Q1 2024 HNI Corp Earnings Call

Marshall H. Bridges: Thanks, Jeff. Let's start with our demand outlook. We expect 2024 organic revenue and workplace furnishings to grow at a low single-digit rate year-over-year. That outlook is unchanged from what we communicated on our last call.

Marshall H. Bridges: We expect demand conditions to remain generally in line with those experienced over the last nine months, and we continue to expect demand to be choppy but stable in a range. For residential building products, revenue trends are expected to improve as the year progresses, with year-over-year growth returning in the second half. However, for the full year, residential building product revenue is expected to be flat, or slightly down, versus 2023 levels.

Marshall H. Bridges: All right, let's shift to Outlook for 2024 earnings. We expect four-year EPS to strongly increase from 2023 levels, primarily due to continued margin expansion in workplace furnishings and the four-year benefit of accretion from KII. Looking at the second quarter of 2024, we expect earnings per share to solidly increase year-over-year. Again, we expect the benefit of Kimmel International and continued profit transformation and legacy workplace partnerships to drive the increase. I'd like to point out that we are now facing increasingly difficult year-ago comps, as the second quarter of 2023 showed noticeable benefits from our profit transformation initiative.

Marshall H. Bridges: We expect second quarter workplace furnishings organic revenue to be down slightly versus the same quarter of 2023. Moving to Kimball International for the second quarter of 2024, we expect KII to be accretive to non-GAAP EPS, generally in line with first quarter results. KII is expected to add $75 to $80 million of incremental revenue to the second quarter.

Marshall H. Bridges: As a reminder, this is reflective of two months of incremental revenue at the anniversary of the closing of the transaction in June. Finally, in residential building products, year-over-year declines are expected to moderate with second quarter revenue down in the low single digits versus the year-ago period. This reflects new construction growth and moderating declines in R&R. By shifting the balance sheet, we maintained our strong financial position. A gross leverage ratio of 1.9 times remained below 2 times for the second straight quarter as higher profit offset a modest seasonal increase in debt.

Marshall H. Bridges: Looking forward, we expect to modestly reduce leverage and improve our already strong balance sheet over the rest of the year. In addition, during the quarter, we accelerated our share repurchase activity, while the total outlay during the quarter was modest. Our ability to hold leverage steady while deploying TAS speaks to our strong TAS flow characteristics. Our low leverage and consistent cash flow generation provide substantial financial flexibility and ample capacity for capital deployment. Our current priorities for cash deployment remain reinvesting in the business, funding dividends, and pursuing share buybacks and M&A opportunities. Alright, now I'll turn the call back over to Jeff. Thanks, Marshall.

Jeffrey D. Lorenger: We are a natural start to 2024 as our strategies continue to deliver outstanding earnings growth. We are committed to increasing margins in workplace furnishings and driving long-term revenue growth in residential buildings. Our results to begin 2024 reflect the dedication of our member owners, the strength of our business model, and our ability to manage through all parts of the economic cycle, and he anticipates another strong year in 2024. We will now open the call to your questions.

Operator: As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our first question will come from the line of Reuben Garner with Benchmark Company. Please go ahead. Thank you. Good morning, everybody. Good morning. So maybe you start with a big picture question. Earnings or margin performance in the last three or four quarters has been pretty remarkable. You mentioned difficult comps, Marshall, kind of starting in the second quarter. Can you talk about what they are? What's left to go in terms of what you control in terms of earnings expansion as the year progresses and into next year?

Reuben Garner: Yeah, Reuben, I think we still have the same primary drivers, productivity, and cost controller in the SC&A line, and of course, PriceCost is just all those up against StrongerComp. So, in particular, price-cost is going to taper off here a little bit. That was a decent benefit in the first quarter. We still expect it to be a benefit for the remainder of the year, just less so. Yeah, Reuben, I could add that, you know, Marshall hit it.

Marshall H. Bridges: I mean, really, we've got our lean efforts in both segments, both businesses. You know, labor flow materials, we're seeing early benefits from our investments in mainly Mexico and the workplace learning side, and then we're getting some procurement savings as well. So, we've probably pumped in about $30 to $35 million of benefit, you know, in 24, but I think if you look out past 24, I think, You know, I didn't just spend another $30; it's so on top of the 24 numbers.

Marshall H. Bridges: And that 30, Reuben, would be from the Mexico investment, as well as synergies from KAI. We'd have our usual lean efforts on top of that. So that's after this year, just to clarify. Okay, good. That's helpful.

