Q4 2023 HNI Corp Earnings Call
Operator: Good morning, my name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the HNI Corporation fourth quarter and year-end fiscal 2023 results conference call. All lines have been placed on mute to prevent any background noise.
Good morning, My name is Dennis and I will be your conference operator today at this time I would like to welcome everyone to the H N I Corporation fourth quarter and year end fiscal 2023 results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star one again.
If you would like to ask a question. During this time simply press Star then the number one the ador telephone keypad to withdraw your question Press Star One again I would now like to turn the conference over to Mr. Nicole. Please go ahead Sir.
Operator: I would now like to turn the conference over to Mr. McCall. Please go ahead. Thank you. Good morning. My name is Matt McCall.
Thank you and good morning, My name is Matt Mccall, and Vice President of Investor Relations and corporate development for <unk> Corporation.
Matt McCall: I'm Vice President, Investment Relations, and Corporate Development for HNI Corporation. Thank you for joining us to discuss our fourth quarter and year-end fiscal 2023 results. With me today are Jeff Lorenger, Chairman, President, and CEO, and Marshall Bridges, Senior Vice President and CFO. Copies of our financial news release and non-GAAP reconciliations are posted on our website. Statements made during this call that are not strictly historical facts are forward-looking statements, which are subject to known and unknown risks. The 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 am now pleased to turn the call over to Jeff Lorenger. Jeff?
You for joining us to discuss our fourth quarter and year end fiscal 2023 results.
With me today are Jeff Lawrence <unk>, Chairman, President and CEO, and Marshall Bridges, Senior Vice President and CFO.
Copies of our financial news release, and non-GAAP reconciliations are posted on our website.
Statements made during this call that are not strictly historical facts are forward looking statements, which are subject to known and unknown risks actual results could differ materially.
Our news release posted on our website includes additional factors that could affect actual results Corporation assumes no obligation to update any forward looking statements made during the call.
Now please turn the call over to Jeff Oranger, Jeff Thanks, Matt.
Jeffrey Lorenger: Thanks, Matt. Good morning, and thank you for joining us. Our members continued to deliver outstanding results and had a strong finish to the year. For the fourth quarter, non-GAAP earnings per share increased 56% versus the prior year period. This was despite a 6% year-over-year organic revenue decline during the quarter, which was primarily driven by continued housing market weakness. Overall, 2023 was an outstanding year for HNI. During the year, we completed the largest acquisition in our company's history with the addition of Kimball International to the HNI family.
Good morning, and thank you for joining us.
Our members continue to deliver outstanding results and had a strong finish to the year.
For the fourth quarter non-GAAP earnings per share increased 56% versus the prior year period.
This was despite a 6% year over year organic revenue decline during the quarter, which was primarily driven by continued housing market weakness.
Overall 2023 was an outstanding year for HII.
During the year, we completed the largest acquisition in our company's history with the addition of Kimball international to the HII family.
Jeffrey Lorenger: Deliberate on our plan to improve margins without the benefit of top line support. Entering 2023, we anticipated a challenging demand year. And we built a plan to deliver earnings growth in the face of these challenges. We also generated significant cash flows to strengthen our business and provide returns to shareholders. This resulted in 2023 non-GAAP EPS that increased by more than 20% year-over-year despite an organic revenue decline. This was on top of 35% non-GAAP EPS growth in the prior year. With our strong cash flow, we rapidly reduced debt following the acquisition of Kimball International and finished the year with a gross leverage ratio under two times. I'm extremely proud of the efforts our employees put forward during the past year.
We delivered on our plan to improve margins without the benefit of top line support.
Entering 2023, we anticipated a challenging demand year and we built the plan to deliver earnings growth in the face of these challenges.
We also generated significant cash flows to strengthen our business and provide returns to shareholders.
This resulted in 2023, non-GAAP EPS increased by more than 20% year over year, Despite an organic revenue decline.
This was on top of 35% non-GAAP EPS growth in the prior year.
With our strong cash flow, we rapidly reduced debt following the acquisition of Kimball International and finished the year with a gross leverage ratio under two times.
I am extremely proud of the efforts of our members put forward during the past year are.
Jeffrey Lorenger: Our plan delivered excellent results, and despite the uneven macro environment, we exited 2023 a fundamentally stronger company. On the call today, I will highlight four key topics. First, we delivered another quarter of significant margin expansion in workplace furnishings, and we expect continued year-over-year profit and margin improvement from here. Second, the integration and synergy capture associated with the acquisition of Kimball International are both ahead of schedule. And we now expect total associated synergies to be $10 million higher than the initial projection.
Our plan delivered excellent results and despite the uneven macro environment, we exited 2023, a fundamentally stronger company.
On the call today, I will highlight four key topics.
First we delivered another quarter of significant margin expansion and workplace furnishings.
And we expect continued year over year profit and margin improvement from here.
Second the integration and synergy capture associated with the acquisition of Kimball International are both ahead of schedule.
And we now expect total associated synergies to be $10 million higher than the initial projections.
Jeffrey Lorenger: The addition of KII is providing significant value creation to our shareholders. Third, we expanded margins in residential building products despite top-line pressure from ongoing housing market weakness, and order trends improved during the quarter. And fourth, we strengthen our already strong balance sheet, and our gross leverage ratio is back below two times, only two quarters following the completion of the Kimbell International Acquisition. Following those highlights, Marshall will review our outlook. I will conclude with some general closing comments before we open the call to your questions.
The addition of <unk>, providing significant value creation to our shareholders.
Third we expanded margins in residential building products, despite topline pressure from ongoing housing market weakness and order trends improved during the quarter.
And fourth we strengthen our already strong balance sheet and our gross leverage ratio is back below two times only two quarters. Following the completion of the Kimball International acquisition.
Following those highlights Marshall, who will review our outlook.
I will conclude with some general closing comments before we open the call to your questions.
Jeffrey Lorenger: Moving to the first topic, we delivered another strong quarter of significant margin expansion in workplace furnishings. When excluding KII results, fourth quarter non-GAAP operating profit margin for legacy HNI workplace furnishings was 7.2%. This represents an expansion of 480 basis points year-over-year and was the seventh straight quarter of year-over-year operating margin improvement as our profit transformation initiatives continue to drive results. Looking forward, we expect continued year-over-year profit and margin improvement from here. As a reminder, our Legacy Workplace Furnishings Profit Transformation Plan consists of four primary actions.
