Q4 2022 HNI Corporation Earnings Call
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Mr. Mcfall, you may begin your conference.
Good morning, My name is Matt Mccall, and Vice President Investor Relations and corporate development for <unk> Corporation.
Thank you for joining us to discuss our fourth quarter fiscal 2022.
<unk> with me with me today are Jeff Oranger, 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 stay.
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'm now pleased to turn the call over to Jeff Lawrence or Geoff Thanks, Matt.
Good morning, and thank you for joining us on the call today I will highlight four key topics first we delivered strong earnings growth in the quarter, Despite a soft macro environment.
Second our workplace furnishings margin expansion initiatives are delivering results.
Third we are prepared for 2023.
And fourth we are positioned for strong growth beyond 2023.
Following those comments Marshall, who will review our outlook I will then conclude with some general closing commentary.
We will then open the call to your questions.
Moving to the first topic, we delivered strong earnings growth in the quarter, even though we experienced a softer demand environment, we generated solid year over year margin expansion and 47% year over year non-GAAP earnings growth in the fourth quarter. This was despite.
<unk> volume pressures associated with macroeconomic concerns.
Consolidated gross and operating margins expanded on a year over year basis.
Led by favorable price costs, which continued to improve in the quarter and.
And for the full year, we fully recovered the price cost shortfall driven by the rapidly rising inflationary pressures we experienced in 2021.
Fourth quarter profit improved in both segments.
Residential building products operating margin expanded 170 basis points year over year, reaching nearly 20%.
Our fourth quarter results demonstrate the strength of our differentiated business model and residential building products.
In workplace furnishings fourth quarter non-GAAP operating profit more than doubled despite lower sales.
The Europe over year top line decline was driven by divestitures and restructuring activities implemented earlier in 2022.
Excluding these actions fourth quarter year over year segment revenue growth was just over 4%.
Although these streamlining efforts negatively impacted our topline they contributed to our margin expansion, reflecting our commitment to improving profitability and workplace furnishings.
That leads to the second topic.
Our initiatives to expand workplace furnishing margins are delivering results non.
non-GAAP operating margin expanded 150 basis points year over year in the fourth quarter and in the second half of 2022.
Favorable price cost and benefits from our cost reduction and simplification efforts drove the improvement.
As we have discussed on prior calls we are driving multiple initiatives to expand margins and workplace furnishings. These efforts are in three broad categories.
First we are simplifying our business to focus on our most attractive markets.
Actions taken in 2022, including the sale of Atlanta ex.
The e-commerce business restructuring and the discontinuation of a small workplace brand reflect our efforts to drive profit improvement through simplification and focus.
Second we are lowering our cost structure.
We announced a $30 million cost reduction plan last quarter that plan is well underway and we are now on track to reduce costs $30 million to $35 million in 2023.
Approximately $25 million of that total will impact workplace furnishings. This year.
Third we are driving productivity and we will see future benefit from ongoing operational investments.
Our fourth quarter productivity improved versus the prior year as we continued to benefit from our lean actions and improving supply chain health.
We expect our productivity momentum to continue and positively impact 2023.
Regarding investments our largest operational investment is our new facility in Mexico. In 2021, we started up a new seating plant in <unk>, Mexico with.
We plan to expand that operation and shift to a larger building during 2023.
Although these actions have negatively impacted our short term results that will drive margin expansion as they mature.
The third topic is we are prepared for some headwinds in 2023.
And workplace furnishings, we expect to drive profit improvement notwithstanding anticipated topline pressures.
Margin expansion initiatives focused on simplification costs and productivity will continue to gain traction. This year, we expect those efforts.
When combined with favorable price cost will more than offset lower volume driven by macroeconomic concerns and inconsistent office reentry patterns.
And residential building products, we are prepared for a slowing near term demand environment.
Cost actions and favorable price cost will partially offset volume pressures, while we continue to position for growth beyond 2023.
Overall, our cost structure has improved our balance sheet is strong and we expect a strong free cash flow year. Despite an overall weaker demand environment in 2023.
That brings me to my fourth topic for today, we anticipate and are positioned for strong growth beyond 2023.
And workplace furnishings, our research indicates the market will recover and demand patterns will change in a way that aligns with our market positions.
Specifically population migration patterns towards secondary and tertiary geographies.