Reuben Garner: I guess on the building product side... Anything in terms of the size of homes or affordability that concerns you or signs that you've seen where we might be running into headwinds on the number of fireplaces per home, or do you guys have an offering at that price point to kind of offset it if affordability for the builders and the homebuyers becomes a bigger issue? Yeah, Reuben, that's a good question.

Jeffrey D. Lorenger: I mean, affordability has been an issue for a while now, you know, and so we've watched that, and we, our product price, you know, accounts for that. The other thing I would talk about is, you know, we've got some newer units in the electric category that really address some of that as well. We have a lot, you know, a lot of innovation going there. So, so no, I don't see the Hedwins being any more than they've been candidates for the last couple of years. Okay, last one for me.

Reuben Garner: Rates are moving up again here of late. Your conversations, I guess, specifically on the S&B side, it doesn't sound like... The Outlook has changed a lot. Any rifts there, or do you think the other drivers are more than offsetting when we go forward? Yeah, I think... Twenty-four is an interesting time given the economic cycle and election year, but for the most part, we see that business and the drivers holding pretty solid.

Reuben Garner: And I would say that, you know, the orders in most of those areas are running at where we've been or slightly up. Yeah, Reuben, that's a business that's done pretty well for the last several quarters, and we're still seeing growth on top of those strong comps. We're still pretty, pretty, still pretty good about it. And I think the encouraging thing is we're starting to see contracts converge with that growth.

Reuben Garner: So contract orders were up in the first quarter, and we're expecting some reasonable growth in the second half from both contract and S&B. Great. Thanks for the call, you guys, and congrats on the strong quarter. Good luck going forward.

Gregory Burns: Your next question will come from the line of Greg Burns with Sidotium Company. Please go ahead.

Gregory Burns: Morning. The dynamic you mentioned was... with Kimball impacting. The Revenue Recognition, I guess, there was this quarter. Was that pulled forward?

Gregory Burns: I'm just trying to gauge. Like, are you expecting... Like, is your guide for the second quarter lower than it would have been otherwise? Like, I'm just trying to kind of gauge if this is like the normal seasonality that you're expecting for the business going forward, or if this is a timing issue with some of these orders you were expecting to shift around.

Marshall H. Bridges: Yeah, it's a tiny issue, and it pulled from the second quarter, so if you look at our guide for the incremental revenue from KII, pretty much the same as it was last quarter, but we got more of it in the first quarter. And that's a business that is project-oriented, so there's not necessarily a seasonality to it. It just depends on when the timing of those projects occurs. Okay.

Gregory Burns: And then, what's the split of your revenue now on the building product side between new construction and remodeled retrofit? Has that changed much? It hasn't changed much. It's very close to 50-50.

Marshall H. Bridges: Certainly, with remote work being done more than new construction, maybe a tad more new construction right now, but it's close enough to 50-50 there, not change that ratio, okay. Okay, and then I guess you kind of touched on this, but it seems like that you're, The contract side of the business seems to be showing some more activity. I guess, maybe, can you talk about, you know, what you're seeing in terms of funnel activity there, conversations with your customers, any more callers you get there? Do you feel better about that side of the business?

Marshall H. Bridges: And see, you know, maybe an... Improving demand outlook there. Yeah, Greg, I think that's how I would characterize it. Current trends, we think our funnel, our quoting, our pre-order activity is solid. It's, you know, actually.

Jeffrey D. Lorenger: We've got double-digit growth rates and all those pre-order metrics. What I would say is that we've got some segments that are showing some pretty decent activity, both project-type, FedGov, corporate accounts, you know, in that space as well. Now, having said all that, what I would say is, you know, I think it's going to be a slow, steady grind up. It's not a rocket ride to the moon. I think it's, but the good news is those critter metrics are starting to change, and we're having, you know, those critter metrics are up nicely.

Jeffrey D. Lorenger: And I think the cycle's a little elongated, so it's just going to kind of be a slow, steady grind. But it does predict, you know, the outlook will be growth in the contract space as we go forward.

Budd Bugatch: Your next question will come from the line of Budd Bugatch with Water Tower Research. Please go ahead.

Budd Bugatch: Good morning, Jeff. Good morning, Marshall, Matt, and Jeff. Congratulations on the performance in the quarter. Very, very heartening.

Jeffrey D. Lorenger: Jeff, you talked about those four items, and I think Marshall stressed that price cost was important during this quarter. We still remain positive, but less so going forward. Can you talk about which ranks highest of the other three in terms of importance in this quarter and what's left to get in terms of productivity, streamlining costs, or simplifying? Yeah, but in the first quarter, you know, we had about $14 million of favorable price costs. So that was the biggest item. But a very close second was productivity, which was about $12 million in benefits year over year. The actual SUA cost was less than that.

