Q2 2022 HNI Corp Earnings Call
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 Lawrence Geoff Thanks, Matt Good morning, and thank you for joining us.
Our members delivered strong top and bottom line performance in the second quarter, while we continued to invest in strengthening our operational network and go to market capabilities.
Today I'll cover three key points and discuss why we remain on the right track for 2022 and beyond.
First we delivered 30% earnings growth in the quarter, driven by solid organic volume growth and positive price cost.
Second we continue to invest and deploy capital maintaining our focus on our long term strategies and an increasing shareholder returns.
And third last week, we divested <unk> a move consistent with our previously announced portfolio simplification efforts that will allow us to better focus on our core strategies going forward.
I will cover these points and discuss some thoughts on the recent demand environment.
Marcia will then go through our updated 2022 outlook I will then conclude with some general closing comments finally, we will open up the call to your questions.
Moving to our first key point, we delivered 30% earnings growth in the quarter, driven by organic volume growth and positive price cost.
Both workplace furnishings in residential building products generated double digit year over year revenue growth in the quarter.
In workplace furnishings price utilization and increase volume drove strong top line growth.
When excluding the impacts of the recent restructuring in one of our e-commerce businesses.
Segment shipments grew nearly 30% in the quarter.
In residential building products pricing volume and lead time improvements drove 21% organic revenue growth in the quarter.
Segment backlog levels remain elevated which helps improve our second half visibility.
Sequentially, our consolidated gross and operating margins improved in the second quarter as we benefited from higher volume and continued to make progress recovering inflationary pressure, we faced last year.
During the second quarter price exceeded cost by nearly $8 million.
We continue to expect price cost to deliver significant profit improvement in 2022.
In fact, our price cost expectation has improved from what we shared with you last quarter.
I will now move on to my second key point, we continued to invest and deploy capital maintaining our focus on our long term strategies.
Post COVID-19 environment labor and supply chain dynamics continue to be challenging.
In response, we opened a new seating facility in Mexico relocated production lines to take advantage of locations with better labor dynamics and implemented multiple other operational changes.
These investments, which totaled over $5 million in the second quarter are positioning us for the long term by making our operations more productive and more resilient.
We also continue to make investments in our go to market capabilities, including advancing our digital efforts enhancing our connection with end users and developing new products.
During the quarter, we acquired a hearth products installing distributor located in Raleigh, North Carolina.
It will add to our already strong competitive position in this fast growing region.
This is the sixth installing distributor we have acquired in the past three years.
Now 127 installing distributors.
Providing us with unmatched service capability and an improved connection with homebuyers homeowners and homebuilders.
And in total more than 25% of segment revenue now flows through our unique vertically integrated residential building products model.
Inorganic growth will remain an important part of our long term strategy and our residential building products segment.
Finally, we returned more than $50 million to shareholders in the quarter.
We now have returned more than $170 million over the past four quarters through dividends and repurchases demonstrating our strong cash flow generation capabilities of our business model.
And as Marshall will discuss in more detail in a moment our balance sheet remains in great shape.
I will finish with my third key point, we continue to make progress simplified simplifying our business last week, we announced the sale of Atlanta, ex China, and Hong Kong based office furniture business for $75 million sub.
Subject to standard post closing adjustments.
Divestiture, along with the elimination of a small brand and the restructuring of one of our E. Commerce businesses all of which occurred this year are examples of our broader focus on simplifying our workplace furnishings business.
These initiatives will allow us to better focus on our core strategy is going forward with each of these moves ultimately aimed at expanding margins in the segment.
Before I turn the call over to Marshall I wanted to provide some thoughts on recent business dynamics, given the broader economic landscape and risk of recession.
Starting in workplace furnishings orders in the second quarter increased 4% compared to the second quarter of 2021, when orders grew 41% year over year.
Second quarter order growth was lower than expected and softened later in the quarter and order growth from small to medium sized customers lagged growth from contract customers are.
Our strategic accounts business, which targets our largest customers was very strong in the quarter growing over 60% year on year.
This is a pattern we have experienced before as slowdowns emerge the smaller customers react more quickly to changes in the economy.
It appears this group of customers is pulling back in response to recessionary concerns and declining confidence metrics. Despite the negative trends. We continue to expect a strong full year revenue growth in workplace furnishings.
And our residential building products segment orders in the second quarter increased 14% compared to the second quarter of 2021, when orders grew 40% year over year.