Positive employment and demand trends with small to mid size offices.
And feedback from large corporate customers regarding return to office plans and adoption of hybrid work models.
All aligned with our strong market coverage and product and price point breadth and depth and point to the return of sustained volume growth post 2023.
And residential building products, we are continuing to invest in our growth initiatives in the areas of <unk>.
Category awareness, new product innovation online capabilities and the expansion of our wholly owned installing distributor footprint.
Overall, the housing market has strong fundamentals.
It is under supplied and demographic trends support future demand growth <unk>.
Additionally, an aging housing stock will drive remodeling activity.
The average home is now 40 years old supporting robust renovation growth.
Given the market strong fundamentals, our unique growth opportunities and our category leading positions. We are bullish about our growth in this high margin high return business beyond 2023.
I will now turn the call over to Marshall to discuss our initial outlook for 2023 Marshall.
Thanks, Jeff let's start with seasonality. This is important because we are expecting 2023 seasonality to be different than what occurred in 2022 and that difference will distort quarterly year over year comparisons of sales and profit.
Specifically, we expect sales and earnings seasonality in 2023 to be more in line with pre pandemic trends.
That follows three years of abnormal seasonality.
2022 seasonality was particularly unusual in that quarterly revenue peaked in the second quarter.
And first half revenue exceeded second half revenues that unusual pattern was primarily driven by backlog dynamics that positively impacted the first half.
And deteriorating workplace furnishings demand that negatively impacted the second half of 2022.
As a result, our first half comparisons will be more challenging on a year over year basis, and our second half comps less so.
Due to the change in seasonality, we expect more than 85% of our annual profit will be generated in the second half of 2023 that compared.
Compares to 60%.
In the second half of 2022.
Alright, let's let's move on to our outlook for the first quarter.
And workplace furnishings, we expect first quarter revenue to decline at a year over year rate in the low twenties.
This decline is the result of last year's unusual seasonality the.
The continued negative impact of broader macroeconomic concerns and the sale of land mix.
With respect to seasonality first quarter 2022 benefited from the unwind of backlog built up during 2021 that unwind will not repeat in this year's first quarter and accounts for more than 10 percentage points of our expected year over year sales decline.
In addition, the sale of land next with lower growth in workplace furnishings by five percentage points or $17 million in the first quarter.
First quarter residential building products revenue is expected to decline at a year over year rate in the mid to high teens.
It is important to note. This segment backlog is currently approaching normal levels, which means our revenue after the first quarter should trend more closely with pre pandemic seasonality and be fully impacted by weakening new construction and remodel retrofit activity.
In total consolidated revenue for <unk> overall is expected to decline at a high teens rate in the first quarter.
We expect consolidated non-GAAP operating income to be approximately breakeven in the first quarter of 2023.
Let's move to our outlook for 2023 overall.
During 2023, we plan to drive 80% to $85 million of year over year profit support through improved price cost.
Better productivity and reduce structural cost.
These items were partially offset the earnings pressure associated with topline trends.
Importantly, our efforts do not come at the expense of future growth, we will continue to invest throughout 2023.
Looking at the segments, we expect the 80% to $85 million of profit support to drive profit growth in workplace furnishings, and offset much of the negative impact from lower volume in residential building products, it's being driven by the weakening housing market.
Yeah.
Shifting to the balance sheet, we have a strong financial position, which provides flexibility for investment and positions us well for a slowing economy.
Gross debt to EBITDA as calculated per our debt covenants with 0.7 at the end of the fourth quarter.
We have a history of generating strong free cash flow through a variety of economic conditions, and we expect free cash flow in 2023 to benefit from a return to more normal working capital levels.
Our low leverage and continued free cash flow generation provides flexibility for the dynamic environment and continued investment.
I'll now turn the call back over to Jeff. Thanks, Marshall before we take your questions I want to take a moment to mention that in December <unk> was again named one of America's most responsible companies ranking number six in Newsweek's fourth annual list of America's 500, most responsible companies.
These rankings are based on public data that analyze the top analyzes the top performance across environmental social and corporate governance categories.
It's important components in our <unk> members daily efforts include a commitment to reducing our environmental impact.
A positive social impact and practicing good corporate governance are.
Our goal of enhancing where people work live and gather shines a light on our decades long commitment to sustainability and good corporate citizenship.
