Q3 2023 HNI Corp Earnings Call

Okay.

Good day, everyone and welcome to the H and I Corporation's third quarter of fiscal 2023 results Conference call today's call is being recorded.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad and if you would like to remove yourself. Please press star one again.

Now I'll turn the conference over to Matt Mccall. Please go ahead.

Good morning, My name is Matt Mccall, I'm, Vice President of Investor Relations and corporate development for <unk> Corporation.

Thank you for joining us to discuss our third quarter fiscal 2023 results.

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.

<unk> 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.

Cancel news release posted on our website includes additional factors that could affect actual results.

Corporation assumes no obligation.

Any forward looking statements made during the call.

I'm now pleased to turn the call over to Jeff Jeff. Thanks, Matt.

Thank you for joining us.

During the third quarter 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 and workplace furnishings. However, we're not finished and see more opportunity ahead.

Second.

The divestiture of pop and will drive immediate financial benefits and the integration of Kimball International is progressing nicely.

AI accretion exceeded our expectations in the quarter and we expect the rate of accretion to increase overtime.

Yeah.

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 Mark 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 continued to deliver strong margin expansion and workplace furnishings.

When excluding K eye popping.

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.

And we have line of sight to additional improvement opportunities.

As we have discussed on previous calls our profit transformation plan and our legacy workplace furnishings business consists of four primary actions first we are driving increased productivity.

Our focus on lean cost reduction and better efficiencies continues to deliver improvement.

And we expect our recent investments in Mexico to provide outsized benefits as they mature over the next couple of years.

Second.

We have streamlined our cost structure.

Last year's third quarter call, we announced $30 million $30 million corporate wide cost savings program.

12 months later not only have we achieved that goal we have added to it.

Cost savings run rate now totals approximately $50 million across the corporation.

More specifically in workplace furnishing $25 million of that total is contributing to our margin expansion in 2023.

Third we continue to simplify our business as we focus our efforts on the most attractive markets.

Examples of portfolio simplification actions taken over the past year include exiting popping.

Our China business and wrestling rationalizing our e-commerce offering.

All of which are contributing to our improved margins in fourth price cost improvement continues to benefit our profitability.

These actions and our recent results demonstrate our profit transformation plan does not require volume growth.

However, despite a mixed near term picture, we continue to see encouraging trends related to future workplace furnishings demand, particularly given our market position.

We continue to see growth in the small to medium sized customer segment, where we have an unmatched competitive position.

SMB orders grew 6% year over year in the third quarter and are up 9% year to date.

In General this segment has benefited from healthy dynamics.

Small and mid size mid sized firms have accounted for nearly 100% of net post pandemic hiring.

This segment has also benefited benefited from population shifts to smaller secondary metros, where office visits are nearly back to pre pandemic levels.

We believe this segment will continue to outperform.

Switching to contract recent demand has been down modestly. However, we are seeing encouraging signs for the future.

Orders from contract customers were down 4% year over year in the third quarter and have declined 3% on a year to date basis.

Those rates are consistent with lower return to office rates in the larger markets and lagging hiring activity by large companies.

Looking forward, we see dynamics, which support an increase in furniture buying events.

I'll remind you that furniture events are the primary driver of demand in our industry.

Placing office furniture as an episodic event generally driven by an office move or need to refresh an environment for employee recruitment and retention.

Going forward the predicted acceleration of lease expirations and the need for companies to adapt their spaces for hybrid work support an increase in these events.

Hybrid work has become the new normal according to a recent Gallup survey more than half of all remote capable employees now working in hybrid environments with that number expected to move to 60% in coming quarters.

And office lease rollover activity is expected to more than double next year and remain elevated through 2028.

These factors taken together support an increase in furniture buying averse.

Moving to my second topic, we completed the divestiture of <unk> and the integration of Kimball International is progressing nicely.

Excluding pattern.

I added approximately <unk> <unk> of non-GAAP EPS in the quarter. These.

These results exceeded our expectations.

Moreover, <unk> generated a strong operating margin of 10, 6%.

This was despite incurring $5 million of incremental purchase accounting cost during the quarter.

Our confidence in the strategic and financial benefits of the combination with Kimball International continues to build.

<unk> better positions us to lead in the evolving workplace environment and provides new opportunities for profit growth.

And importantly, we continue to see the previous announced annual run rate synergy amount associated with the acquisition of $25 million as a floor.

With a strong potential for upside.

The sale of popping, which we completed in early September provides immediate financial benefits recall pop and had an annual operating loss of nearly $20 million prior to the sale.