Marshall H. Bridges: Moving forward, it's about productivity. You know, price costs are still going to be positive in the mission the rest of the year. That means less, though, and productivity ramps up.

Marshall H. Bridges: As Jeff mentioned, we're expecting around $35 million of incremental net productivity benefit year over year. Compare that to maybe the price cost of the year, 15 to 20, 14 of which was already in the first quarter. Okay, and by the end of the year, where do you think the legacy HNI workplace furnishings margins will be? And what's still the goal? Is it still double digits? Look, our goal is more ambitious than double-digit, but we may not quite get there this year, but we're certainly trying, and we expect to see margin expansion going forward.

Marshall H. Bridges: Okay. I'm going to ask you to define a word for me, and that word is solidly, which is an adjective you use, I think, to describe the performance in the second quarter. You want to put some framework on solidly. Oh, gosh, bud, that's a tricky one. Well, that's you, Marjorie.

Budd Bugatch: You know that better than me. Yeah, I'm not sure we have a lot of color for you on that one. What I'd maybe point to, bud, is that I think the consensus estimate for the second quarter is like 64 cents, and so I think that would be up solidly versus the prior year to kind of add some color to it. Okay, well, let's check the second check a year another way.

Budd Bugatch: So when we get to the normal earnings per share seasonality performance of maybe one-third, two-thirds or 30-70 for the first half, second half, for Vector Thinking, yeah, that's exactly what we're thinking. That 70-30, 1-3rd, 2-3rd range is right on. Okay, that's very helpful.

Marshall H. Bridges: And in residential building products, I'm curious, everybody we hear has pretty much said business is a little slow, but we're optimistic going forward. And I'm trying to understand the reasons for the optimism. And where are you seeing that? Are you seeing it in orders?

Budd Bugatch: Is the order book so solid that it's giving you that improvement? Yeah, Bud, what I would say is, on the new construction side, you can look at our Q1 orders as we were down low single digits. And that's now flipped to a positive order growth rate on the new construction side. So that's probably what we're talking about.

Jeffrey D. Lorenger: But even if you talk about R&R, you know, the decline was in the low 20s in the order book, but now that decline is moderated. So, it's, um... That's a sign of some optimism, you know, as we go out throughout the year in 24 on the RBP project. Maybe if I just add to that, the first quarter rates, I think Jeff mentioned this in his prepared comment, are kind of distorted, but they don't provide a very good look-through of what the next quarter's revenue would be because of all the noise in the prior comp. So maybe that helps a bit, too. And for me, I want to make sure I understand something.

Marshall H. Bridges: I am delighted to hear that you're seeing improvement in contracts, and I've had no problem with the thought that it was going to grind forward until about the middle part of last week when the ABI came out and hit me in the face with a pretty sizable drop, and that always is a worrisome issue, to dissuade me of that concern. Well, I think that the... The drivers in contracts are mixed.

Jeffrey D. Lorenger: There's a lot of reasons to believe we're going to see some good growth. Our pre-order metrics are up, certainly the adoption of hybrid and people moving space, taking advantage of attractive lease rates, and creating furniture events, those are all good. But then there's things like you just mentioned, the ADR is down, people are worried, and rates are up. So that's why we kind of think it mixes together to be a kind of slow grind.

Jeffrey D. Lorenger: But that's where we're at. We don't think we're seeing dramatically high growth in the back half, but maybe something that was small, the digital digits in the back half year over year for contracts. Yeah, but it's clearly still choppy out there on all those factors.

Jeffrey D. Lorenger: Mark just mentioned that, you know, a slight, if you kind of snap a line on this, we see it just, you know, slightly picking up, which is great news for us because, you know, we're able to kind of deliver expanded margins without that. And once that volume growth, even a couple points, comes, that's going to lever through pretty well for us, and I do have one more question on that. 75 to 80 million of incremental Kimball revenues. Is that above the 52 or 56 million that you reported in the second quarter of 23? Yeah, correct, but that's incremental versus last year, so that's not their total revenue for the quarter, that's just the incremental year-over-year. So it'll be in that $135 to $140 million range, your best guess now.

Marshall H. Bridges: Right. Okay. Marshall, thank you very much. And Jeff and the team, congratulations on a really, as you would say, solid quarter. Thanks, Bud.