New construction order rates outperformed remodel retrofit activity.
For 2022, we are still expecting strong revenue growth driven by pricing benefits inorganic revenue and our growth initiatives initiatives aimed at expanding the category.
Recent order rates have moderated consistent with well documented negative trends in single family housing, primarily driven by deteriorating affordability.
However, elevated builder backlogs and a longer construction cycle in single family housing will help soften the impact on the second half of 2022.
We are preparing for a slowdown, but we remain optimistic about the long term dynamics. In this segment. We continue to believe the opportunities associated with demographic trends and an under supply of single family market will benefit our business over the intermediate to long term.
Our unique vertically integrated business model has unmatched product and channel reach with a regional distribution infrastructure that offers unparalleled customer service now I'll turn the call over to Marshall to discuss our outlook.
Okay as Jeff indicated we are seeing signs that macroeconomic and recession concerns will negatively impact our second half demand.
As a result, we are lowering our 2022 outlook.
Compared to the prior outlook, we now expect slower second half profit growth.
Due to lower volume and the divestiture of land mix. These factors will be partially offset by improved price cost and reduced expenses.
Even with these reductions we are still expecting strong revenue and profit growth for 2022 compared to the prior year.
And workplace furnishings, we now expect our revenue growth rate in the low teens for 2020 to.
That expectation is approximately 7% to nine percentage points lower than our previous view.
Slower second half volume growth is driving a little more than half of the reduction a little less than half is due to the sale of Atlanta acts.
I would also like to note that our segment growth rate would be in the low twenties, when excluding our actions to streamline our portfolio.
<unk> and the previously announced restructuring of an E. Commerce business are expected to lower reported segment growth rates by about 10 percentage points in 2022.
And residential building products pricing benefits revenue from acquisitions and continued benefits from multiple growth initiatives are expected to fuel growth rates in the high teens for 2022.
Compared to the prior outlook segment growth is now expected to be softer in the second half.
A few comments on the third quarter and expected seasonality for 2022 weeks.
We expect third quarter, non-GAAP EPS to be to sequentially improve from second quarter 2022 levels.
And the above prior year results, primarily driven by favorable price cost.
Pricing benefits are expected to drive third quarter revenue growth rates in the high single digits to low teens.
Regarding earnings seasonality as a reminder, we historically generate approximately 70% of our total profit in the second half.
In 2022, we are now expecting profit to be slightly less weighted to the back half than in recent years.
This differs from our prior outlook.
Due to our strong first half performance and moderating second half outlook.
From a balance sheet perspective, we expect to maintain a strong financial position debt to EBITDA was one seven at the end of the second quarter, and we expect to lower debt levels in the second half our low leverage and continued free cash flow generation will provide flexibility and ample capacity for continued capital deployment.
Finally, some additional detail on our Lennox divestiture first the transaction will strengthen our balance sheet plan to use the proceeds to repay debt.
Second the sale will be margin accretive on a full year basis more importantly, we believe there will be additional benefit from the resulting increase in focus.
However, given <unk> revenue and earnings seasonality with the majority of revenue and almost all profit coming in the second half.
The transaction will negatively impact second half 2022 earnings.
We estimate the sale will reduce second half EPS by approximately <unk> <unk>, when including the benefit of reduced interest costs.
Third the transaction will positively impact our second and third quarter results on a GAAP basis.
Those impacts have been and will be excluded from our non-GAAP results.
We expect the sale to generate a pretax gain of approximately $50 million in third quarter.
The expectation of that gain created tax benefits in the second quarter that increased our second quarter GAAP EPS by approximately <unk> 21.
I'll now turn the call back over to Jeff. Thanks Marshall.
We remain focused on our two primary objectives, improving the long term profitability of our workplace furnishing segment by driving margin expansion and.
And delivering strong topline growth in residential building products by leveraging our differentiated business model.
Although the environment is becoming more challenging we remain focused on improving our long term competitive positions. We expect strong earnings growth in 2022, while maintaining a strong balance sheet.
And we have an experienced team that is prepared to confront an increasingly difficult economic environment.
While maintaining our long term strategic objectives.
We will now open the call to your questions.
As a reminder, if you would like to ask a question press Star one follow that star followed by the number one on your telephone keypad.
Our first question today comes from the line of Reuben Garner with Benchmark Company. Your line is now open.
Thank you and good morning, everybody.
Good morning.
Could we start with the differences youre seeing.
The contract for the small to medium sized businesses.
