Good day, everyone and welcome to the HNI Corporation's Third 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 speaker's remarks, there will be a question-and-answer session. [Operator Instruction] I will now turn the conference over to Matt McCall. Please go ahead.

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 third-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 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 am now pleased to turn the call over to Jeff Lorenger. Jeff?

Thanks, Matt. Good morning. Thank you for joining us. During the third quarter, our profit transformation actions continued to accelerate reflecting the focus and dedication of our members. We delivered 31% year-over-year growth in non-GAAP earnings per share despite facing top-line headwinds from ongoing macroeconomic pressures. On the call today, I will highlight three key topics first, we continue to deliver strong margin expansion in Workplace Furnishings. However, we are not finished and see more opportunities ahead. Second, the divestiture of Poppin will drive immediate financial benefits and the integration of Kimball International is progressing nicely. KII accretion exceeded our expectations in the quarter and we expect the rate of accretion to increase over time. Third, we demonstrated the resiliency of our Residential Building Products business model in the face of housing market weakness. Cost reduction actions enacted last quarter helped the operating margin in this segment remain unchanged compared to the same period of 2022. This was despite a year-over-year revenue decline of 22%. Following those highlights Marshall will review our outlook, I will then conclude with some general closing comments before we open the call to your questions. Moving to the first topic, we continue to deliver strong margin expansion in Workplace Furnishings. When excluding KII and Poppin. Non-GAAP operating margin in this segment expanded 820 basis points year-over-year to 10.7% as our profit transformation plan continues to deliver results. This was the sixth straight quarter of year-over-year operating margin improvement, both operating profit margin and operating profit dollars reached the highest level since the third quarter of 2019, despite lower industry volume. We made strong progress with our profit transformation initiatives. However, there is still work to be done and we have a line of sight to additional improvement opportunities. As we have discussed on previous calls,…

Thanks, Jeff. Let's start with our expectations for demand in the fourth quarter. In Workplace Furnishings, we expect organic revenue to be approximately flat with fourth quarter 2022 levels. That outlook is consistent with recent order patterns, it excludes Kimball International, and it assumes continued SMB outperformance. In Residential Building Products, we expect revenue declines to further moderate in the fourth quarter with revenue declining at year-over-year rates in the high single digits to low teens. That outlook assumes new construction will outperform our model retrofit. Let's shift to the expected impact of Kimball International. For the fourth quarter, we expect KII to add $140 million to $150 million of revenue. We also project KII accretion will be consistent with third quarter results. An additional note on KII, earlier, Jeff mentioned $5 million of incremental purchase accounting costs in the third quarter of that $5 million, approximately $3 million is associated with inventory step-up and should be considered one-time in nature. That points to an adjusted operating margin for KII of approximately 12.5% in the third quarter. Fourth quarter non-GAAP EPS is expected to solidly increase year-over-year to be modestly below our just reported third quarter results, this is consistent with normal seasonal patterns. Recall we typically see lower sequential volumes and margins in workplace furnishings as we move from the third quarter to the fourth. Shifting to the balance sheet. We ended the third quarter with total debt of $509 million, which was down significantly from the $598 million outstanding a quarter ago, our working capital dynamics continue to improve and return to historical levels that drove free cash flow per share of more than $2 in the third quarter. In terms of leverage, our gross debt to EBITDA at the end of the quarter was 2.2 times. Our reasonable leverage and strong cash generation will continue to provide flexibility for the dynamic environment and ongoing investment. I'll now turn the call back over to Jeff.

Thanks, Marshall. Our strategies are delivering results. Operating margin in Workplace Furnishings continues to expand, reaching 10% in the third quarter. Our profit transformation initiatives have momentum, and we expect continued year-over-year profit improvement in the segment. The integration of Kimball International is doing well. KII is already strengthening our business and delivering earnings accretion, which will only increase as our synergies mature. KII better positions us to lead in the evolving workplace environment and provides new opportunities for profit growth. And we are increasingly confident in the combination of strategic and financial benefits. In Residential Building Products, we have adjusted the cost structure and demonstrated the resiliency of our margins. While continuing to invest in our growth strategies, leading brands and operating platforms. Although the near term remains dynamic, we are uniquely positioned to drive high-margin growth as housing recovers. In summary, we remain committed to our core strategies of continuing to expand margins of Workplace Furnishings and drive long-term high-margin revenue growth in Residential Building Products. I want to thank all HNI members including our new members from KII. Our results reflect their collective effort and dedication. We will now open the call to your questions.