Moving to the first topic, we delivered another strong quarter of significant margin expansion and workplace furnishings.
When excluding <unk> results fourth quarter non-GAAP operating profit margin for legacy HMA workplace furnishings was seven 2%.
This represents an expansion of 480 basis points year over year and was the seventh straight quarter of year over year operating margin improvement as our profit transformation initiatives continue to drive results.
Looking forward, we expect continued year over year profit and margin improvement from here.
As a reminder, our legacy workplace furnishings profit transformation plan consists of four primary actions.
Jeffrey Lorenger: First, we are driving increased productivity. Our focus on lean, cost reduction, and better efficiencies helped drive our profit growth in 2023 while funding operational investments primarily in our new facility in Mexico. Looking forward, our investments will help drive outsized productivity benefits as they mature over the next couple of years and add to our continued lean-up. Second, price-cost improvement continues to benefit our profitability. Our pricing strength continued to support profitability in the fourth quarter, and we expect continued net benefits in 2024 from pricing actions announced within the past 12 months. Third, we have streamlined our cost structure. We previously announced a $30 million corporate-wide cost savings program. However, we have far exceeded this target.
First we are driving increased productivity.
Our focus on lean cost reduction and better efficiencies helped drive our profit growth in 2023, while funding operational investments primarily.
In our new facility in Mexico.
Looking forward, our investments will help drive outsized productivity benefits as they mature over the next couple of years and add to our continued lean efforts.
Price cost improvement continues to benefit our profitability.
Our pricing strength continued to support profitability in the fourth quarter and we expect continued net benefit in 2024 from pricing actions announced within the past 12 months.
Third we have streamlined our cost structure, we previously announced a $30 million corporate wide cost savings program.
However, we far exceeded this target.
Jeffrey Lorenger: And as of the end of 2023, the program's run rate savings will be $50 million across the corporation, with half of that total contributing to our workplace furnishings margin expansion in 2023. And finally, we continue to simplify our business as we focus our efforts on the most attractive markets. We divested Poppin, we divested our China business, and we rationalized our e-commerce offer.
As of the end of 2023, the programs run rate savings was $50 million across the corporation with half of that total contributing to our workplace furnishing margin expansion in 2023.
And finally, we continue to simplify our business as we focus our efforts on the most attractive markets.
Divested popping, we divested our China business, and we rationalized our ecommerce offering.
Jeffrey Lorenger: All in all, we continue to see opportunity for margin upside in workplace furnishings. I will remind you our profit transformation plan does not require buy and grow. However, we continue to see encouraging trends related to future workplace furnishings demand, particularly given our unique market position. In the near term, demand remains choppy, but it's stable within a range, consistent with our commentary last quarter. Looking further out, we continue to see growth in the small to medium-sized customer segment, where we have an unmatched competitive position. Legacy SMB orders grew 6% organically year-over-year in the fourth quarter and were up 8% in 2023 overall. In general, this segment has benefited from healthy dynamics. For example, small and mid-sized firms have accounted for nearly 85% of all post-pandemic hiring.
All in we continue to see opportunity for margin upside in workplace furnishings.
I will remind you our profit transformation plan does not require volume growth. However, we.
We continue to see encouraging trends related to future workplace furnishings demand, particularly given our unique market position.
In the near term demand remains choppy, but is stable within a range consistent with our commentary last quarter.
Looking further out we continue to see growth in the small to medium sized customer segment, where we have an unmatched competitive position.
Legacy SMB orders grew 6% organically year over year in the fourth quarter and were up 8% in 2023 overall.
In General this segment has benefited from healthy dynamics.
Small and mid sized firms have accounted for nearly 85% of all post pandemic hiring.
Jeffrey Lorenger: This segment has also 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, trends improved in the quarter, and we are seeing encouraging signals. Order some legacy contract customers.
The segment has also 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 trends improved in the quarter and we are seeing encouraging signals.
Orders from legacy contract customers were down 2% for the year.
Jeffrey Lorenger: We're down 2% for the year, but we're approximately flat in the fourth quarter on a year-over-year basis. The full year results are consistent with lower return to office rates in the larger markets and the lagging hiring activity by large companies I just mentioned. Encouragingly, some return to office metrics continue to tick up and have reached post-pandemic highs in recent weeks. This, along with the predicted acceleration of lease expirations and the need for companies to adapt their spaces for hybrid work, support a projected increase in furniture events and should bode well for contract demand patterns going forward. Orders for KII's workplace and health business also increased at a mid-single-digit pace, at a mid-single-digit pace on a year-over-year basis. We continue to be encouraged by the complementary nature and attractive post-pandemic positioning of KII's offices.
Were approximately flat in the fourth quarter on a year over year basis.
The full year results are consistent with lower return to office rates in the larger markets and the lagging hiring activity by large companies I just mentioned.
Encouragingly some return to office metrics continue to tick up and have reached post pandemic highs in recent weeks.
This along with the predicted acceleration of lease expirations and the need for companies to adapt their spaces for hybrid work support and projected increase in furniture events and should bode well for contract demand patterns going forward.
Orders for <unk> workplace and health business also increased in the mid single digit pace.
Adam mid single digit pace on a year over year basis.
We continue to be encouraged by the complementary nature and attractive post pandemic positioning of <unk> offerings.
Jeffrey Lorenger: Across all of our major workplace brands, year-over-year order trends were uneven during the quarter, but they were strongest and grew in December. And first quarter 2024 to date has seen a continuation of these trends, generally positive, but still choppy. Moving to my second topic, both the integration and synergy capture associated with the acquisition of Kimball International are ahead of schedule. KII added approximately $0.07 to non-GAAP EPS in the quarter and delivered a strong non-GAAP operating profit margin of 10.7%.
Across all of our major workplace brands year over year order trends were uneven during the quarter, but were strongest and grew in December.
In first quarter 2024 to date has seen a continuation of these trends generally positive but still choppy.
Moving to my second topic.
With the integration and synergy capture associated with the acquisition of Kimball International are ahead of schedule.