<unk> operating margin is already in double digits cost synergies elimination of popping losses, and ongoing productivity efforts point to additional margin expansion opportunity in the months and years ahead.

Yeah.

My third topic as we demonstrated the resiliency of our residential building products business model in the face of housing market weakness.

Third quarter operating margin in this segment remained unchanged versus the prior year and was up sequentially.

This was despite a year over year revenue decline of more than 20%. As this segment continues to face volume pressure in line with the overall weakness in the broader housing market.

We continue to see $15 million to $20 million of our targeted cost savings benefiting residential building products. This year with another $5 million to $10 million of benefit next year.

These cost reduction efforts along with normal seasonal patterns will result in further improvements to segment profitability in the fourth quarter of this year.

Importantly demand trends in this segment continue to stabilize.

Third quarter orders were 18% below year ago levels, which represents an improvement compared to rates seen in the first half when segment orders declined 29% year over year.

Both new construction and remodel retrofit activity have shown similar sequential improvement.

Additionally, the improvement has continued in the early part of the fourth quarter.

Although mortgage rates and affordability continued to weigh on housing single family, New construction has been a bright spot.

Year over year growth in new single family permits averaged 5% in the third quarter, which supports further new construction improvement in 2024.

Despite the near term headwinds we are bullish on the intermediate to long term dynamics for the segment.

Demand fundamentals remain strong.

U S housing is under supplied demographic trends point to robust future construction growth renovation activity will benefit from an aging housing stock.

And there are indications that renovation activity will accelerate as existing homeowners are less likely to relocate given the current mortgage environment with many having attractive lower interest rates.

In addition to the strong long term market fundamentals, we have unique growth opportunities.

We continue we continue to invest in our initiatives aimed at expanding the market, including in the areas of category awareness, new product innovation online capabilities and the expansion of our wholly owned installing distributor footprint.

The market's fundamentals, our unique growth opportunities and our category leading positions point to the return of growth.

I will now turn the call over to Marshall to discuss our outlook Marshall. Thanks, Jeff, let's start with our expectations for demand in the fourth quarter and workplace furnishings, we expect organic revenue to be approximately flat with fourth quarter 2022 levels.

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 rate.

In the high single digits to low teens, the outlook assumes new construction will outperform remodel retrofit.

Let's shift to the expected impact of Kimball International for the fourth quarter, we expect <unk> to add $140 million to $150 million of revenue.

We also project K I.

Accretion will be consistent with third quarter results.

And additional note on K III 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.

At that point to an adjusted <unk>.

<unk> operating margin for <unk> of approximately 12, 5% in the third quarter.

Fourth quarter non-GAAP EPS is expected to solidly increase year over year, the modestly below our just reported third quarter results.

This is consistent with normal seasonal patterns recall that we typically see lower sequential volumes and margins and workplace furnishings.

As you 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 or gross debt to EBITDA at the end of the quarter was two two 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 and 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 going well.

<unk> already strengthening our business and delivering earnings accretion.

With only increase as our synergies mature.

K I 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.

And 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 and workplace furnishings and drive long term high margin revenue growth and residential building products.

I want to thank all <unk> members, including our new members from K II.

Our results reflect their collective effort and dedication.

We will now open the call to your questions.

Operator: Good day everyone and welcome to the HNI Corporation 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.

As a reminder, everyone that is star one to ask a question we will take our first question from Steven Ramsey with Thompson Research group.

Operator: After the speakers remarks will be a question and answer session. If you would like to ask a question during this time simply press star one on your telephone keypad. And if you would like to remove yourself, please press star one again.

Hi, Good morning, maybe to look at SMB up again and outperforming contract do.

Or do you just 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.

Operator: I will now turn the conference over to Matt McCall. Please go ahead.

Matthew McCall: Good morning. My name is Matt McCall. I'm Vice President and best relations and corporate development for HNI Corporation.

Yes, Stephen I mean look I think we continue to.

Matthew McCall: 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-gap reconciliation 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 risk. Actual results could differ materially. The financial news release posted on our website and the additional factors that could affect actual results. The corporation assumes no obligation to update any forward looking statements made during the call.

Bank SNB will outperform.

No.

As I laid out in the prepared remarks I mean.

We have a strong position there thats part of it the market is healthy they've been hiring returned to office theres still the even though they've return they're still looking at furniture events in those spaces. So our belief at this point is SMB will continue to outperform in and contract will stabilize that's.