Katherine Thompson: Your next question comes from the line of Katherine Thompson with Thompson Research Group. Please go ahead.

Katherine Thompson: Hi, thank you for taking my questions today. Following up on the non-resin market and the ABI, our primary research and feedback from the field paints a little bit different picture than the ABI, and what large commercial contractors are sharing with us is that mega-projects and sub-projects simply aren't being captured by the ABI. Which I guess leads to the question of, as you look at megaprojects, in what ways does H

Katherine Thompson: and in what ways or ways that you can learn.

Jeffrey D. Lorenger: Hey Catherine, good question. Just to clarify, you're referring to workplace furnishings and how we would participate in large projects there? Yeah, yeah, yeah.

Jeffrey D. Lorenger: We participate strongly in those projects. We have corporate account sales teams. We've got dealers that are well-positioned, and we have a lot of activity in that space.

Jeffrey D. Lorenger: There is activity. People have been on the sidelines for quite some time, and a lot of people have now kicked the can, and the leases can't be kicked anymore.

Jeffrey D. Lorenger: And so people are starting to get active in that space, and so we have access to that space. We always have. We talk about SMB a lot because we're kind of neatly positioned there. But we're clearly positioned in the top 10 markets for those mega-projects as well, and routinely have those in our funnel and track them. And I would say that there is more dialogue on those types of events than there has been in the last couple of years.

Katherine Thompson: All of them are just listed in the commercial contractor space. Historically, HNI has been focused on middle America, whereas the coast has been for some of your peers in terms of just relative strength, and with population shift, it's been much talked about in the Southeast and Southwest, so a lot of it still is in middle America, but it's just kind of shifted south. As you look at growth in these big cities, are you able to capture your fair share in the southern half of Central America versus just kind of more the Midwestern portions of the U.S.? I hope that question makes sense. It's mainly about capturing your fair share where that population is.

Jeffrey D. Lorenger: Yeah, just maybe to clarify... We participate broadly across the U.S. We're in large cities. We're in large coastal cities. We have a good share in those cities. So I just want to make sure that you don't get the impression that we're just in the Midwest. That's definitely not the case.

Katherine Thompson: We're broadly in the United States. Oh, yeah, no, no, for sure. Yeah, yeah, yeah. It was mainly like midtown Manhattan versus Chicago, you know, that type of neighborhood, my neighbors.

Jeffrey D. Lorenger: I think we look a lot like the U.S. employment base, where it is spread out, and of course, we've got our unique position in the non-top 10 markets, where we really have a very strong position. But that's not to say we're not also participating in larger markets, and I think KAI better positions us for that population shift, as well as the product shift that's going on. So we feel pretty good about being able to catch the growth that is out there, Catherine.

Jeffrey D. Lorenger: Yeah, absolutely. I think we kind of have been sitting in neutral in some of these larger markets like a lot of people have been because the clients have been sitting in neutral. So, as I just commented, those engines are starting to warm up a bit, and we like the population migration, and KRI, as Marshall said, only strengthens that because the secondary geography, the product breadth and depth, the price points, the product mixing that's going on for flexibility, that all allows us to capture our fair share, if not more than our fair share, in those markets.

Katherine Thompson: Okay, great. And then a final question for the day on Temple. He's given some great detail on the call today and in the Q&A. He clearly made some solid progress from a margin expansion standpoint. But stepping back and looking, of course, for the trees as we come to the anniversary of that deal, what are two or three things that have been upsides to you that may be learned after you acquire a company that gives you hope and optimism for the future?

Jeffrey D. Lorenger: Yeah, Catherine, I would say, I kind of said that in my opening remarks, I would say, you know, the product application that they have, the exposure, we like that, but I think that's probably stronger than we even imagined. The hospitality space, which, you know, we didn't know a lot about, but has been a nice surprise and upside. And in health care, we didn't have a lot of exposure to health care, and they have a nice piece of the health care business as well that has really added.

Jeffrey D. Lorenger: And then you wrap all that in what I think is the real super ingredient, the cultural fit. These deals tend to turn on culture and people, and you stack that and wrap that around the three things I just mentioned, and it's all been a plus-plus. You knew it was a plus, but it's been a plus-plus from my perspective.

Katherine Thompson: Perfect, thanks. Best of luck.

Jeffrey D. Lorenger: If there are no further questions at this time, I'll turn the call back over to Mr. Lorenger for any closing remarks.

Jeffrey D. Lorenger: Yes, thank you. Thank you for your interest in HNI and thanks to everybody for taking the time to join us on this Monday morning. Have a great day.