I added approximately <unk> <unk> to non-GAAP EPS in the quarter and delivered a strong non-GAAP operating profit margin of 10, 7%.
Jeffrey Lorenger: In addition, we now expect to achieve total annual cost synergies of $35 million. This is up from previous expectations of at least $25 million, and the $25 million run rate is now expected to be achieved in 2024. This is well ahead of the initial communicated timeline, and the increase is primarily tied to higher-than-anticipated procurement savings. Kimball International is complementary from a product, market, and cultural perspective, and the addition of its brands strengthens our workplace furnishings exposure to several important trends and markets, namely ancillary products, secondary geographies, health care, and hospitality.
In addition, we now expect to achieve total annual cost synergies of $35 million.
This is up from previous expectations of at least $25 million and the $25 million run rate is now expected to be achieved in 2024.
This is well ahead of the initially the initial communicated timeline the increase was primarily tied to higher than anticipated procurement savings.
Kimball International is complementary from a product market and cultural perspective.
And the addition of its brands strengthens our workplace furnishings exposure to several important trends and markets, namely ancillary products secondary geographies healthcare and hospitality each provides.
Jeffrey Lorenger: Each provides new opportunities for profit growth, and our confidence in the combination of strategic and financial benefits continues to accelerate. My third topic is that we expanded margins to near record levels in our residential building products business, despite continued cyclical top-line pressure. Segment non-GAAP operating margin in the fourth quarter improved to more than 22%.
These new opportunities for profit growth and our confidence in the combination strict strategic and financial benefits continues to accelerate.
Okay.
My third topic is we expanded margins to near record levels and our residential building products business. Despite continued.
Cyclical topline pressure <unk>.
Segment non-GAAP operating margin in the fourth quarter improved to more than 22%.
Jeffrey Lorenger: This represents a 240 basis point improvement from levels reported in the year-ago period, as our recent cost reduction actions continue to support profitability. We delivered margin improvement despite a 13% year-over-year revenue decline, as housing market weakness continued to pressure demand trends in the quarter. Importantly, the housing macro backdrop continued to improve in the fourth quarter, specifically as it pertains to single-family new construction. Year-over-year single-family permits and starts showed healthy growth in the fourth quarter, which supports further new construction improvement in 2024. Remodel retrofit demand remains soft; however, the declines are moderate. Overall, segment order trends improved during the quarter. Fourth quarter orders were 3% below year-ago levels.
This represents a 240 basis point improvement from levels reported in the year ago period as our recent cost reduction actions continue to support profitability.
We delivered margin improvement despite a 13% year over year revenue decline as housing market weakness continued to pressure demand trends in the quarter.
Importantly, the housing macro backdrop continued to improve in the fourth quarter, specifically as it pertains to single family construction.
Year over year single family permits and starts showed healthy growth in the fourth quarter, which supports further new construction improvement in 2024.
Remodel retrofit demand remains soft however, the declines are moderating.
Overall segment order trends improved during the quarter fourth quarter orders were 3% below year ago levels. This represents an improvement compared to rates seen in the third quarter of minus 18% and in the first half when segment orders declined 29% year over year.
Jeffrey Lorenger: This represents an improvement compared to rates seen in the third quarter of minus 18% and in the first half, when segment orders declined 29% year-over-year. Despite the near-term headwinds, we are bullish on the intermediate to long-term dynamics for the segment. The demand fundamentals remain strong, U.S. housing is undersupplied, demographic trends point to robust future construction growth, and renovation activity will benefit from an aging housing stock and increased housing turnover. In addition to the solid long-term market fundamentals, we have unique growth opportunities and continue to invest in the areas of category awareness, new product innovation, online capabilities, and the expansion of our wholly-owned installing distributor footprint. In summary, order trends improved during the quarter, and the intermediate to long-term demand dynamics remain encouraging for the second quarter. Finally, and my fourth key point from the quarter, we further strengthened our already strong balance sheet. We repaid $73 million of debt in the fourth quarter and $162 million in the second half of 2023. As a result, we ended the fourth quarter with $436 million in total debt and a gross leverage ratio of 1.9 times.
Despite the near term headwinds we are bullish on the intermediate to long term dynamics for the segment.
The demand fundamentals remains strong U S housing is under supplied demographic trends point to robust future construction growth and renovation activity will benefit from an aging housing stock and increased our housing turnover.
In addition to the solid long term market fundamentals, we have unique growth opportunities and continue to invest in the areas of category awareness, new product innovation online capabilities and the expansion of our wholly owned installing distributor footprint.
In summary order trends improved during the quarter and the intermediate to long term demand dynamics remain encouraging for the segment.
Finally, my fourth key points in the quarter, we further strengthened our already strong balance sheet, we repaid $73 million of debt in the fourth quarter and $162 million in the second half of 2023.
As a result, we ended the fourth quarter with $436 million in total debt and our gross leverage ratio of one nine times.
Our gross leverage ratio is back below two times or two quarters. Following the acquisition of Kimball International This speaks to the strong cash flow characteristics of our company and continues to provide us substantial financial flexibility.
Following those 22 summary comments I will now turn the call over to Marshall to discuss our outlook for 2020 for Marshall.
Thanks, Jeff, let's start with our demand outlook, we expect 2020 for organic revenue to grow at a low single digit rate in both workplace furnishings and residential building products.
Jeffrey Lorenger: Our gross leverage ratio is back below two times, only two quarters following the acquisition of Kimball International. It speaks to the strong cash flow characteristics of our company and continues to provide us with substantial financial flexibility. Following those 22 summary comments, I will now turn the call over to Marshall to discuss our outlook for 2024.
For workplace furnishings. This outlook assumes demand conditions remained generally in line with those experienced in the second half of 2023.
And residential building products, we expect growth in new construction to be partially offset by softness in remodel retrofit.
Shifting to the impact of Kimball International we expect <unk> to add $215 million to $225 million of incremental revenue to 2024 that will occur in the first half. We also expect Kimball international to be solidly accretive to earnings.
Marshall H. Bridges: Thanks, Jeff. Let's start with our demand outlook. We expect 2024 organic revenue to grow at a low single-digit rate in both workplace furnishings and residential building products. For workplace furnishings, this outlook assumes demand conditions remain generally in line with those experienced in the second half of 2023. In residential building products, we expect growth and new construction to be partially offset by softness and remodeled retrofit. Shifting to the impact of Kimball International, we expect KII to add $215 million to $225 million of incremental revenue. In 2024, that will occur in the first half.