Thank you. [Operator Instructions] We'll take our first question from Steven Ramsey with Thompson Research Group.

Hi, Good morning. Maybe to look at SMB up again and outperforming contract, do you expect this to persist for a few more quarters even though contract is stabilizing? Is there anything in the pipeline that may show directionally how the two customers drive results in the next few quarters?

Yes, Stephen, I mean, look, I think we continue to think SMB will outperform you know as I laid out in the prepared remarks, I mean we have a strong position there. That's part of it. The market is healthy, they've been hiring, returned to office, there still they even though they returned, they're still looking at furniture events in those spaces. So our belief at this point as SMB will continue to outperform and contract will stabilize. That's I think that's a good way to think about it.

Okay, helpful. And then on the population shift. It's clearly helping the Workplace segment as you've discussed for a few quarters now. Can you talk to how this is or could help the Resi segment over time, do you have the distribution in place where the population shift is occurring?

Yes, that's a good question, Steven. We do, we've added. First of all, we have a strong independent network that is services those markets, and we've also added some wholly owned distributor footprint and some of those markets recently, and we continue to be active you know keeping an eye on all of that. So I do believe that the population shift will also benefit over time the Resi business.

Okay, helpful. And then last one from me again on the Resi business curious, the dynamic you're hearing on the ground for the R&R side of resi hearing from others that it's sluggish, but steady out there and not continuing any kind of demand degradation on a sequential basis, but I'm curious if that's how you would describe spending on fireplaces.

Yes, I think overall, Steven. We're seeing demand kind of decline moderate new construction is a relative bright spot there specifically related to remodel retrofit. We're also seeing declines moderate, but not nearly as much as they are new construction, we still have pretty low existing home turnover, which drives remodeling events and of course consumer sentiment is not helping there, but certainly the trend is improving, although still down year-over-year.

Okay, that's helpful. Thank you.

Okay. We'll take our next question from Reuben Garner with Benchmark Company.

Thank you. Good morning, everyone. Congrats on the strong quarter guys. So maybe on the Workplace margins to start. Jeff, I think you said I think the words where there's room to run or more to go there. Can you talk about -- I see the savings or heard the savings could come in better than anticipated. That $50 million was that recognized-to-date number or run rate. And when you say there is more to go. I mean is this 10%-plus, kind of, legacy number sustainable without volume acceleration because of your initiatives or was there anything kind of mix-driven or one-time in this quarter that kind of boosted it?

Yes, Reuben so several, several questions in there. The first one is that the $50 million as Jeff mentioned, is our cost savings program that was really enacted starting early this year and we're another tranche kind of midyear $40 million to $45 million of that will hit 2023 with another $5 million to $10 million rolling over into '24. The part that rolls over into '24 is mostly associated with the Residential Building Products segment as it relates to Workplace Furnishings got about $25 million of that total $50 million that hits that segment, all of which hits this year. In terms of where the margins can go, we see continued opportunity the reason we up so much year-over-year in the third quarter is really three things at favorable price cost, we've better productivity, and we've better SG&A efficiency and we see opportunity in all three of those to continue, maybe not all the same rates and on top of that we had this investment in Mexico we're making that will begin mature and help out subsequent years.

Okay. And then on the residential side, you mentioned existing home sales. Just curious how much fireplace activity, retrofit activity is tied to inspection that a big part of what can drive demand, and if we do see a rebound in home sales when rates drop that can kind of get the R&R segment turned around?