I think thats, a good way to think about it.

Okay.

Okay helpful. And then on the population shift it's clearly helping the workplace segment as we've discussed for a few quarters. Now can you talk to how that is or could help the RASM segment overtime do you have the distribution in place where the population shift is occurring.

Jeffrey Lorenger: I'm 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-gap earnings per share despite facing top line headwinds from ongoing macro economic pressures.

<unk>.

Yes, that's a good question Steven we do we've added.

First of all we have a strong independent network.

As is.

Jeffrey Lorenger: On the call today we'll highlight three key topics. First, we continue to deliver strong margin expansion and workplace furnishings. However, we are not finished and see more opportunity ahead.

Services those markets and we've also added some wholly owned distributor footprint in some of those markets recently and we continue to be active.

Keeping an eye on all of that so I do believe that the population shifts will also benefit over time.

Jeffrey Lorenger: Second, the divestiture of pop and 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.

The resi business.

Okay helpful. And then last one for me again on the resi business curious.

The dynamic you are hearing on the ground for the R&R side of ready hearing from others that it's sluggish, but steady out there and not continuing any kind of demand degradation on a sequential basis, but im curious if thats, how you would describe spending on fireplace.

Jeffrey Lorenger: 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 operating margin in the segment remain unchanged compared to the same period of 2022. This was despite a year over year revenue decline of 22%.

Yes, I think overall, Stephen we're seeing demand.

Matthew McCall: Following those highlights, Marshall will review our outlook.

Jeffrey Lorenger: 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 and workplace furnishings. When excluding KII and pop and non-gap operating margin in the 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 reach the highest level since the third quarter of 2019 despite lower industry volume. We made strong progress with our profit transformation initiatives.

The declines 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 in new construction.

We still have a pretty low existing home turnover, which drives for modeling events and of course consumer sentiment is not helping there, but but it's certainly the trend is improving although still down year over year.

Okay. That's helpful. Thank you.

Yeah.

We'll take our next question from Reuben Garner with benchmark company.

Thank you and good morning, everyone.

Congrats on the strong quarter guys.

Jeffrey Lorenger: However, there is still work to be done and we have line of sight to additional improvement opportunities, as we have discussed on previous calls, our profit transformation plan and our legacy workplace furnishings business consists of four primary actions. First, we are driving increased productivity. Our focus on lean, cost reduction and better efficiencies continues to deliver improvement. And we expect our recent investments in Mexico to provide outside the benefits as they mature over the next couple of years. Second, we have streamlined our cost structure.

So.

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 will come in better than anticipated.

That $50 million with broader recognized to date number or run rate and when you say there's more to go I mean is this 10 plus percent kind of legacy number sustainable without.

Volume acceleration, because we're hearing all initiatives or was there anything kind of mixture of them are one time in this quarter that kind of boosted it.

Jeffrey Lorenger: Our last year's third quarter call, we announced a $30 million corporate-wide cost savings program. Twelve months later, not only have we achieved that goal, we have added to it. Our cost savings run rate now totals approximately $50 million across the corporation. More specifically, in workplace furnishings, $25 million of that total is contributing to our margin expansion in 2023. Third, we continue to simplify our business. As we focus our efforts on the most attractive markets, examples of portfolio simplification actions taken over the past year include exiting pop-in, divesting our China business and rationalizing our e-commerce offering, all of which are contributing to our improved margins. In fourth, price cost improvement continues to benefit our profitability. These actions and our recent results demonstrate our profit transformation plan does not require volume growth.

Yes, Reuben so several several questions. There. The first one is that the $50 million as Jeff mentioned as our cost savings program that was really enacted.

Starting earlier this year and we had another tranche kind of mid year.

40% to $45 million of that will hit 2023, with another $5 million to $10 million rolling over into 'twenty four.

The part that rolls over into 'twenty four is mostly associated with the residential building products segment.

As it relates to workplace furnishings got about $25 million of that totaled $50 million of hits that segment, all of which hits this year.

In terms of where the margins can go we see continued opportunity. The reason were up so much year over year in the third quarter is really three things at favorable price cost, we had better productivity and we had 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 have this investment in Mexico, we're making that will begin to mature and help out subsequent years.

Jeffrey Lorenger: However, despite a mixed near-term picture, we continue to see encouraging trends related to future workplace furnishings demand, particularly given our market position. We continue to see growth in the small to medium-sized customer segment, where we have an unmatched competitive position. SMB orders grew 6% year over year in the third quarter and are up 9% year-to-date. In general, this segment has benefited from healthy dynamics. Small and mid-sized firms have accounted for nearly 100% of net post-pandemic hiring. The segment has also benefited from populations shifts, the smaller secondary metros where office visits are nearly back to pre-pandemic levels. We believe this segment will continue to outperform.