And most importantly on the commitment and efforts of all <unk> members will make a positive difference every day.
In closing we remain focused on our two primary long term objectives, improving the profitability of our workplace furnishing segment by driving margin expansion and delivering strong topline growth in residential building products by leveraging our differentiated business model.
We will now open the call to your questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Yeah.
And our first question comes from Rex Henderson Atwater Tower research.
Good morning, and congratulations on a really impressive quarter.
Terrific margin performance.
I did have some questions about first of all order trends in the two segments, it's coming out of December into January and February .
Directionally what are you seeing in those order trends in the two segments.
Okay Rex.
Let me start with workplace, we kind of look at it in three buckets.
And kind of our.
Mid market segment.
Segment. It remains strong orders in the Q4 and year to date or both.
Up strong double digits.
It's consistent with.
What's going on in the market actually migration patterns.
Large cities, losing office jobs smaller cities, gaining employment trends small midsized businesses, adding jobs. So that's what we're seeing in that portion of the market and then we go to our contract segment is stabilizing to improving orders are flat year to date.
I would say Theyre presale activity is improving.
As people focus on hybrid environments.
We're looking for more of a second half improvement there and then third we have our transactional business is still down those trends are down double digits in.
Those are those are real short cycle small small orders that are really sensitive to macro environment.
Winds.
Okay, and Rick Rex as it relates to go ahead and residential building products.
Our orders were down 18% in the fourth quarter.
And then we saw some pressure in both the new construction as well as remodel retrofit they were they were down.
Similarly, now we do expect new construction to be down more than remodel retrofit.
During 2023.
Okay.
Okay. So you've already answered my one of my other questions, which is some differentiation between what's happening in Newbuild and ret.
Retrofit and remodel in the.
R.
RVP segment, and so new constructions worse than than the than the retrofit business is that right.
Yes, we expect it to be worse traditionally at least historically the remodel retrofit business is just not as volatile.
We basically track single family construction activity.
In the new home side exactly so we're seeing some pressure there expect it expect it to really.
Be fully impacted in the second quarter and the quarters thereafter.
Yes.
And then one other question your gross margin performance here was really quite impressive.
I'm wondering if you're beginning to see any competitive pressure or customer pushback on prices.
Commodity prices come down are you seeing anybody pushing back on prices at all.
Rick that's a good question, we monitor that pretty closely we haven't seen anything yet.
As I think there is some some in these spaces, particularly in the workplace side are still announcing price increases and we're kind of in line. We have been in line with what we've seen in the market. So, but we keep an eye out for that but so far there hasnt really been.
I think it was such a shock to the system that I think in general people were kind of hitting getting hit with inflation across the board. So it's so far been accepted.
Okay. It looks they are still inflationary pressures out there that we have to cover and we are still recovering our margins. So we're still making progress there and it seems like the market has been pretty similarly.
Very good thank you I'll pass on to questions to someone else. Thanks. Thank you.
We'll move next to Bob <unk> at water Tower research.
Yes. Good morning, Thank you for taking my questions. So I hope everybody is well there.
Just wanted to follow up on direction a little bit.
So in terms of hearth.
Are we seeing any change in the product mix I know you've done a great job on the logistics, but I'm wondering.
Are we seeing anything in terms of penetration in terms of new housing and there is product mix like electrical making a change on water, making an impact there.
Yes, Hey, Budd.
Good question I mean, I think we are we have been working on that for a bit.
And when it comes to electric.
For example, we're seeing a lot of.
Opportunity there, we're launching a lot of new products in that category is expanding the category. We've got examples where we've got.
Places.
In the country, where the IR rate was zero and it jumps to 50% just because of the electric.
The electric availability on that unit so it's a.
It's really a <unk>.
Expansion of the category not a replacement of the category and so that's and then we also are seeing some traction as we've talked in the past on our insert business.
Does that become as customers become more aware of their ability to do an insert that's easier than having to blow up a whole remodel and replace maybe an old woodburn or with an insert gas that's made for an easy install we're starting to see a lot more traction there as well and that's that's really category expansion because otherwise.
They werent they weren't going to be.
We're going to be looking at a remodel just yet so it's a way that we can get a unit in there without doing a full remodel.
Jeff that incident rate jumped sounds really fantastic.