From an overall earnings perspective, 2024, non-GAAP EPS is expected to increase solidly year over year, primarily driven by continued margin expansion and workplace furnishings and the full year benefit of accretion from <unk>.
For the first quarter of 2024, we expect non-GAAP earnings per share to increase year over year with margin expansion and accretion from Kimler national more than offsetting macro driven top line pressure.
A few details on our first quarter outlook, we expect first quarter workplace furnishings organic revenue to be down in the low single digits versus the same quarter of 2023.
Marshall H. Bridges: We also expect Kimball International to be solidly accretive to earnings. From an overall earnings perspective, 2024 non-GAAP EPS is expected to increase solidly year-over-year. Primarily driven by continued margin expansion in workplace furnishings and the full year benefit of accretion from KII. For the first quarter of 2024, we expect non-GAAP earnings per share to increase year over year with margin expansion and accretion from Kimmler National more than offsetting macro-driven top line pressure. A few details on our first quarter outlook. We expect first quarter workplace furnishings organic revenue to be down in the low single digits versus the same quarter of 2023.
Although growth in our fourth quarter orders would point to a modest first.
First quarter topline growth in the segments, we are seeing a higher mix of project business seeking delivery after the first quarter.
This is a headwind for the first quarter, but it does support our positive full year outlook.
For the first quarter, we expect Kimball international to add $125 million to $130 million of revenue.
And in residential building products, we expect first quarter revenue to be down in the low to mid teens year over year.
This primarily reflects the impact from unwinding the elevated backlog in the year ago period.
Shifting to the balance sheet, we expect to further deleverage.
Marshall H. Bridges: Although growth in our fourth quarter orders would point to modest... First quarter top line growth in this segment, we are seeing a higher mix of project business seeking delivery after the first quarter. This is a headwind for the first quarter, but it does support our positive full year outlook. For the first quarter, we expect Kimball International to add $125 million to $130 million of revenue. And for residential building products, we expect first quarter revenue to be down in the low to mid-teens year over year.
And improve our already strong balance sheet during 2024, low leverage and consistent cash flow generation will provide substantial capacity for capital deployment.
Our current priorities for cash deployment are reinvesting in the business funding dividends and pursuing share buybacks and M&A opportunities.
I'll now turn the call back over to Jeff.
Thanks Marshall.
Before we open the call to your questions I wanted to take a moment to highlight a few of our accomplishments over the past couple of years from a profitability perspective for the corporation overall, our strategies have driven non-GAAP earnings per share growth in excess of 60% and non-GAAP operating margin expansion of more than 270 basis points over this two <unk>.
Marshall H. Bridges: This primarily reflects the impact of unwinding the elevated backlog in the year-ago period and shifting it to the balance sheet. We expect to further deleverage and improve our already strong balance sheet during 2024. Low leverage and consistent cash flow generation will provide substantial capacity for capital deployment. Our current priorities for cash deployment are reinvesting in the business, funding dividends, and pursuing sure-bite vaccine M&A opportunities. I'll now turn the call back over to Jeff.
Year period, despite a consistently turbulent the lesson supportive macro backdrop and.
In workplace furnishing specifically, our profit transformation initiatives and the addition of CAD II have expanded margins more than 600 basis points and segment operating profit is growing $110 million more than 750% from 2021 levels.
Jeffrey Lorenger: Thanks, Marshall. Before we open the call to your questions, I wanted to take a moment to highlight a few of our accomplishments over the past couple of years. From a profitability perspective, for the corporation overall, our strategies have driven non-GAAP earnings per share growth in excess of 60% and non-GAAP operating margin expansion of more than 270 basis points over this two-year period, despite a consistently turbulent and less than supportive macro-backdrop. For Workplace Furnishings specifically, our profit transformation initiatives in the addition of KII have expanded margins more than 600 basis points and segment operating profit has grown In addition, the integration and accretion from Kimbell International are ahead of schedule, and our synergy expectations are now $10 million higher. Our confidence in the combination of strategic and financial benefits continues to accelerate. And finally, in residential building products, we quickly adjusted our cost structure to respond to the housing reset in 2023.
And we expect continued year over year profit and margin improvement in coming quarters.
In addition, the integration and accretion from Kimball International are ahead of schedule and our synergy expectations are now $10 million higher our confidence and the combination of strategic and financial benefits continues to accelerate.
And finally in residential building products, we quickly adjusted our cost structure to respond to the housing reset in 2023 as.
As a result, despite the macro driven topline pressure our operating profit margin in the fourth quarter expanded to near record levels. While we continue to invest in our growth strategies, leading brands and operating platforms, although although the near term dynamics remain.
Leading indicators are improving and we are uniquely positioned to drive high margin growth as housing stabilizes.
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 in residential building products.
I want to thank all <unk> members, our strong results in 2023 reflect their collective effort focus and dedication to our stakeholders. We will now open the call to your questions.
Jeffrey Lorenger: As a result, despite the macro-driven top-line pressure, our operating profit margin in the fourth quarter expanded to near record levels, while we continue to invest in our growth strategies, leading brands, and operating platforms. However, the near-term dynamics remain. Leading indicators are improving, and we are uniquely positioned to drive high-margin growth as housing stabilizes. In summary, we remain committed to our core strategies of continuing to expand margins in workplace furnishings and drive long-term, high-margin revenue growth in residential building projects. I want to thank all the HNI members.
At this time I would like to remind everyone in order to asking question simply press Star then the number one auto telephone keypad.
Our first question is from the line of Reuben Garner with the benchmark company. Please go ahead.
Thank you good morning, everybody.
Good morning.
Maybe to start.
Thanks for the color on.
<unk> 44.
A lot of moving pieces with with Campbell.
The savings there.
<unk> growth.
Sure.
The productivity of our global warming.
You had kind of carrying over from last year. When you kind of help us put all that together and Barcelona, and our bridge loan.
Operator: Our strong results in 2023 reflect their collective effort, focus, and dedication to our stakeholders. We will now open the call to your questions. At this time, I would like to remind everyone that in order to ask a question, simply press the star, then the number 1 on your telephone keypad.