Specifically I guess I'm wondering you said you've seen this in the past do you see any differences here is is this kind of the Canary in the coal mine in and we're going to see softness in contract or is there no.
Two economy, two stories to tell in that regard.
That's a great question I mean, when we refer to the past.
Historically, we have seen when the SMB business goes.
Those into a slowdown before the contract just based on the selling cycle.
You know.
At this time.
I can't predict whether that's going to happen or not I think we're still assessing.
What that looks like we're going to prepare for a slowdown but it may be a pause as customers just continue to work through the larger customers continue to work through their plans like they've been doing.
Yes.
It may take a little longer to sort out and in the past.
<unk>.
The economic uncertainty is not really helping us, but again I don't I am not prepared to say its Canadian coal mine I'm, just saying that we clearly see it in our SMB business, it's a shorter cycle business the.
The recession economy is has that is operating like it typically has in the past.
But I'm not here to claim that contract will necessarily operate that way but.
We're looking at multiple scenarios, there just kind of given the whole post pandemic world wind right now.
Right and so that the you mentioned larger your largest accounts doing well are you seeing regional.
Differences is this kind of strength of recovery in some of the major markets.
Might be a little different than some of the small business customers in smaller markets.
Yes, no I wouldn't say, it's regionally based.
<unk> I think it's just some of the larger customers have been studying this their post pandemic plans hybrid.
What model emerging and they've they've got those plans underway and I think they have been moving out on some of that and again, it's the it's a longer cycle and so those things have been holding up very well for us.
But it's not really regionally based at this point, it's kind of a kind of across the board.
Okay, and then switching gears to the residential business.
So.
Any.
Color you can give us on the breakdown between the growth youre seeing in new construction versus repair and remodel is repair and remodel still growing and then can you can you breakdown.
Price versus volume for us.
Yes, sure Reuben so what we saw in the quarter is that remodel retrofit.
Sales grew faster than the new construction on an order basis. It was the opposite there is some noise in there from some of our our programs to encourage people to order earlier in the year for their fall fall demand.
What we're seeing right now is the remodel retrofit is stronger than new construction no surprise, given whats happening in the market. So what we're expecting for the full year in residential building products is growth in the high teens that includes about seven percentage points from acquisitions, so organic growth.
It would be in the low teens, which includes about 10% price realization.
Non price organic growth for the year of being a low single digits.
Perfect.
Sorry about that I guess, I Miss read or misinterpreted.
The release I was thinking.
New construction I guess I guess I'll just read the order.
Orders comment so.
Going forward do you feel that the strength in repair and remodel.
Hold I mean, theres been some clear slowdowns in DIY I think the fireplace industry is more contractor driven and there's probably an element of backlog how do you guys feel.
That portion of the business going forward.
I think we're expecting both sides of the business the slowdown.
We have a pretty large backlog, particularly in the remodel retrofit is going to soften that event.
So I mean, it we're expecting construction to be softer than remodel retrofit in in the back half that said driven if you exclude price were still expecting low single digit sort of unit growth for the segment in the back half. So this is not a.
Where it's going to fall off rapidly it's more of a gradual easing.
Great. Thanks, guys.
Thank you.
Your next question comes from the lines of Greg Burns with Sidoti. Your line is now open.
Good morning could you just talk about the strategy behind the vertical integration the <unk>.
Acquisition of these.
Following distributors, how does that benefit you in.
What are your plans going forward in terms of.
Growing that part of the business.
Yes, Greg it's great question I mean, we've.
We set out a couple of years ago to to really get closer to our customers first of all.
Yes.
What's important to homeowners.
Whether it be R&R.
Important to homebuyers in new construction and so part of that effort is digital part of it is is go to market part of it is market research, but the other part is service and so.
We had this we had this network and we decided we could we could leverage that network, even more as we get more insights about the consumers and homeowners and homebuyers and we can control the service model more directly.
It's a great combination, it's a strong business anyway on its face just in the typical b to b.
Installing distributor model, but.
That's really what it's about it's about leveraging now the insights we're getting to get closer to the customer and provide better service levels to the customer.
And so that's it's a profitable business and now we're going to add that piece to it service capability is really what it's about.
Is there any potential conflicts with other.
Distributors as you kind of move into markets.
Typically no we've.
We are.
We're careful about that and we're collaborative about that and in some of these cases, we become a succession plan too.
An owner that doesn't have another plan and wants to get out of the business and retire and so it takes all forms but we are we've got great independent.