Okay, and then on the residential side, you mentioned look workday home sales just curious.

How much.

The fireplace.

Fireplace activity retrofit activity is tied for inspection that a big part of what.

What can drive demand and if we do see a rebound in Hong Saleswomen rates.

Dropped that can kind of get the R&R segment turned around.

Yes, I'm not sure we have precise data on inspections that we do know that remodeling events are pretty highly correlated with the purchase of the new home easily remodeling events occur within a year or two after the after the purchase and.

Jeffrey Lorenger: Switching to contract, recent demand has been down modestly. However, we are seeing encouraging signs for the future. Orders from contract customers were down 4% year-over-year in the third quarter and had declined 3% on a year-to-date basis. Those rates are consistent with lower return to office rates and the larger markets and lagging hiring activity by large companies.

And given the new homes are not selling as much existing homes that song as much we're definitely seeing some some softness in that segment, but if it did if we do see existing homes stick ticked up we would see remodeling pick up eventually.

Okay and last one for me a nice snapback in margins.

The residential business I think if I'm looking at it correctly comparable to a year ago on much lower.

Jeffrey Lorenger: Looking forward, we see dynamics which support an increase in furniture buying events. I remind you that furniture events are the primary driver of demand in our industry. Replacing office furniture is an episodic event, generally driven by an office move or need to refresh an environment for employee recruitment and retention. Going forward, the predicted acceleration of lease aspirations and the need for companies to adapt their spaces for hybrid work support an increase in these events.

Base is there any positive price cost in there as well or is all of that from the initiatives you 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 is multiple factors there 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.

Jeffrey Lorenger: Hybrid work has become the new normal. According to a recent Gallup survey, more than half of all remote capable employees are now working in hybrid environments. With that number expected to move to 60% in coming quarters, and office lease rollover activity is expected to more than double next year and remain elevated through 20-28. These factors taken together support an increase in furniture buying events.

Okay, great. Thanks, guys.

Thanks.

We'll take our next question from Greg Burns with Sidoti <unk> Company.

Okay.

Good morning.

The outlook for flattish workplace growth.

Last quarter, you were talking about low single digit growth in the second half so a little bit of a reduction there can you just talk about what.

Jeffrey Lorenger: Moving to my second topic, we completed the divestiture of pop-in and the integration of Kimball International is progressing nicely. Excluding pop-in, KII added approximately 6 cents of non-gap EPS in the quarter. These results exceeded our expectations. Moreover, KII generated a strong operating margin of 10.6%. This was despite incurring $5 million of incremental purchase counting costs during the quarter. Our confidence in the strategic and financial benefits of the combination with Kimball International continues to build.

What changes youre seeing in the demand environment there.

Or your outlook.

Greg I'm not sure I would characterize as a major change we didn't talk about low single digits, I think organic revenue and workplace, excluding Canada and Papua was one 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.

Jeffrey Lorenger: KII better positioned us to lead in the evolving workplace environment and provides new opportunities for profit growth. And importantly, we continue to see the previous announced annual run rate synergy amount associated with the KII acquisition of $25 million as a floor with a strong potential for upside.

Okay.

I don't know Kimball had.

I a good size health care business can you just talk about maybe some of those adjacent markets like health care.

Education, where maybe you could drive incremental growth Thats the core office segment.

Isn't recovering to pre COVID-19 levels like what what initiatives you have in place and I guess, specifically how was the Kimball health care business this quarter.

Jeffrey Lorenger: The sale of pop-in, which we completed in early September, provides immediate financial benefits. Recall pop-in had an annual operating loss of nearly $20 million prior to the sale. While KII's operating margin is already in double digits, cost energies, elimination of pop-in losses and ongoing productivity efforts point to additional margin expansion opportunity in the months and years ahead.

Yeah, Greg Good question, I think where the activity is pretty been pretty solid throughout the year and it's starting to build in the healthcare segment.

And <unk> had quite a bit of product pipe in that in that piece of the business that will be coming online in 'twenty four as well so we like that position and we do believe that's an opportunity for growth overall education they've been strong.