Earnings growth.
Yes.
Hey go solidly in 'twenty four powerful at solid remove multiple more.
Okay.
Yes.
Reuben I think when we say solidly we're expecting EPS growth in the high single digits to low teens and our objective there would be to have our third consecutive year of double digit EPS growth that the two big drivers of that growth or the continued margin expansion in the legacy workplace furnishings.
Reuben Garner: Your first questions from the line of Reuben Garner with the Benchmark Company, please go ahead. Thank you. Good morning, everybody.
Reuben Garner: Morning. Maybe to start, thanks for the color in 2024. There are a lot of moving pieces with Kimball, the savings there, organic growth, and kind of some of the productivity and savings initiatives you had kind of carrying over from last year. Can you kind of help us put all that together, Marshall, on a bridge? And I know you said earnings growth, EPS could grow solidly in 2024. If you could kind of tell us what solid means in Muscatine, that would be helpful too.
That's roughly half of it the other half is the continued accretion from us getting a full year from the K.
So those are the two major drivers. We also will see some benefit from improved profitability in residential building products.
Yeah.
Sorry, I was on mute.
Is there any.
Remaining.
Savings or price cost benefits.
That will help 2023 the carrier for.
Marshall H. Bridges: Yeah, look, Reuben, I think when we say solidly, you know, we're expecting EPS growth in the highest single digits to the low teens, and our objective there would be to have our third consecutive year of double-digit EPS growth. The two big drivers of that growth are the continued margin expansion in the legacy workplace furnishings, and we'll say that's roughly half of it. The other half is the continued accretion from us getting a full year from the KAI. So those are the two major drivers.
The first part of 'twenty four.
Okay.
Absolutely the major driver of the continued profit growth in legacy workplace furnishings is the productivity.
Productivity and price cost.
That's our major major profit levers there. So we are expecting this to be favorable for the year end and certainly that's a little bit disproportionate to the first half as well.
Okay, and then a couple of questions on the residential building products segment.
Marshall H. Bridges: We also will see some benefit from improved profitability in residential building products. Sorry, I was on mute, and are there any remaining savings or price-cost benefits that helped you guys in 23 to carry over, at least in the first part of 24? Absolutely, the major driver of the continued profit growth in legacy workplace furnishings is productivity and price. That's our major profit levers there, so we are expecting those to be favorable for the year, and certainly that's a little bit disproportionate to the first half as well. Okay, and then I have a couple of questions on the residential building product segment.
The outlook there is very encouraging.
Particularly given the start for the year and I'm, just kind of want to Claire.
Clarify maybe if you can kind of break down your end market expectations within that low single digit growth framework and just to be clear that that kind of points to a high single digit.
Growth framework in Q2, three and four can you kind of walk us walk us through how you get to those kind of assumptions.
Yes, we're expecting new construction to be up in the mid single digits for the year and then remodel retrofit were expected to be flattish and so that's where we get to the low single digit growth on average for the year.
Marshall H. Bridges: The outlook there is very encouraging, particularly given the start to the year. And I just kind of want to clarify, maybe if you could kind of break down your end market expectations within that low single-digit growth framework. And just to be clear, that kind of points to a high single-digit.
But you're right, we do expect growth to improve through the year, we're going to start off a little bit slower due to that year over year comp issue that we alluded to on the call.
Marshall H. Bridges: Growth Framework in Q2, Q3, and Q4, can you kind of walk us through how you get to those assumptions? Yeah, we're expecting new construction to be up in the mid-single digits for the year, and then remodeled retrofit, we're expecting to be flat-ish. And so that's where we get to low-single-digit growth on average for the year. But you're right, Reuben; we do expect growth to improve through the year. We're going to start off a little bit slower due to that year-over-year comp issue that we alluded to on the call, but remodeled retrofit, we do expect to get better through the year.
Remodel retrofit, we do expect to get better through the year one of the one of the items that we are.
And a benefit from this.
We had some trade inventory.
Stocking in 2023, which won't repeat in 2024, so as we start to anniversary that later in the year, the comps get easier and the growth will improve.
And we think new construction is going to have pretty solid all year. So the change in the trajectory is really driven by remodel retrofit getting less bad is starting to get a little better in the back half.
Marshall H. Bridges: One of the items that we're going to benefit from is that we had some trade inventory destocking in 2023, which won't repeat in 2024. So as we start the anniversary of that later in the year, the comps get easier, and growth will improve. And we think new construction is going to be pretty solid all year. So the change in the trajectory is really driven by remote retrofit getting less bad and starting to get a little better in the back half. Okay, thanks. And I'm going to sneak one more in.
Okay. Thank you and I'm going to sneak one more in.
On the residential segment the margin performance in the fourth quarter anything kind of one time, there obviously a pretty big.
Big number is that something we can kind of look forward going forward or you go back to your historical ways to kind of reinvesting.
More of that profit to generate growth.
Yes, Ruben I think there is no there is nothing extraordinary in the fourth quarter per se. The fourth quarter is always traditionally been a strong quarter for us.
He is our highest margin quarter, historically, and we were still investing.
Marshall H. Bridges: On the residential segment, the margin performance in the fourth quarter, anything kind of one time there, obviously a pretty big, big number. Is that something we can kind of look for going forward, or will you go back to your historical ways of kind of reinvesting more of that profit to generate growth? Yeah, Reuben, I think there's no, there's nothing extraordinary in the fourth quarter, per se.
In the fourth quarter anyway, but but we're always expanding looking to expand that but I think you know.
It will go back probably two.
Normal pattern, where the fourth quarter will remain high.
I don't see any reason we can't.
Achieve those margins down the road in the fourth quarter.
Great. Thanks, guys. Congrats on a strong close to the year and good luck on the 24th.
Marshall H. Bridges: The fourth quarter has traditionally been a strong quarter for us and usually is our highest-margin quarter historically. And we were still investing, you know, in the fourth quarter anyway, but we're always expanding, looking to expand. But I think, you know, it'll probably go back to a normal pattern where the fourth quarter will remain high. I don't see any reason we can't achieve those margins down the road in the fourth quarter. Great, thanks guys. Congratulations on a strong close to the year and good luck in the 24th. Thanks. Our next question is from the line of Greg Burns with Synodian Company. Please go ahead.