Independent dealers have the strongest network in the marketplace and we love that model as well and so it's really complementary and we're very.
Collaborative when we do this.
That's all the last six we've done last few years have been that way.
Okay.
You mentioned a couple of times youre preparing for a slowdown what does that mean that you're just putting plans in place in case things get worse actual.
Is there anything being implemented currently or is it something that you are just planning for.
Yes look Greg I think it's just we're being prudent.
We always have kind of been that way.
We'll have plans on the shelf and will also.
Take some altitude out of the out of the system a bit just to just to <unk>.
Keep some dry powder when the pandemic hit for instance.
And we took a bunch of cost out when inflation here you can see we took pricing actions I mean, we couldnt take it fast enough, but now they flipped around.
We built the facility in Mexico. So we just have we have a history of being able to move fairly quickly and being pretty agile on that front and so that's what that's what I mean, when I say preparing.
Okay.
Great and then just lastly, I mean, it sounds like you.
You don't feel like the.
The building products business is going to be.
Cliff here it sounds like you're expecting more of a moderate slowdown do you.
Given what youre seeing in the market in terms of housing is there a potential for.
Contraction I know the comps are going to get.
You've had a couple of strong <unk>.
Quarters behind you and now I would assume.
Just what were seeing Macroeconomically seems like there's a slowdown in general slowdown in housing I don't see how that doesn't.
Necessarily impact that side of the business more strongly because just wanted together.
Feel for your view on that.
Well, we would agree with you Greg I think it's just a question of timing the backlog and the stuff in motion as we sit right now we believe gives us visibility to what we described as low single digit growth in the third and fourth quarter I think the fourth quarter remains a little bit unknown to us.
I said, we do have some big backlogs there, but eventually that's going to flow through to us yes.
We think that would probably hit more in 'twenty three if anything Greg.
Yes, okay. Okay.
Alright, thank you.
Yes. Thanks.
Your next question comes from the line of Rex Henderson with water Tower Research. Your line is now open.
Okay.
Yeah.
Okay.
Mr. Henderson Your line is open.
Good morning.
Good morning.
Hello.
Hello.
I'm not able to contact you.
We can hear you.
Okay.
Okay. Good Hello, we can hear you.
Can you hear me.
Yes.
Okay, Great Alright.
But I haven't done this for a while but had a conflict and couldn't be here today that is first of all wanted to give you. Some some props and some congratulations on doing a really good job of navigating through some really confusing times over the last couple of years.
I did have wanted to focus on the RVP segment, a little bit and the.
The vertical they 27 locations that you have now can you give me a little bit of color on how much of your RVP business now flows through those 27 locations and what kind of advantages you get in terms of margin.
Core sales growth through those relative to the rest of that business.
We have reps.
I've said in the prepared remarks, it's about 25% of the overall.
Business business segment revenue of that segment flows through our owned.
Distributors.
As I said earlier I think one of the big benefits of that ilk.
Elaborate a little further on the earlier question was.
We also can control the marketing content at a local level as we get closer to the customers.
We kind of use it as a as a.
<unk> incubator, so we own that group, we test and learn on marketing connectivity to the customer base run it through that group and then we take it to our independent so it really it provides.
Really nice mechanism with which like I said to improve service try things out that resonate with customers put them in the system and get them implemented quickly and then we prove them out and then we can give them to the rest of the network on the independent side, that's that's a big benefit of that as well.
Okay do you have.
Have any vision for how big that segment.
That vertical can be and whether youre going to continue to grow through either greenfield or continued acquisition.
Any any end goal for what that segment can be.
Well <unk> not really an end goal what like I said earlier, it's kind of a case by case market by market situation, sometimes it's.
Distributor.
Cause us sometimes we call them.
And so basically what we do know is we know how to run that business and it gives us a lot of built in advantages with customers and in the service model and so we're always kind of opportunistically looking looking for options to build a network out, but I don't really have it on up.
Point in time, or an and game necessarily.
Okay.
In preparation for the potential slowdown later this year early next year, you said youre, putting some plans on the shelf.
A year or so of our late last year. You said you had a lot of open positions is that still the case or are you still holding a lot of positions open.
Or is your hiring slowed down what what's happening.
On the Labor force right now and your expectations for that.
Yes, I think we're pretty stable on the labor for US right now direct labor side, we've been able to kind of catch up a bit and we also have Mexico has come online and it continues to ramp and it'll be fully ramp here by the fourth quarter and so thats taken pressure off as we had planned and so.