Operator: That will conclude our call for today. Thank you all for joining us. You may now disconnect.

Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the agent I Corporation first quarter fiscal 'twenty 'twenty four results conference call. All lines have been placed on mute to prevent any background noise.

The speaker's remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question press. The star one again I would now like to turn the conference over to Matt Mccall. Please go ahead.

Good morning, My name is Matt Mccall, and Vice President of Investor Relations and corporate development for each not corporation.

Thank you for joining us to discuss our first quarter fiscal 2024 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 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.

During the call.

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

Good morning, and thank you for joining us.

During the first quarter our teams continue to build upon the strong progress we have made over the past two years.

We delivered earnings that were nearly triple the prior year period.

Operating margin and EPS, reaching first quarter levels not seen since 2007.

First quarter non-GAAP EPS of <unk> 37 was.

It was up 185% year over year.

This was despite an 8% organic revenue decline, which was primarily driven by continued housing market softness.

Our strong results continue to be fueled by our legacy workplace furnishings proppant transformation plan and the inclusion of Kimball International which combined to deliver the highest first quarter workplace furnishings operating profit margin since 2016.

Residential building products, our recent cost actions helped support profitability. Despite a continued soft housing market.

Longer term, we remain bullish about the prospects of the housing market broadly and our market leading position specifically.

Overall, we started the year on a very strong note.

On the call today I will highlight three key topics.

First our profit transformation actions continue to drive improvement and workplace furnishes.

When excluding the benefits of Kimball International legacy workplace furnishings non-GAAP operating margin.

Stand at 560 basis points year over year.

Looking forward, we expect profit growth and margin expansion to continue.

Second Kimball international delivered strong accretion.

<unk> is already.

Providing significant value creation to our shareholders and there is more to come.

We continue to expect annual cost synergies, resulting from the combination with <unk>.

Two totaled $35 million when mature.

Third residential building products posted solid profit despite ongoing housing market challenges.

Recent cost reduction actions continue to support profitability and we expect revenue growth and margin expansion to return through the year.

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.

Yeah.

Moving to the first topic, our profit transformation actions continue to drive improvement in workplace strategies.

As I mentioned first quarter non-GAAP operating profit margin for legacy workplace furnishings improved 560 basis points year over year.

That was the eighth straight quarter of year over year operating margin improvement in the segment.

And there is more to come as we expect additional benefits from our profit transformation plan during 2024 and beyond.

As a reminder, our legacy workplace furnishings profit transformation plan consists of four primary actions first we are driving increased productivity.

<unk> benefits from price positive price costs are helping to drive improved profitability.

Third we have streamlined our cost structure.

And finally, we continue to simplify our business.

Some of these benefits of this plan are recognized in our results and have helped drive the recent strength in our margins.

We also continue to see opportunity.

Our operational investments primarily in our new facility in Mexico will help drive substantial productivity benefits as they mature over the next couple of years.

This will add to our continued lean efforts helped drive additional profit growth.

Next we expect continued net price cost benefit through the remainder of 2024 from pricing actions announced over the past 12 months.

Finally, the rollover benefits from our corporate wide cost savings program will provide an incremental profit support in 2024.

All of this gives us line of sight to additional margin improvement.

And as I said earlier, we expect year over year profit growth and margin expansion and workplace furnishings to continue in 2024 and beyond.

Let's shift to workplace furnishings demand.

Our view of the market is mostly unchanged from our last call.

First quarter organic revenue was down two 5% year over year consistent with our expectations.

S M B again outperformed contract.

In the near term demand remains choppy, but is stable within a range.

SMB orders grew 1% year over year in the first quarter on top of an 18% increase in the first quarter of 2023, which was positively impacted by price increase timing.

This segment of our business continues to benefit from healthy dynamics, including population shifts to markets outside the top 10.

And relatively higher office usage in those markets.

We expect these factors along with increasing preorder metrics to continue to support SMB demand.

Switching to contract demand trends further improved in the quarter.

Orders from contract customers were also up 1% in the first quarter on a year over year basis.

The year ago comp was also challenging in contract with first quarter 2023 order growth of 14%, which was also positively impacted by timing of price increases.

Two year order trend is encouraging and is consistent with many of the other demand indicators.

Our preorder activity in quoting remain elevated.

Return to office metrics continue to tick up and reached post pandemic highs in recent weeks.

<unk> churn is expected to accelerate as tenants take advantage of attractive lease economics, and nonviable office space is repurposed.

And the need for companies to adapt their spaces for hybrid work will further support demand.