Thanks.
Your next question is from the line.
Greg Burns with Sidoti <unk> Company. Please go ahead.
Morning.
The.
Really nice job on the margins in the residential billings product side of the business as.
As we look into next year, if things are firming up and revenue starts to.
Revenue growth starts to Reaccelerate there.
These margin levels something you could sustain do you.
Intend to give a little bit back to support growth how should we think about margins on that side of the business going forward.
Greg J. Burns: Morning. You have done a really nice job on the margins in the residential buildings product side of the business. As we look into next year, if things are firming up, and your revenue growth starts to reaccelerate there, are these margin levels something you could sustain?
Yes.
Our goal there Greg is the whole margins in the high teens and drive the growth that we believe is out there for the taking and so as Jeff kind of mentioned in our prior answer there's a seasonality to the margins in that business fourth quarter is usually the highest and I think for the year will be in that high teens level.
Marshall H. Bridges: intend to give a little bit back to support growth. How should we think about margins on that side of the business going forward? You know, our goal there, Greg, is to hold margins in the high teens and drive the growth that we believe is out there for the taking. And so, as Jeff kind of mentioned in our prior answer, there's a seasonality to the margins in that business. The fourth quarter is usually the highest, and, you know, I think for the year, we'll be in that high teens level, so I think the margins are relatively where we want them to be. They may go up or down a little bit from here, but we're really trying to drive growth. So, there's nothing unusual in the fourth quarter number. That's right in line with where we want to be on a seasonal basis, you know, perspective. Moving on the...
So I think the margins are relatively where we want them to be they may go up or down a little bit from here, but we're really trying to drive growth. So there is nothing unusual in the fourth quarter number.
That's right in line, where we want to be seasonal.
Perspective.
Okay.
And then on the.
In the office market on the contract side of the business or are you seeing.
How are your conversations going with with the customers there.
Are you seeing.
Any pickup in an intense our activity there relative to maybe project pipeline or just the.
The conversations in general that you are having with those customers or there are you are you getting a sense that maybe.
Yeah.
They might be more intend to.
Greg J. Burns: The in the office market on the contract side of the business. So, how are your conversations going with customers there? You know, are you seeing any pickup in intent or activity there relative to maybe project pipeline or the conversations in general that you're having with those customers, are you getting a sense that maybe... They might be, you know, more intent to.
Spend on upgrading their offices or anything there that might get that market that part of the market.
Moving pad.
Yes look thats, we are seeing it stabilize a bit and we're seeing some positive signs for improvement there Greg I think it's still choppy. However.
Greg J. Burns: Spend on upgrading their offices or anything there that might get that part of the market moving ahead. Yeah, look, we are seeing it stabilize a bit. And we're seeing some positive signs for improvement there, Greg. I think it's still choppy.
Small project business has strengthened.
Fyodor metrics are encouraging, particularly with small projects.
Which would suggest people are starting to do not just day to day stuff, but.
Jeffrey Lorenger: However, you know, small project business is strengthened. preorder metrics are encouraging, particularly with small projects, which would suggest people are, you know, starting to, you know, do not just day to day stuff. But you know, Some refreshes, you know, I will say as an aside, we see strength in education and state and local healthcare and hospitality, those subsegments we have exposure to are all, you know, we're showing strength. The other thing that I think we're kind of, we have our eye on and we're talking to customers about is this whole leasing dynamic with, I know there's a lot of, you know, speculation out there on, you know, the CRE side of things, but we really are looking at furniture events and you know, what's been happening is a lot of people have been kicking the can and I think owners have been open to letting people kick the can, but that's kind of stopping now and people are having to pull a trigger and it's whether it's moving from a B or C to an A space, it's a furniture event.
Some refreshes.
You know I will say as an aside we see strength in education and state local health care and hospitality those sub segments, we have exposure to you all.
Showing strength the other thing that I think we're kind of we have our ion and we're talking to customers about is this whole leasing dynamic with I know, there's a lot of.
No speculation out there on the CRE side of things, but we really are looking at furniture events and.
What's been happening is a lot of people have been kicking the can and I think owners have been opened or letting people kick the can but thats kind of stopping now and people are having to pull a trigger and it's whether it's moving from a b or C to in a space. It's a furniture event. So we believe in the in the midterm that is going to start to.
Generate more demand in that contract space as well.
And that that place that plays to our strength in place too.
Jeffrey Lorenger: So we believe in the midterm, that is going to start to generate more demand in that contract space as well, because in that place, that plays to our strength and it plays to, you know, a positive outlook on that space, albeit, it'll be a slow grind, my guess, but I do believe that's going to start to unlock some demand in that space. OK, great. Thank you. Your next question is from the line of Steven Ramsey with Thompson Research Group. Please go ahead. Hi, good morning.
Our positive outlook.
In that space, albeit it will be a slow grind it'd be my guess, but I do believe that's going to start to unlock some demand in that space.
Okay, great. Thank you.
Okay.
Yes.
Your next question is from the line of Steven Ramsey with Thompson Research Group. Please go ahead.
Hi, Good morning wanted to continue that line of thought you've got similar dynamics with with leasing.
Steven Ramsey: Wanted to continue that line of thought. You've got similar dynamics with leasing on the workplace side and then existing home sales slowing down, repair, and remodel. So maybe to focus on existing home sales, how does that impact resi building product demand for you guys historically or maybe how you see it shaping up in the near term? Yeah. You know, Steve, that's a good question.
In the workplace side, and then existing home sales.
Slowing down repair and remodel so maybe to focus on the existing home sales.
Does that impact.
Reggie building product demand for you guys, historically or maybe how you see it.
Shaping up in the near term.
Yes.
Yes.
Jeffrey Lorenger: I think, look, you know, we need, it's a similar dynamic. You are right. People kind of remodel once they move.
So thats a good question I think look we.
It's a similar dynamic you are right people remodel.
Kind of once they move but.