You know.
Basically we're kind of where we need to be.
Labour front standpoint.
So you really don't have a lot of open positions that youre looking to fill at this point anymore, you feel like you've got all the job you need to have build our field.
Pretty much yeah, I mean look theres always some stuff here and there some engineers and some things that were always in the market for but we're not it's more back to normal times not not craziness.
Okay very good.
And finally.
One of the thing one of the comment button aid was it.
In the in the RVP segment a lot of the.
A lot of the builder side goes through goes to spec home builders builder building on spec is that still the case are you getting orders from new homebuyers.
What's happening there and the differences between spec and new homebuyers.
Right.
We're very strong with the national builders and we follow their mix. So I wouldn't I wouldn't necessarily say that we're over indexed on spec homes. We were just going to look a lot like the larger builders and recall coming off really low inventory levels.
Not sure that there's less spec building out there, but that's probably a question asked them rather than us.
Okay.
Alright, well, thank you very much and thanks for taking my call.
Again, congratulations and I hope to spend more time talking to you and getting to know your business better over time. Thank you very much. Thank you appreciate it.
Your next question comes from the line of Steven Ramsey with Thompson Thompson Research Group. Your line is now open.
Hey, good morning.
Questions on price cost, maybe can you walk through the <unk>.
Jeff Currie at price cost through the first half how that plays out.
The second half.
Why do you think that's going to be better now.
Previously thought.
Yeah, Yeah. So.
Price cost in the first quarter was about $2 million favorable and the <unk>.
Second quarter was about $8 million favorable.
In the third quarter and the fourth quarter, we're expecting to be $25 million to $30 million favorable during each quarter and the reason for that is twofold. One is we are going to get more price realization.
<unk> suite has been ramping up just as an example, Stephen we recognize about $62 million of incremental price versus the prior year in the first quarter that went to seven in the second quarter and it's going to go higher in the back half.
And inflation, we're going to start Anniversarying the period last year, where inflation heard it ramped up so the incremental inflation versus last year is not as great. So the combination of more price realization in less incremental inflation gets us a much more favorable price cost when you look at the year, we're now expecting price cost to be favorable.
<unk> in the $60 million to $70 million range and that puts us basically at a place where we recover what we lost last year. So if you look over the last two years were roughly neutral on price cost.
Okay.
Okay very helpful very helpful and then thinking about the residential segment.
How you think about.
Maintaining profitability.
Or go slow kind of combined with the investments you are baking the cake advantage of.
The long term opportunity.
Think about keeping the pedal down on investments for long term gains.
And I guess, maybe what I'm getting at would you allow margin in that segment to go to mid teens for a time.
Lower volumes to keep the investments down for long term growth.
Yes.
Yes.
That business is highly profitable and certainly as volumes decline is going to put some pressure on it we are in that business for long term. We are very interested in growing that category. We're going to keep investing we may may decelerate investments a bit and as an example, this year, even though we do see slowdown coming we're continuing to win.
And that business in the back half, we're expecting to invest.
$7 million to $9 million for the corporation roughly half of that is going into residential building products.
Steve It's a great question I think look we talk about that but again as you said, we want to grow that category, we want to grow the revenue. There. So we will we'll be smart about it but we've been investing through the whole pandemic and that business.
Last two years quite adequate.
Cliff and we don't we will continue to do so.
We need to maintain some profitability, but we can take some short term here and there in order to continue to kind of lean into that.
That business.
Right makes sense, Okay, and then last quick one for me on the E Commerce restructuring and workplace can you share more on the actions you are taking a maybe something the.
Second half.
Earnings or is this something that is more helpful to 2023.
Okay.
Yes, Steve what we did there is we exited some some low profit.
Product categories and that ecommerce business.
So yes, I think there is some benefit.
The P&L, but we're kind of in.
Kind of chaotic or a volatile situation right now so it's not a it's not a large benefit it is putting a pretty big headwind on our sales growth, but again its not much of a profit impact yes, I think it's got more benefit next year I agree more benefit next year.
Okay. Thank you.
Okay.
Okay.
There are no further questions at this time.
Hello, Andrew I'll turn the call back over to Kim.
Yes. Thank you.
Thanks to everybody today for joining us.
And your interest in <unk> Corporation and have a great day.
Yeah.
This concludes today's conference call. Thank you for attending you may now disconnect.
Yeah.