Jeffrey Lorenger: My third topic is we demonstrated the resiliency of our residential building products business model in the face of housing market weakness. Third quarter operating margin in the segment remained unchanged versus the prior year and was up sequentially. This was despite a year-over-year revenue decline of more than 20% as this segment continues to face volume pressure in line with the overall weakness in the broader housing market. We continue to see $15 to $20 million of our targeted cost savings benefiting residential building products this year with another $5 to $10 million of benefit next year.

In education similar to our legacy business, both have had pretty solid years to date, we see the education vertical as an opportunity for growth going forward as well.

And then I would mentioned they have a hospitality business that is competing well at this point.

We see some good second half growth in their hospitality business kind of pent up demand catch up from kind of the post.

Post COVID-19 remodel activity.

Jeffrey Lorenger: These cost reduction efforts along with normal seasonal patterns will result in further improvements to segment profitability in the fourth quarter of this year. Importantly, demand trends in this segment continue to stabilize. Third quarter orders were 18% below year-go levels, which represents an improvement compared to rate seen in the first half when segment orders declined 29% year-over-year. Both new construction and remodel retrofit activity have shown similar sequential improvement. Additionally, the improvement has continued in the early part of the fourth quarter.

Refresh rates for four 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 <unk> with water Tower research.

Good morning, and thank you for taking my question and congratulations on a very good quarter to your to your team and for your members.

Really impressive.

Marshall I would love to get maybe if you could walk.

Jeffrey Lorenger: Although mortgage rates and affordability continue to weigh on housing, single-family new construction has been a bright spot. Year-over-year growth in new single-family permits averaged 5% in the third quarter, which supports further new construction improvement in 2024. Despite the near-term headwinds, we are bullish on the intermediate to long-term dynamics for the segment. The demand fundamentals remain strong. US housing has undersupplied demographic trends, points of robust future construction growth. Renovation activity will benefit from an aging housing stock, and there are indications that renovation activity will accelerate as existing homeowners are less likely to relocate given the current mortgage environment with many having attractive lower interest rates.

On the workplace the legacy workplace, even just on a GAAP basis from $5 6 million operating profit in last year to $39 $6 million. This year and I can't remember, it's a $5 six included much of <unk>.

Drawdown of that I thought that might have been included all evolved into the into the gain number. So maybe you could give us some more color on.

On a walk from that.

Those margins because it's pretty impressive.

Yes, but there is a bit of land next 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.

Jeffrey Lorenger: [inaudible] in addition to the strong long-term market fundamentals, we have unique growth opportunities. We continue to invest in our initiatives and that expanding the market, including in the areas of category awareness, new product innovation, online capabilities, and the expansion of our wholly-owned installing distributor footprint. The market's fundamentals are unique growth opportunities and our category-leading positions point to the return of growth.

The segment, excluding cat and pop ends up $31 million in operating profit year over year and is really two big items, there got price cost favorable about $21 million.

And net productivity was up about $11 million and so theres. Some rounding there, but those two things really drove that $31 million of profit improvement in the segment.

So the 11 continues or is that that.

Marshall Bridges: I will now turn the call of it to Marshall to discuss our outlook. Marshall?

That continues and then it anniversaries in the 'twenty one how do we think about that going forward, how do we think about that kind of.

Marshall Bridges: Thanks, Jeff.

Two to one client.

Marshall Bridges: 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-of-year rate in the high-final digits to low teens. That outlook assumes new construction will outperform or model retrofit.

Ratio.

The productivity is going to continue we certainly see benefits from our ongoing lean initiatives as well as the Mexico investments, we look out price cost.

This is we're anniversarying some some.

Some lower price periods, and we got pretty pretty stable commodities. So I don't think thats going to continue at the same rate, but it's not it's not going away immediately.

Okay.

And commodities are they are they stable.

Stable or are they starting to or have they fallen in.

Marshall Bridges: Let's shift to the expected impact of Kimball International. For the fourth quarter, we expect KII to add 140 to 150 million dollars of revenue. We also project KII accretion will be consistent with third quarter results. In additional note on KII, earlier Jeff mentioned $5 million of incremental purchase to kind of 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.

Having to do any 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 earlier 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 pricing Bud will kind of.

Hold in there where it's at today, where thats kind of what we're seeing in the marketplace.

Marshall Bridges: That points to an adjusted operating margin for KII of approximately 12.5% in the third quarter. Fourth quarter non-gap EPS is expected to solidly increase year-of-year. The modestly below are 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.

We typically do a once a year price increase than we usually have that adjustment is that usually the beginning of the year kind of thing and I know in this environment nothing as usual but.

Trying to I'm sure I'm.