Jeffrey Lorenger: But, you know, so that is definitely having an impact on some of the R&R business. So, you know, I think. We continue to look at that space; we see upside there as things will start to unlock down the road, but it clearly has an impact. Now, we have a lot of efforts focused on that space as well to drive activity. We've got some efforts in the area of digital campaigns to drive awareness of what's possible with some of our inserts and exploring possibilities of replacement for people who have decided, maybe, to stay in place because they can't find a home. So, we're working in that way as well. Okay, that's helpful.
So that that is definitely having an impact on some of the R&R business. So I think we continue to look at that space and we see upside there as things will start to unlock.
Down the road.
Clearly has a clearly has an impact now we have a lot of efforts focused on that space as well.
To drive you know.
Activity, we've got some some efforts in the area of digital campaigns to drive awareness of what's possible with some of our inserts and exploring possibilities of replacement for people, who decided maybe to stay in place as because they can't they can't find a home so.
We're working leverage that way as well.
Okay.
Jeffrey Lorenger: And then thinking about the residential product margin target at the high teens combined with the growth you expect this year, that does seem to imply more dollars of investment into that segment for growth, yet some natural constraints on the R&Rs you just talked about. Curious where the investment dollars are going aside from campaigns and if that's leaning more to gaining share in new construction or if it's driving R&R amidst the slow backdrop. You know, it's a bit of both.
That's helpful and then thinking about.
Residential product margin target at the high teens combined with the growth you expect next year that does seem to imply more dollars of investment into that segment for growth yet.
Yet some some natural constraints on R&R as you just talked about curious where the investment dollars are going aside from campaigns.
That's leaning more to gaining share in new construction or if it's driving R&R amidst the slow backdrop.
It's some of both I mean, we are investing in product platforms updating product platforms modernizing product platforms, we've got investments in electric category.
Jeffrey Lorenger: I mean, we're investing in product platforms, updating product platforms, modernizing product platforms, we got investments in the electric category, all in addition to, you know, consumer awareness, homeowner, and homebuyer awareness, relative to the digital efforts that we have ongoing. Okay, assuming the workplace environment of the second half stays, I guess you're saying S&B keeps outperforming contract to the same degree, or is there a potential that it closes the gap Look, I mean, our best guess at this point is that it will continue to outperform by several percentage points. I don't have a reason to think it's going to accelerate or decelerate.
All in addition to consumer awareness homeowner homebuyer awareness relative to the digital efforts that we have ongoing.
Okay. That's helpful.
The workplace environment of the second half.
Dave.
Yes, youre, saying F&B, Keith outperforming contract to the same degree or is there potential that.
Closes the gap widens further.
Look I mean, that's it.
Our best guess at this point is it will continue to outperform by several percentage points.
I don't I don't have a reason to think it's going to accelerate or decelerate I think it probably kind of maintains its our best our best assumptions at this point is this going to maintain what it's been doing.
Jeffrey Lorenger: I think it probably kind of maintains its, our best assumption at this point is it's going to maintain what it's been doing, you know, the last 12 months. Okay, that's helpful. Thank you. Your next question is from the line of Bud Bugatch with Water Tower Research. Please go ahead.
The last 12 months.
Okay. That's helpful. Thank you.
Thanks.
Your next question is from the line of Budd <unk> with a water tower research. Please go ahead.
Beryl Bugatch: Good morning and thank you for taking my questions and congratulations on an outstanding quarter. Well, I guess the question I have is we've come out of a couple of years of really unusual events, and that impacted the typical seasonality of your earnings and revenues. Are we back to a period where we see the normal kind of earnings seasonality, where it gets one-third in the first half and two-thirds in the second half? How do you see that, Marshall?
Good morning, and thank you for taking my questions.
Congratulations on an outstanding quarter.
Yes.
I have we've come from.
Out of a couple of years of really.
Unusual events.
Typical seasonality.
Of your.
Earnings and resolutions are we back to a point, where we see the normal kind of of our earnings.
Seasonality word.
<unk> one.
One third in the first half.
<unk> second half having seen that Marshall.
Marshall H. Bridges: Yeah, but we absolutely believe we're back to normal seasonality. I think, you know, the acquisition aside, we were there in 2023, but from 2020 through 2022, we had abnormal seasonality. So anytime you're comparing against those years, there's some noise, but we're back to being clean now. Both 2023 and 2024 should follow the normal seasonal pattern, as you said, you know, roughly. 30% of the profit in the first half, 70% in the back half, kind of range. And you've come out of this period stronger than you went into it.
Yes, but we absolutely believe we're back to the normal seasonality I think the acquisition. Aside we were there in 2023, but 2020 through 2022, we had abnormal seasonality so anytime you're comparing against those years Theres. Some theres some noise that we're back to being clean now both.
2023, and 2024 should follow the normal seasonal pattern as you said roughly.
30% of the profit in the first half 70 in the back half kind of <unk> kind of range.
Okay.
You've come out of those subgroups stronger there.
You went into April.
Beryl Bugatch: Your balance sheet is pretty good right now. What do you see going forward in terms of the longer term now after KII and the leasing events that I think Jeff alluded to accelerating? Maybe furniture events.
Your balance sheet.
Pretty good right now where do you see going forward in terms of.
Well the longer term now after <unk>.
Sure.
Well.
The leasing where brands without some Jeff alluded to.
Accelerating mobile furniture events.
Marshall H. Bridges: Do you see anything strategically that you'd like to comment on? But we see lots of runway on the path we're on right now where we're driving profit expansion, margin expansion, and workplace furnishings, driving the benefits of the integration with KAI, and driving top-line growth in the high-margin residential building product segment. So, no, we're not – we feel like we've got a lot of runway for what we have right now and not necessarily feeling that we need to add anything at this moment. Yeah, I think that's right.
Any things considerably.
What seems like comment going.
But we see lots of runway on the path. We're on right now, where we're driving profit expansion and margin expansion in workplace furnishings.
Driving the benefits of the integration with Kai and driving top line growth in the high margin residential building products segment. So now we're not we feel like we got a lot of runway with what we have right now.
Not necessarily feeling we needed to add anything at this moment, yes, I think thats right, but I think we believe we got a lot our teams or our focus we got plowing. The ground, we've got a lot of dry powder.
Jeffrey Lorenger: But I think, you know, we believe we've got a lot. Our teams are focused. We've got plows in the ground.
