A line. And of course, price cost is just that, all those up against stronger comps. So in particular, price cost is going to taper off here a little bit. That was a decent benefit in the first quarter. We still expect it will be a benefit for the remainder of the year, just less so.

Jeff Lorenger: Yeah, Reuben, I’d just add that, Marshall, hit it. I mean, really — we got our lean efforts both in both segments, both businesses, labor flow, materials. We’re seeing early benefits from our investments, mainly Mexico and the workplace furnishing side. And then we’re getting to procurement savings as well. So we probably pumped in about $30 million to $35 million of benefit in ’24. But I think as you look out past ’24, I think I’d anticipate another $30 million or so on top of the ’24 number.

Marshall Bridges: And that 30, Reuben, would be from the Mexico investment, as well as synergies from KII. We’d have our usual lean efforts on top of that. So that’s after this year, just to clarify.

Reuben Garner: Okay, good. That’s helpful. And then I guess on the building products side, anything in terms of the size of homes or affordability that concerns you or signs that you’ve seen where we might be running into headwinds on the number of fireplaces per home, or do you guys have an offering at that price point to kind of offset it, if affordability for the builders and the home buyers becomes a bigger issue?

Jeff Lorenger: Yeah, Reuben, that’s a good question. I mean, affordability has been an issue for a while now. And so, we’ve watched that and we — our product pipe accounts for that. The other thing I would talk about is, we got some newer units in the electric category that are — that really address some of that as well, that we’ve got a long — a lot of innovation going there. So, no, I don’t see the headwinds being any more than they’ve been candidly for the last couple of years.

Reuben Garner: Okay. And last one for me, rates moving up again here of late, your conversations, I guess, specifically in the SMB side, it doesn’t sound like the outlook has changed a lot. Any risks to that or you think the other drivers are more than offsetting it on a go-forward basis?

Jeff Lorenger: Yeah, I think, look — ’24 is an interesting time given the kind of economic cycle and election year, but for the most part, we see that business and the drivers holding pretty solid. And I would say that the orders in most of those, what we look at, most of those areas are running, running at where we’ve been or slightly up.

Marshall Bridges: Yeah, Reuben, that’s a business that’s done pretty well for last several quarters and we’re still seeing growth on top of those strong comps. So we’re pretty — feel pretty good about it. And I think the encouraging thing is we’re starting to see contract converge with that growth. So contract orders were up in the first quarter and we’re expecting some reasonable growth in the second half from both contract and SMB.

Reuben Garner: Great. Thanks for the color, guys, and congrats on the strong quarter. Good luck going forward.

Jeff Lorenger: Thank you.

Operator: Your next question will come from the line of Greg Burns with Sidoti & Company. Please go ahead.

Greg Burns: Good morning. The dynamic you mentioned…

Jeff Lorenger: Good morning.

Greg Burns: …with Kimball impacting the revenue recognition, I guess, there this quarter, was that pulled forward? I’m just trying to gauge, like, are you expecting, like, is your guide for the second quarter lower than it would have been otherwise? Like I’m just trying to kind of gauge if this is like the normal seasonality that you’re expecting for the business going forward or if this is just timing issue with some of these orders you were expecting to shift around.

Marshall Bridges: Yeah, it’s a timing issue and it did pull from the second quarter. So if you look at our guide for the incremental revenue from KII, it’s pretty much the same as it was last quarter, but we got more of it in the first quarter. And that’s a business that is project-oriented. So there’s not necessarily seasonality to it. It just depends on when the timing of those projects occur.

Greg Burns: Okay. And then what’s the split of your revenue now on the building product side between new construction and remodel retrofit? Does that change much?

Marshall Bridges: It hasn’t changed much. It’s very close to 50-50. Certainly with the remote retrofit being down more than new construction, maybe a tad, more new construction right now, but it’s close enough to 50-50 to not change that ratio.

Greg Burns: Okay. Okay. And then I guess you kind of touched on this, but it seems like your — the contract side of the business is, seems to be showing some more activity. I guess maybe can you just talk about what you’re seeing in terms of funnel activity there, conversations with your customers, anymore color you have there. Do you feel better about that side of the business and see maybe improving demand outlook there?

Jeff Lorenger: Yeah, Greg. I think, that’s how I would characterize it. Current trends, we think our funnel, our quoting, our preorder activity is solid. It’s actually — we’ve got double-digit growth rates and all those preorder metrics. What I would say is that we’ve got some segments that are showing some pretty decent activity. Both project pipe, Fed gov, corporate accounts in that space as well. Now, having said all that, what I would say is, I think it’s going to be a slow, steady grind up. It’s not to the moon. I think it’s — but the good news is those [pre-order met] (ph) those are starting to convert and we’re having those pre-order metrics are up nicely and I think the cycle is a little elongated. So it’s just going to kind of be a slow, steady grind. But it does predict, the outlook will be growth in the contract space as we go forward.

Greg Burns: Okay, thank you.

Operator: Your next question will come from the line of Budd Bugatch with Water Tower Research. Please go ahead.

Budd Bugatch: Good morning, Jeff. Good morning, Marshall, and Matt and Jack.

Jeff Lorenger: Hey, Budd.