Yes, I'm not sure we have precise data on inspections. But we do know that remodeling events are pretty highly correlated with the purchase of the new home usually remodeling events occur within a year or two after the-- after the purchase and given the new homes are not selling as much existing homes, not selling as much, we're definitely seeing some softness in that segment. But if it did -- if we do see existing homes tick up, we would see remodel and tick up eventually.

Okay and last one for me. Nice snapback in margins in the Residential business. I think if I'm looking at it correctly comparable to a year ago on much lower base is there any positive price cost in there as well or is all of that from the initiatives you've put in place earlier in the year?

Yes. We were flat at 17.7% operating margin in Residential Building Products in the third quarter and yes there are multiple factors that are kind of the same three factors I mentioned, we did have favorable price cost there, we also had better productivity as well as some better SG&A efficiency.

Okay, great, thanks, guys.

Thanks.

We'll take our next question from Greg Burns with Sidoti & Company.

Good morning. The outlook for flattish Workplace growth. I think last quarter you were talking about low single-digit growth in the second half. So a little bit of a reduction there. Could you just talk about what changes you're seeing in the demand environment there to lower your outlook?

Greg, I want to strike this is a major change. We did talk about low-single-digits. I think organic revenue in Workplace excluding and Poppin was 1.7% in the third quarter. So right in that range and then flattish maybe puts us at the low end of low single digits for the back half, but I wouldn't, I wouldn't call it a major change.

Okay. Kimball had a good size health business, can you just talk about maybe some of those adjacent markets like healthcare education where maybe you could drive incremental growth if the core office segment? Isn't recovering to pre-COVID levels like what initiatives you have in place and I guess specifically how was Kimball Healthcare business this quarter?

Yes, Greg, good question. I think where the activity is pretty been pretty solid throughout the year and starting to build in the health segment and KII had quite a bit of product pipe in that-- in that piece of the business that will be coming online in '24 as well. So we like that position and we do believe that's an opportunity for growth overall. Education, they've been strong in education, similar to our legacy business both have had pretty solid year-to-date, we see the education vertical as an opportunity for growth going forward as well. And then I would mention, they have a hospitality business that's competing well at this point, we see some good second-half growth in their hospitality business, kind of pent-up demand to catch up from kind of the post-COVID remodel activity, refresh rates for hotels. So all three of those, healthcare, education, hospitality, we can rotate into and lean into notwithstanding core commercial.

Okay, great. Thank you.

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

Good morning and thank you for taking my question and congratulations, on a very good quarter, to your team and to your members, really impressive. Marshall, I would love to get -- maybe if you could walk on the workplace, the Legacy Workplace even just on a GAAP basis from a $5.6 million operating profit in last year to $39.6 million this year. And I can't remember if the $5.6 million included much of Lamex a drawdown of that. I thought that might have been included all balled into the gain number. So maybe you could give us some more color on that -- on a walk from that -- those margins because that's pretty impressive.

But there is a bit of Lamex in the GAAP numbers in the prior year, both sales and profit as well as the gain. If you look at the non-GAAP, it's probably a little cleaner the segment, excluding KII and Poppins, up $31 million in operating profit year-over-year. And there's really two big items there. You got price-cost favorable about $21 million and net productivity was up about $11 million. And so there's some rounding there. But that -- those two things really drove that $31 million profit improvement in the segment.

So the 11 continues? Or is that continues and then anniversaries and the 21? How do we think about that going forward? How do we think about that kind of 2:1, kind of, ratio?

Well, the productivity is going to continue. We certainly see benefits from our ongoing lean initiatives, as well as the Mexico investment as we look out. Price-cost, this is -- we're anniversarying some lower price periods and we got pretty stable commodities. So I don't think that's going to continue at the same rate. But it's not going away immediately.

And commodities are they stable? Or are they starting to -- or have they fallen -- and are we having to do any -- are we worrying anything about pricing having to be retraced?

For the year, commodities are pretty stable. We had some inflation when you include everything early in the year, and we had a little bit of deflation here recently. As we look to the fourth quarter, we're starting to see a little bit of pressure from diesel and some other commodities. But in general, input costs are pretty stable.