In summary, we continue to see encouraging trends related to future demand, particularly given our unique market position and overall market coverage.

However, as we have communicated for several quarters, our profit transformation plan does not require volume growth volume.

Volume growth will only enhance our profitability.

Moving to my second topic Kimball.

<unk> generated an operating profit margin of nine 3% and added an estimated 10 cents and non-GAAP EPS in the first quarter.

We continue to expect annual cost synergies to reach $25 million in 2024.

And total synergies are expected to reach $35 million when fully mature.

From a revenue perspective Kai I solidly outperformed the expectations, we shared with you last quarter.

The upside came from the hospitality segment.

Hospitality has been performing well however, entering the quarter, we had expected revenue recognition to be negatively impacted by shipping delays related to disruption in the Red Sea.

Those delays did not materialize, which helped drive hospitality revenue above our expectations.

We continue to be encouraged by the complementary nature and attractive post pandemic positioning of <unk> offering.

The addition of Kay is providing significant value creation.

As we have highlighted Kimball international is complementary from a product market and cultural perspective.

<unk> strengthens our exposure to several important trends and markets, namely ancillary products secondary geographies healthcare and hospitality.

Each provides new opportunities for profit growth.

And our confidence in the combination of strategic and financial benefits continues to prove out and accelerating.

My third topic residential building products posted solid profit despite ongoing housing challenges.

Recent cost reduction actions continue to support profitability.

Segment non-GAAP operating margin for the first quarter was 14, 4%.

This represents the seventh consecutive year with first quarter segment, non-GAAP operating margin at or above 14%.

We were able to extend this level of performance in 'twenty four despite a 17% year over year revenue decline as housing market weakness continue to pressure demand trends in the quarter.

Let me provide some color on the first quarter revenue decline in residential building products first the year over year rate has some noise in it.

We're comparing against the prior year period benefited from unwinding demand that had built up during the back half of 2022.

Our first quarter revenue and order growth rates are somewhat distorted due to that issue.

Second consistent with broader housing trends R&R performed worse on a year over year basis, the new construction.

And third the year over year revenue decrease was modestly worse than expected primarily due to slower new construction, which was negatively impacted by weather early in the quarter and more recently by incrementally higher interest rates and inconsistent builder sentiment.

Looking forward year over year single family permits and starts are showing healthy growth, which supports new construction improvement going forward in 2024.

Segment orders showed improvement consistent with the broader market indicators in the first quarter.

Orders in new construction outperformed remodel retrofit with Newbuild orders down only low single digits year over year.

Despite some near term headwinds we are bullish on the intermediate to long term dynamics of the business. In addition to the solid long term market fundamentals, we have unique growth opportunities.

Continue to invest in the areas of category awareness, new product innovation online capabilities and the expansion of our wholly owned installing distributor footprint.

Sure.

In summary order trends in our residential building products segment improved during the quarter and.

In the intermediate to long term demand dynamics continue to remain encouraging for this business.

Looking through the remainder of 2024, we expect growth and margin expansion to return through that through the year.

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 and workplace furnishings to grow at a low single digit rate year over year.

That outlook is unchanged from what we communicated on our last call. We expect demand conditions to remain generally in line with those experienced.

Over the last nine months and we continue to expect demand will be choppy, but stable in a range.

In residential building products revenue trends are expected to improve as the year progresses with year over year growth returning in the second half for the full year residential building products revenue is expected to be flat to slightly down versus 2023 levels.

Alright, let's shift to our outlook for 2020 for earnings.

We expect full year EPS to strongly increase from 2023 levels, primarily due to continued margin expansion and workplace furnishings and the full year benefit of accretion from K III.

Looking at the second quarter of 2024, we expect earnings per share consolidated increase year over year.

Again, we expect the benefit of Kimball International and continued profit transformation and legacy workplace furnishings to drive the increase.

I'd like to point out that we are now facing increasingly difficult year ago comps as the second quarter of 2023.

Notable benefits from our profit transformation initiatives.

We expect second quarter workplace furnishings organic revenue to be down slightly versus the same quarter of 2023.

Moving to Kimball International for the second quarter of 2024, we expect <unk> to be accretive to non-GAAP EPS generally in line with first quarter results.

AI is expected to add $75 million to $80 million of incremental revenue to the second quarter.

As a reminder, this is reflective of two months of incremental revenue as we anniversary the closing of the transaction in June.

Finally in residential building products year over year declines are expected to moderate with second quarter revenue down in the low single digits versus a year ago period.

This reflects new construction growth and moderating declines in R&R.