I'm showing my age.

But yes, 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 for getting the workplace furnishings margins back to this kind of level. So the other side as RVP and having that grow keeping the kind of great profitability. You have there are there any new program reserve accrue.

Marshall Bridges: Shifting to the balance sheet, we ended the third quarter with total debt of $509 million, which was down significantly from the $598 million at standing a quarter ago. Our working capital dynamics continued to improve and return historical levels that drove free cash flow for share of more than $2 in the third quarter. In terms of leverage, our growth debt to EBIDA 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.

Our anticipating try to.

Maybe spark a little bit more of the RVP.

Or is it yes, the environment is just too tough.

Well look we're continuing to invest in that you hit it right on the head by where where 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 RVP look we like our operating model, we're going to we're going to continue to invest.

Jeffrey Lorenger: I'll now turn the call back over to Jeff. Thanks, Marshall. Our strategies are delivering results.

Jeffrey Lorenger: Operating margin and workplace furnishings continue to expand, reaching 10% to 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. Ki's already strengthening our business and delivering earnings accretion, which will only increase as our synergies mature. K.I, better positions us to lead in the evolving workplace environment and provides new opportunities for profit growth. And we are increasingly confident in the combinations, strategic and financial benefits.

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 we like where that can go I would say right. The third the third piece of this though is the integration of <unk> AI, that's where we're working.

Hard there I commented on their business in healthcare and hospitality and also integration and synergy. So that's that would I would say the two the two items we've been talking about continue.

We're continuing to lean in to workplace margins in RVP growth investments and then bring kion and kind.

Jeffrey Lorenger: 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.

Kind of mine that those that profit in that model, it's got strength, but theres more to do.

Yes.

Right to my third my third area of questioning whether it was on <unk>.

What kind of RCI or RCI programs do you see that going for that <unk> has they have a number of had a number of divisions that might that have been performing up to snuff or anything that you feel comfortable talking about at this point in time.

Jeffrey Lorenger: I want to thank all HNI members, including our new members from KII. Our results reflect their collective effort and dedication.

Yeah, but really all I would say is we have we got we dispossessed the pop and thing that was kind of job one as we got in there and now where 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.

Operator: We will now open the call to your questions. Thank you. As I remind everyone that is star one to ask a question.

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

Jeffrey Lorenger: Hi, good morning. Maybe to look at SMB up again and outperforming contract. You expect this to persist for a few more quarters even though contract is stabilizing. Is there anything in the pipeline that may show directly how the two customers drive results in the next few quarters? Yes, Steven. I mean, look, I think we continue to think SMB will outperform. As it laid out in the prepared remarks, I mean, we have a strong position there.

50000 feet, it's going great loved the team and what they bring to the table and we're continuing to.

To invest in that business as well.

But I would just I would just add to that and look.

Healthy margins in that business right now, it's very strong we do see synergies moving forward in in the run rates, we see right now and their profitability is is about $10 million of annual improvement related to <unk> corporate costs.

Jeffrey Lorenger: That's part of it. The market is healthy. They've been hiring, returned to office. There's still even though they've returned. They're still looking at furniture events in those spaces. So our belief at this point is that SMB will continue to outperform and contract will stabilize.

So that's $10 million or $25 million of synergies that we expect as a floor and so the other 15, we see coming over the next couple of years until real clear line of sight to that and as Jeff mentioned it.

It has strong potential for more that we'll communicate as we get further into it.

Steven Ramsey: That's a good way to think about it. Okay, helpful.

Does that February <unk> that we've seen for 400, how much since college feathers in over the next couple of quarters for quarterly rate.

Jeffrey Lorenger: 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 REZI segment over time? Do you have the distribution in place where the population shift is occurring? Yeah, that's 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 distributive footprint in 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 REZI business.

We're averaging about $2 $5 million a quarter right now so we've got.

About a $10 million run rate as we as we sit right now.

Probably add $5 million to $8 million next year, and then we get the full incremental 15.

$2025 for a $25 million run rate and when you take that $25 million plus the $20 million benefit from exiting pop N plus the strong profitability of the K I had before the acquisition again, we're looking at.

<unk> EBITDA multiple on the acquisition of near five it's really speaks to the value creation opportunity that we have.

Wow, Okay and last for me is corporate overhead.

Is it is this the current run rate of $27 million or how do we think about that on a quarterly basis and how much of that was variable comp.