And we think pricing, but we'll kind of hold in there where it's at today, where that's kind of what we're seeing in the marketplace.

And we typically do a once-a-year price increase. Do we not usually have that adjustment? Is that usually a beginning of the year kind of thing? And I know in this environment, nothing is usual, but trying to -- I'm showing the -- I'm showing my age.

But yes, Budd, it's typically kind of in the first quarter. It moves around a bit depending on the cycle, but it's typically in the first quarter.

Okay. And this has been part of your strategy, Jeff, of getting the Workplace Furnishings margins back to this kind of level. So the other side is RBP and having that grow, keeping the kind of great profitability you have there, are there any new programs that you are anticipating to try to maybe sparked a little bit more of the RBP stuff? Or is it the environment just too tough.

No, look, we're continuing to invest in that. You hit it right on the head, Budd. We're -- this has been our goal is to reset margins and have a line of sight for more, and that's what we start -- we've been talking about that for a couple of years, and that will continue. RBP -- look, we like our operating model. We're going to continue to invest in that business because it's only a matter of time. And the fact that we've been able to kind of hold our margin profile in that business, notwithstanding the volume decline, we like where that can go. I'd say, right, the third piece of this, though, is the integration of KII. That's where we're working hard there. I commented on their business in healthcare and hospitality and also integration in synergies. So that's -- that would -- I would say the two items we've been talking about continue. We're continuing to lean in the workplace margins and RBP growth investments and then bring KII on and kind of mine that those -- that profit and that model, it's got strength, but there's more to do.

That's -- you got right to my third area of questioning, was on Kimball. What kind of RCII or RCI programs do you see going for that. They have a number of -- had a number of divisions that might not have been performing up to snuff. Anything that you feel comfortable talking about at this point in time?

Yes, Budd, really, all I would say is we had -- we got -- we dispossessed the Poppin thing. That was kind of job one as we got in there. And now we're getting our arms around the synergies and the team, and they're doing great. And there'll be more -- we'll probably have more details on that going forward. But right now, I'd say 50,000 feet, it's going great. I love the team and what they bring to the table, and we're continuing to invest in that business as well.

Budd, I would just add to that. And look, healthy margins in that business right now is very strong. We do see synergies moving forward. In the run rates we see right now in their profitability is about $10 million of annual improvement related to duplicative corporate costs. So that's $10 million of the $25 million of synergies that we expect as a floor. And so the other $15 million, we see coming over the next couple of years and feel real clear line of sight to that. And as Jeff mentioned it, is strong potential for more that we'll communicate as we get further into it.

And how does that feather in? I mean how much have we seen so far? And how much -- how much feathers in over the next couple of quarters -- quarterly rate?

Yes, we're averaging about $2.5 million a quarter right now. So we've got about a $10 million run rate as we sit right now. Probably add $5 million to $8 million next year, and then we get the full incremental $15 million in 2025 for a $25 million run rate. When you take that $25 million plus the $20 million benefit from exiting Poppin plus the strong profitability that KII had before the acquisition. Again, we're looking at EV to EBITDA multiple on the acquisition of near $5 million, it really speaks to the value creation opportunity that we have.

Wow, okay, last for me is corporate overhead looks -- is this the current run rate of $20-some million? Or how do we think about that on a quarterly basis? And how much of that was variable comp.

Corp -- if you look at the fourth quarter, we do think it's going to be up $6 million or $7 million being that $21 million to $22 million range, not just up a little bit from the third quarter. And yes, the big drivers of the year-over-year increase are variable comp. It was pretty low last year and it's rebounded this year. And we got some variation in insurance programs that also contribute to that variation.

Okay, thank you very much. Congratulations again on a really impressive performance in the third quarter.

Thanks, Budd.

And there are no further questions at this time. I'd like to turn the call back over to Jeff Lorenger for any additional or closing remarks.

Great. Thanks, everybody, for joining us today. Again, once again, thanks to all HNI members. Have a great day.

And that concludes today's presentation. Thank you for your participation, and you may now disconnect.