Shifting to the balance sheet, we maintained our strong financial position.

Our gross leverage ratio of one nine times remained below two times for the second straight quarter as higher process offset a modest seasonal increase in debt looking forward, we expect to modestly reduce leverage and improve our already strong balance sheet over the rest of the year.

In addition, during the quarter, we accelerated our share repurchase activity, while the total outlay during the quarter was modest our ability to hold leverage steady while deploying cash speaks to our strong cash flow characteristics.

Our low leverage and consistent cash flow generation provides substantial financial flexibility and ample capacity for capital deployment.

Our current priorities for cash deployment remain reinvesting in the business funding dividends and pursuing share buybacks and M&A opportunities Alright, I will now turn the call back over to Jeff.

Thanks Marshall.

We had an excellent start to 2024 as our strategies continue to deliver outstanding earnings growth.

We are committed to expanding margins and workplace furnishings, and driving long term revenue growth and residential building products.

Our results to begin 2024 reflect the dedication of our member owners the strength of our business model and our ability to manage through all parts of the economic cycle.

And we anticipate another strong year in 2024.

We will now open the call to your questions.

Sure.

As a reminder to ask a question. Please press star followed by the number one on your telephone keypad. Our first question will come from the line of Reuben Garner with benchmark company. Please go ahead.

Reuben Garner: Thank you and good morning, everybody.

Good morning.

So maybe just start with a big picture question earnings or margin performance for the last three or four quarters has been.

Pretty remarkable.

Can you you mentioned difficult comps Marshall kind of starting in the second quarter can you talk about what's.

What's left to go in terms of what you control.

In terms of earnings expansion as the year progresses and into next year.

Yes, Robin I think we still have.

The same primary drivers productivity.

Cost control or in the SG&A line.

Price cost is just that all of those off against stronger comps.

In particular price cost is going to taper off here or there that was a decent benefit in the first quarter, we still expect it will be a benefit.

Reuben Garner: For the remainder of the year just less so.

Yes, but I would just add that.

Marshall hit it I mean really.

We got our lean efforts both in both segments both businesses.

<unk> flow of materials.

We're seeing early benefits from our investments mainly methods Mexico in the workplace furnishing side, and then we'll get into procurement savings as well.

Reuben Garner: So we've probably pumped in about 30% to $35 million of benefit in.

24, but I think as you look out.

Past 'twenty four I think.

I would anticipate another 30 or so on top of the 24 number.

And that 30 roofing would be from.

The Mexico.

Investment as well as synergies from Canada, we would have our usual lean efforts on top of that so that's after this year just to clarify.

Okay. Good that's helpful and then.

I guess on the building products side.

Anything in terms of the size of homes or affordability that concerns you or signs that you've seen.

Where we might be running into headwinds on the number of fireplaces per home or do you guys have an offering at that price point that kind of offset it if affordability.

For the builders and the homebuyers becomes a bigger issue.

Yes. That's good question I mean affordability has been an issue for a while now.

And so we watch that and we we are product pipe accounts for that.

The other thing I would talk about is we got some newer units in the electric category that are that really address some of that as well.

That we've got a long a lot of innovation going there. So so no I don't see the headwinds being any more than they have been candidly for the last couple of years.

Okay and last one for me right.

Moving up again here of late.

Your conversations I guess, specifically in the SMB side it doesn't sound like.

The outlook has changed a lot any.

Any risks to that or do you think the other drivers are more than offsetting it on a go forward basis.

Yes, I think look it's a.

24 is an interesting time, given given kind of the economic cycle and election year, but for the most part we see that business and the drivers holding pretty solid.

And I would say that.

The orders in most of those when we look at it most of those areas are running running at where we've been or slightly up.

Yes, that's right.

It's done pretty well.

Last several quarters and we're still seeing growth on top of the strong comps that were pretty pretty feel pretty good about it and I think the encouraging thing is we're starting to see contract converge with that growth. So contract orders were up in the first quarter and we're expecting some reasonable growth in the second half from from both contract.

Dan SMB.

Great. Thanks for the color guys and congrats on the strong quarter good luck going forward.

Thank you.

Your next question will come from the line of Greg Burns with Sidoti <unk> Company. Please go ahead.

Good morning, the dynamic <unk> morning.

But with Kimball impacting.

The revenue recognition I guess there this quarter was that pulled forward I'm just trying to gauge like are you are you expecting.

Okay.

Like is your guide for the second quarter lower than it would've been otherwise like I'm just trying to gauge. If this is like the normal seasonality.