Do you.
Is it really moving the needle as it is of a size yet that make a difference in the overall category or is it still too small.
It's still it's still in its early innings, but I would say we're in the first bottom of the first.
But I think.
We're seeing I believe it's going to be a material contributor to our business.
Moving forward there.
We're off a low base right now.
Okay, and do you see much more in the way of M&A activity in that in that segment in that business unit in terms of international.
Yes.
Yes, that's a good question I think look we do have a unique model in our wholly owned installing distributor network is.
Is.
A really nice asset in this business and we do see lots of there's a lot of opportunity out there.
For that aspect of our business and we aren't.
We operate in tandem with our with our distribution our independent and it's always.
But the succession events there is.
Geographical expansions, so we absolutely have that in our quiver and it's a focus of ours.
Do believe that would be something that youll see more of down the road.
Okay great.
Last for me.
Commodity inflation, particularly in steel was.
Was unwelcome and recovered over the last post Covid period are we seeing some retreating there in.
And marginal said, we're still seeing inflationary pressures, but I wonder if you can pinpoint where it is or maybe quantify what we're seeing in that.
Yes, so look where we are.
Seeing inflation in two broad categories. The first one is wages.
I would say that the wage inflation has moderated but we are still seeing year over year increases like you do in any given year.
And then there's a second bucket, where there's kind of a broad set of commodities that are still under some pressure a lot of that is carryover from the prior year. So.
So we're seeing some inflation from those two buckets, that's been partially offset by lower steel costs, but the net of the three that we're seeing inflation.
Roughly speaking, we're expecting input cost inflation to be up in the $15 million to $20 million range for the year.
Got it.
But like the like the return to seasonality, that's not significantly different than we see almost every year.
We cover with a small price increase once a year annually is that is that a fair way to look at it.
Absolutely.
Very fair.
Okay, great. Thank you very much and let me add my congratulations direction from there.
Margin performance.
As certain compressor. Thank you very much and good luck on 2023.
Great. Thanks Budd.
We'll go next to Reuben Garner at the benchmark company.
Good morning, guys.
Maybe to start.
You referenced <unk>.
The improvement in workplace.
Kind of in the Frankfurt.
The volume headwinds can you give any detail on.
Exactly how much volume decline to withstand with some of these changes are a way to think about decremental margin.
Kind of export price cost and savings and productivity initiatives that you have.
Yeah.
Yes, Reuben and when we do expect to see volume improvement Im sorry profit improvement despite the lower volumes.
I think maybe the way to answer your question is that we're roughly thinking that workplace volume for the year in terms of total top line.
B down on organic basis in the low to mid single digits and that that would be.
A big decline in the first half followed by some moderation in the second half so under those conditions.
We have enough profit supports drive.
Our operating profit growth that we mentioned.
In terms of decremental margins.
Or or incremental margins in workplace on average runs around 35%.
And of course, we have.
Offsetting two two.
Help mitigate that so it really the decremental margins for workplace would not really be accountable right, we're expecting lower volume lower lower sales and higher profit.
Okay.
The murder mid single digit decline in workplace last quarter, you talked about strength youre seeing in mid market.
The mix of our goods it seems like a relatively modest decline relative to what the industry orders.
Have been in recent months.
Update us there mid market still outperforming and is that kind of what gives you confidence that maybe youll do something better than what we've seen of late.
Yes, there is two things there maybe you pointed out is first of all our orders in the fourth quarter. When you exclude the restructuring of the ecommerce business and divested Atlantic were up 3%. So we did see fourth quarter activity Thats in line with that expectation secondly, just remind.
Everyone that we saw pretty significant step down in demand in the back half of 2020 twos as we anniversary that step down it's not that we expect a lot of demand growth and where we are right now, but we'll certainly see lower lower comps are going to be.
Year to compare against.
Yes, and I think Ruben.
Commented earlier that the mid market for lack of a better term is year to date is running up strong double digits.
Presale activity points to continued strength there and so we just believe.
The migration patterns in employment trends align with our strengths and so that's that's really.
Maybe offsetting some of the other other areas of the business.
Okay.
Okay, and then on the housing side.
New construction I think is a little bit easier for us to get a.
Handle on or at least kind of guess, where the market's going can you give us any.
Color on the R&R side of your business, how you expect that.