Jeffrey Lorenger: Okay, helpful. And then last one for me, again, on the REZI business. Curious the dynamic you're hearing on the ground for the R&R side of REZI 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 fire please. Yeah, I think overall, Steven, we're seeing demand kind of declines moderate, new construction is the relative bright spot there, specifically related to remodel retrofit, we're also seeing declines moderate, but not nearly as much as they are in new construction. You know, 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.

Steven Ramsey: Okay, that's helpful. Thank you.

Yes, if you looked at our fourth quarter, reducing its going to be up $6 million to $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 on year increase our variable comp it was pretty low last year and it's rebounded this year and we get some variation in insurance.

<unk> had 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 would like to turn the call back over to Jeff Lawrence for any additional or closing remarks.

Great. Thanks, everybody for joining us today.

Again once again, thanks to all <unk> members have a great day.

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

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Reuben Garner: We'll take our next question from Reuben Garner with benchmark company. Thank you. Good morning, everyone.

Yes.

Reuben Garner: Congrats on the strong quarter, guys. So, maybe on the workplace margins to start Jeff, I think you said, I think the words were, there's room to run or more to go there. Can you talk about, I see the savings or heard the savings have come in better than anticipated. That $50 million was that a recognized to date number or run rate and when you say there's more to go, I mean, is this 10 plus percent kind of legacy number sustainable without, you know, a volume acceleration, because if you're initiatives, there was anything kind of mixed driven or one time in this quarter that kind of boosted it.

Okay.

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Yes.

Okay.

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Reuben Garner: Yeah, Reuben, so several, several questions in there. The first one is that the $50 million that Jeff mentioned is our cost savings program that was really enacted starting early this year, and we had another tranche kind of mid-year. A 40 to $45 million that will hit 2023 with another $5 to $10 million rolling over into 24. The part that rolls over into 24 is mostly associated with the residential billing product segment.

Thanks.

Reuben Garner: As it relates to workplace furnishings, it's 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 were up so much year over year and the third quarter is really three things at favorable price cost. We had better productivity and we had better SGNA efficiency. And we see opportunity in all three of those to continue, maybe not all the same rates.

[music].

Reuben Garner: And on top of that, we had this investment in Mexico that 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.

Thank you.

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Reuben Garner: Yeah, 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 a new home, usually remodeling events occur within a year or two after the purchase. And given that new homes are not selling as much, existing homes are not selling as much. We're definitely seeing some softness in that segment, for the first time in a month. But if it did, if we do see existing homes tick tick up, we would see modeling tick up eventually.

Marshall Bridges: Okay, and last one for me, a nice snap back in Martin 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 and mayor as well or is all of that from the initiative you put in place earlier in the year? Yeah, we were flat at 17.7% operating margin in residential building products in the third quarter. And yeah, there's multiple factors there. 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 as gene efficiency.

Reuben Garner: Okay, great. Thanks, guys.

Operator: Thanks.

Greg Burns: We'll take our next question from Greg Burns with Cedodian Company.

Greg Burns: Good morning. The outlook for flatish workplace growth. I think last quarter, you were talking about low single digit growth in the second half.

Jeffrey Lorenger: So a little bit of a reduction there to just talk about, you know, what changes you're seeing in the demand environment there to lower your outlook. Greg, I'm not sure I characterized it as a major change. We did talk about low single digits. I think the organic revenue in workplace excluding KIA and pop and was 1.7% in the third quarter. So right in that range. And then flatish 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.

Jeffrey Lorenger: I know Kimball had a good size healthcare business. Could you just talk about maybe some of those adjacent markets like healthcare education, where maybe you could drive incremental growth that's if the core office segment. Isn't recovering the pre-COVID levels like what what initiatives do you have in place? And I guess specifically how how was Kimball's healthcare business this quarter? Yeah, great. Good question. I think we're the activity is pretty been pretty solid throughout the year and it's starting to build in the healthcare segment.

Jeffrey Lorenger: And KIA had quite a bit of product pipe in that in that piece of business that will be coming online in 24 as well. So we 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 years 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 and we see some good second half growth in their hospitality business.

Jeffrey Lorenger: It's kind of pent up demand to catch up from kind of the post post COVID remodel activity, you know, refresh rates for for hotels. So all three of those healthcare education hospitality. We we can rotate into lean into notwithstanding core commercial. Okay, great. Thank you.

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

Budd Bugatch: 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 the gap basis from a $5.6 million operating profit in last year to a $39.6 million this year, and I can't remember if the 5.6 included much of Lamex or a drawdown of that.