Jeffrey Lorenger: We've got a lot of dry powder. We'll – but we are investing in the business and, you know, integrating KII. So, there – but that's all good. And operationally, you're where you want to be. And one of the things about that area that I was thinking about was geographically. With KII, you still are, I guess, overweighted in the rural markets.
But we are investing in the business and.
Integrating AI and so but that's all all good.
Operationally, you, where you want to be in.
One other things on that area that I was thinking about was due a graphical with <unk>.
You still are it was overweight on moving to the rural markets.
Beryl Bugatch: As I think you alluded to, Marshall, if businesses start to be a little firmer on their requirement for people to be back in the office, do you see a way to gain some strength in the more metro markets? Yeah, but I mean, look, we still participate there, and we have a nice chunk of business there on the contract side. It's just we have the, you know, we have some other stuff as well.
I think you alluded to Marshall.
Business and start to be a little firmer on their requirement for people to be back in the office and you see a way to gain some strength.
And the more metro markets.
Yes, but I mean look we still participate there.
And we have a nice chunk of business there on the contract side. It's just it's just we have the we have some of the other stuff as well so.
Jeffrey Lorenger: So, that's why we're that's why we talked about it. We're focused on that area. It's been a big piece of our business. And we do believe we're competing well, um, you know, for what's happening now, and we'll compete; we'll compete well going forward. So we did, we will, we will benefit as much as those furniture events on lock-in in major metros. Okay, and last for me, anything on the cost side that you're seeing may be a little worrisome out there? I know people have talked a lot about, at least on the residential side, what's going on in some of the canals and the waterways issues.
That's why we're that's why we've talked about we're focused on that area. It's been a big piece of our business and we do believe we're competing well.
For what is happening now and will compete we will compete well going forward. So we will we will benefit as that as those furniture events on lock in major metros.
Okay and last for me anything on the cost side.
Maybe a little worrisome op, where I know people have talked a lot about.
At least for the residential side, what's going on in some of the hours on the waterways issues.
Marshall H. Bridges: Are you seeing anything on costs that might be a little bit concerning? You know, for the year, but we do expect to see some inflation, primarily from wages, the normal, the normal merit cycle. We are seeing a little bit of freight pressure. That is definitely an issue at the moment.
Are you seeing anything on cost might be a little bit concerning.
Yes for the year, but we do expect to see some inflation primarily from wages and the normal the normal merit cycle, we are seeing a little bit of a freight pressure that is definitely an issue at the moment.
Marshall H. Bridges: And the commodities are pretty stable, even maybe a little deflationary in the first part of the year, and we expect to offset that inflationary pressure with price realizations. So we do expect favorable price costs again in 2024. Roughly speaking, in the $10 million range.
And the commodities are pretty stable, even maybe a little deflationary in the first part of the year and we expect to offset that inflationary pressure with price realization. So we do expect a favorable price cost again in 2024.
Roughly speaking in the $10 million range.
Okay.
Beryl Bugatch: All right. All right. Well, thank you very much. And congratulations and best of luck for the balance of the year. Thank you. Bye. Your next question is a follow-up from Steven Ramsey with the Thompson Research Group. Please go ahead.
Alright.
Alright, well, thank you very much and congratulations and best of luck.
The balance of this year.
Thanks Budd.
Your next question is a follow up from Stephen <unk> with Thompson Research Group. Please go ahead.
Steven Ramsey: Just wanted to circle back to something you just talked about, Marshall, with the runway of drivers helping earnings growth in 2024. How much of that will carry into 2025? Clearly, there's a broad array of good things happening across both segments, so I'd be curious how you think about some of these drivers beyond the next 12 months. Yeah, Steven, we think we've got a lot of runway, particularly on the productivity side of things. I think Jeff mentioned in his comments that we made some operational investments in 2023, primarily in that new facility in Mexico. And that's actually a headwind to our 2023 profitability of about $15 million, all the investments total, including Mexico. And as those investments mature and begin to generate a return in 25, in 26, and a little bit in 24, they'll pay off in the 10 to $15 million range.
Just wanted to circle back to something you just talked about Marshall with the runway of drivers helping earnings growth in 2024.
Each of these carry into 2025, clearly there is a broader way array of of good things happening across both segments. So curious how you think about some of the drivers beyond the next 12 months.
Yes, Stephen we think we got a lot of runway, particularly on the productivity side of things I think Jeff mentioned in his comments that we made some operational investments in 2023, primarily in that new facility in Mexico.
And that's actually a headwind to our 2023 profitability of about $15 million all of the investments total including Mexico.
And as those investments mature and begin to generate a return and 25% and 26% a little bit in 'twenty four.
They'll pay off in the $10 million to $15 million range. So thats, a pretty big swing of at least $25 million from where we are right. Now. So that's indicative of the type of runway, we've got in front of us to keep driving profit growth.
Marshall H. Bridges: So that's a pretty big swing of at least $25 million from where we are right now. And that's indicative of the type of runway we've got in front of us to keep driving profit growth with not a lot of help from volume. Yeah, Steven, as we said, we can continue working to expand margins without volume growth. I mean, obviously, we are doing everything we can to capture as much volume as we can. But we have plans in place that, you know, we're looking at margin expansion in workplace furnishing and ProfitGrowth, you know, visibility on the 24 and 25.
Not a lot of help from volume.
Yes, Steve as we said I mean, we can continue.
Working continue to expand margins without volume growth I mean, we obviously are doing everything we can to capture as much volume as we can but we we have plans in place that we're looking at margin expansion in workplace furnishings.
And profit growth visibility.
Visibility in the 'twenty four 'twenty five.
Jeffrey Lorenger: Okay, that's very helpful. Thank you. And at this time, there appear to be no further questions. I will now turn the call back to Mr. Lorenger for any closing remarks.
Okay. That's very helpful. Thank you.
And at this time there appear to be no further questions I will now turn the call back to Mr. Lawrence <unk> for any closing remarks.
Great. Thanks, everybody for joining us today and taking the time have a great day.
Operator: Great. Thanks everybody for joining us today and taking the time. Have a great day. Thank you all for joining today's call. We appreciate your participation. You may now disconnect.
Thank you all for joining today's call. We appreciate your participation you may now disconnect.
[music].
Yes.
Okay.
Sure.