Hold in any kind of other puts and takes whether it be share gain opportunities or.
Any other drivers outside of the market.
<unk>.
Specific to your fireplace business.
I think Jeff mentioned, a couple of the strategic growth initiatives that probably had a little more on the R&R side than they do on the new construction side and as I mentioned earlier Rubin the R&R side historically less volatile. So we're expecting new construction declined like I said in line with single.
Family housing activity in the existing home or remodel retrofit side of the business be down less expecting a little pressure in both sides that's for sure though.
Thanks, Good luck guys.
Thank you.
Well move next to Steven Ramsey at Thompson Research group.
Okay.
Hi, good morning, and sorry, if I'm repeating myself getting on a little bit late here, but I'm curious how much of your inventory currently.
Still carrying higher costs from inflation and how that works its way through the P&L early in 2023 to benefit margins.
And maybe as a follow on to that.
How do you think about cash generation this year.
And is working net working capital.
Wind there.
Steven the quick answer to your inventory question is that our inventory was essentially flat on a year over year basis, we'd normalized lot of inventory that we brought in during 2022, so it's not going to have a material impact on our margins.
The second part of your question about working capital Thats, a continued focus for US we have use working capital for the last two years as we dealt with all the supply chain disruptions. We brought in some inventory to buffer against that we are working inventory efficiency as well as overall working capital efficiency as I touched on in our prepared comments we expect.
Two.
Have more normalized working capital levels during 2023 and that should be a source of cash for us this year.
Okay.
Great and then thinking about cash generation for this year as well as a.
Low low leverage level can you talk about cash deployment, the willingness to do acquisitions on the resi side of things and in an uncertain period.
People are willing to deal and how you think about share buybacks in the slower time periods. Thanks.
Yes, Steven as I said.
<unk> I think on the resi side, we are always kind of looking at the marketplace.
Trying to decide if there is what opportunities are out there and we've shown an ability and an appetite to do that in the past.
That will continue.
As we see as we see attractive opportunities on the resi side for sure.
In terms of our priorities Steven look we expect to deploy capital.
<unk> our primary.
The primary objective is to invest in the business.
Also look to maintain and modestly grow our dividend and then we pursue M&A and share repurchase it case by case basis, depending on conditions and opportunities and we should continue to do that.
Great. Thanks for the color.
Okay.
And we'll go next to Greg Burns with Sidoti.
Good morning.
Marshall you had mentioned.
The backlog normalizing on the.
The building products side of the business and that will kind of get the business more back to a.
Our normal cadence can you just talk about what historically.
Historically, the typical seasonality of the businesses and I.
I guess maybe for Roger.
Got you.
Expecting in terms of like the current demand trends there.
Yes, so historically residential building products.
Sort of hit the trough in the second quarter, and then builds in the back half.
And then it starts to decline again and again bottoms out in the same quarter. So that did not happen last year last year. If you look at our quarterly revenue, we were pretty consistent from quarter to quarter and that's because the backlog buffered. The seasonality we had more demand and we really had capacity. So we pretty much had the same.
Revenue plus or minus a few percent each quarter. So this year in the first quarter were basically normalized in the backlog. So as we enter the second quarter, we're going to start to experience that typical seasonal depth as well as start to begin to feel the impact of the housing market declines.
Okay.
Talk about the the.
Prove profitability you expect on the.
Workplace furnishing side of the business, but in total I guess with the $80 million to $85 million.
The savings Youre projecting do you do you expect to grow earnings next year.
And workplace furnishings, we do expect to expand margins and grow profit dollars in the segment.
I mean on a consolidated basis like are you going to be able to offset the.
The declines in volume on the.
Building product side of the business and generate.
Consolidated earnings growth next year.
Our expectation right now is that there is a pretty significant decline in residential building products, which is going to ease.
Even though we are going to offset a good chunk of it with our actions that the net impact of that is going to be more than the profit growth in workplace furnishing. So consolidated earnings we expect to be down just maybe not nearly as downs you might might think given the amount of volume.
It has been declining.
Got it okay. That's helpful. Thank you.
And that does conclude our question and answer session. At this time I would like to turn the conference back over to Mr. Lawrence <unk> for closing remarks.
Alright, well, thanks, everybody for joining us today have a great day, and we'll talk to you next time.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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