Budd Bugatch: I thought that might have been included all balls into the gain number. So maybe you could give us some more color on that on a walk from those margins, because that's pretty impressive. Yeah, but there is a bit of Lamex and the gap numbers in the prior year, both sales and profit as well as the gain. If you look at the non-gap, it's probably a little cleaner. The segment excluding in Poppins, up $31 million in operating profit, year after year, and there's really two big items there.

Budd Bugatch: Got price costs, favorable, about $21 million, and net productivity was up about $11 million, and so they're surrounding there, but 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 two to one kind of ratio? Well, the productivity is going to continue.

Budd Bugatch: We certainly see benefits from our ongoing lean issues as well as the Mexico investments we look out. Price cost, you know, this is we're anniversary some lower price periods, and we've got pretty pre-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 have they fallen, and are we having to do anything about pricing, having to be retraced?

Budd Bugatch: 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 you look through the fourth quarter, starting to be a little bit of pressure from diesel and some other commodities, but in general, input costs are pretty stable. You're within pricing, you know, 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.

Budd Bugatch: And we typically do a once a year price increase, and 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 I'm showing my age. Yeah, but yeah, it's typically kind of in the first quarter.

Jeffrey Lorenger: I'm, you know, 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 I have there. Are there any new programs that you, that you are anticipating to try to maybe spark a little bit more of the RBP?

Jeffrey Lorenger: Staff, or is this the environment just too tough? No, look, we're continuing to invest in that. You hit it right on the head, bud. This has been our goal to reset margins and have a line of sight for more. That's what we've started. 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.

Jeffrey Lorenger: And the fact that we've been able to kind of hold our margin profile in that business, notwithstanding the vine decline, we like where that can go. I'd say the third piece of this, though, is the integration of KII. That's where we're working hard there. I commented on their business and healthcare and hospitality, and also integration and synergies. So that's what 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 mind that those that profit and that model. It's got strength, but there's more to do.

Marshall Bridges: Well, that's, yeah, you've got right to my third, my third area of questioning was it was on on Kimble. What kind of RCII or RCI programs do you see going for that? They've had, they have a number of had a number of divisions that might not have been performing up to snuff or anything that you feel comfortable talking about at this point in time. Yeah, but you know, really all I would say is we had, you know, we got, we dispossessed the popping thing.

Marshall Bridges: That was kind of job one as we got in there. And now we're, you know, 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, you know, 50,000 feet, it's going great. Love the team and what they bring to the table and we're continuing to invest in that business as well.

Marshall Bridges: Yeah, but I would just add to that and look healthy margins in that business right now. It's very strong. We do see synergies moving forward in in the run rates we see right now in their profitability is about $10 million of annual improvement related to duplicative corporate costs. That's 10 million of the 25 million of synergies that we expect as a floor. And so the other 15 we see coming over the next couple of years and feel real clear line of sight to that.

Marshall Bridges: And as Jeff mentioned, it is strong potential for more that will communicate as we get further into it. And how does that settle in? I mean, how much have we seen so far and how much does college feathers in over the next couple of quarters of quarterly rate? Yeah, we're averaging about $2.5 million a quarter right now. So we've got you know, about a $10 million run rate as we as we sit right now.

Marshall Bridges: Probably add five to eight million dollars next year and then we get the full incremental 15 in 2025 for a $25 million run rate. And when you take that $25 million plus the $20 million benefit from exiting pop in plus the strong profitability care I had before the acquisition. And again, we're looking at EV the EBITDA multiple on the acquisition of near five. It's really speaks to the value creation opportunity that we have. Wow, okay.

Budd Bugatch: And last for me is corporate overhead looks, is this is is the current run rate of 20 some million dollars or how do we think about that on a quarterly basis and how much of that was variable comp? Yeah, Corp, you know, if you look at a fourth quarter, we do think it's going to be up $67 million being that $21 to $22 million range, not just up a little bit from the third quarter.

Budd Bugatch: And yeah, the big drivers of the year, the increase are variable comp, it was pretty low last year and it's rebounded this year. And we got some variation in insurance programs and also contribute to that variation. Okay.

Operator: Thank you very much. Congratulations again on a really impressive performance in the third quarter. Thanks, bud. And there are no further questions at this time.

Jeffrey Lorenger: I'd like to turn the call back over to Jeff Lorenger for any additional or closing remarks. Great. Thanks to everybody for joining us today.

Jeffrey Lorenger: Again, once again, thanks to all HNI members. Have a great day.

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

Beryl Bugatch: Garner, Beryl Bugatch,