That you are expecting for the business going forward or if this is just.

Timing issue with some of this these orders you're expecting to shift around.

Yes, it's a timing issue and it did pull from the second quarter. So if you look at our guide for.

The incremental revenue from <unk> pretty much the same as it was last quarter, but we got more of it in the first quarter.

And that's a business that is project oriented and so theres not necessarily a seasonality to it.

Just depends on when the timing of those projects occur.

Okay.

And then what's the split of your revenue now in the building product side between new construction and remodel retrofit or has that changed much.

It Hasnt changed much its very close to 50 50.

Certainly with the remainder being down more than new construction, maybe a tad more new construction right now, but it is close enough to 50 50 to not.

That change that ratio.

Okay.

Okay, and then I guess, you kind of touched on this but it seems like you're.

The contract side of the business is seems to be showing some more.

I guess, maybe can you just talk about.

What youre seeing in terms of funnel activity there conversations with your customers just anymore color you can give there do you feel better about that side of the business and see maybe.

Improving demand outlook there.

Yes, Greg I think that's that's how I would characterize it current trends, we think are our funnel our quoting a preorder activity is solid.

Actually.

Got double digit growth rates in all of those preorder.

Preorder metrics.

What I would say is that we've got some segments that are showing some pretty decent activity both project pipe fed Gov corporate accounts.

In that space as well now having said all of that what I would say is.

I think it's going to be a slow steady grind up.

It's not.

To the Moon and I think it's but the good news is those those <unk> those are starting to convert and we're having.

Those pure metrics R. R.

Our up nicely and I think that the cycles will elongated. So it's just going to kind of be a slow steady grind, but it does predict.

The outlook will be will be growth in the contract space as we go forward.

Okay. Thank you.

Your next question will come from the line of Budd <unk> with water Tower Research. Please go ahead.

Good morning, Jeff Good morning, Marshall, and Matt and Joel Budd.

Congratulations on the performance in the quarter very very heartening.

Jack you talked about those four items and I think Marshall.

Stress that price cost was important during this quarter and still remains positive.

But let's so going forward can you talk about what were ranked the other three in terms of importance in this quarter and what's left to get.

So in terms of productivity streamlining costs simplifying.

Yes, but in the first quarter, we had about $14 million a favorable price cost. So that was that was the biggest element, but a very close second is productivity, which is about $12 million of benefit year over year.

The actual SG&A cost was with smaller than that.

Moving forward, it's about productivity price cost is still going to be positive as I mentioned, the rest of the year than.

Less so in productivity ramps up so as Jeff mentioned, we're expecting around $35 million of ink.

Incremental net productivity benefit year over year.

We can compare that to maybe price cost of the year of 15% to 2014, which was already in the first quarter.

Okay and by the end of the year, where do you think.

The legacy <unk> workplace furnishings margins will be and what still the goal still go double digit.

Okay.

Look.

Our goal is more ambitious and double digit, but we may not quite get there. This year, but we're certainly trying and expect to see margin expansion going forward.

Okay.

I'm going to ask you to define a word forming and that word is solidly.

Which is an adjective you used I think you described Bob the performance in the second quarter, you weren't off put some framework on on solidly.

Oh gosh, that's a tricky one.

Wow.

Reuben Garner: Randy.

Yeah.

Sure we've got a lot of color for you on that Len.

Whereas maybe point to Budd is that I think the consensus estimate for the second quarter.

As well.

Reuben Garner: Like 64 cents and so I think that would be up solidly versus the prior year to kind of give some color to it.

Okay, well, let's take the second attack the year a different way do we get to the normal earnings per share.

Seasonality in performance of maybe one third two thirds or 30 74 four.

For the first half second half.

Is that your thinking.

Yes, that's exactly what we're thinking that 70 31 third two thirds range is right on.

Okay.

Very helpful.

And residential building products curious everybody we here.

Yeah, but what I would say is.

On the new construction side, if you look at our Q1 orders were down low single digits.

And that's now flipped to a positive order growth rate in the new construction side. So that's probably what we're talking about but even even if you talk about.

R&R.

The decline was in the low twenties and the order book, but it's now that decline is moderating so it's.

You know that signed that's a sign of some optimism as weak as we go out throughout the year and 24 on the RVP site.

But just to add to that the the first quarter rates I think Jeff mentioned this in his prepared comments are kind of distorted I don't they don't provide a very good look through of what like the next quarter's revenue would be because of all the noise in the prior year comp.

So maybe that helps a bit too.

Gotcha.

For me just I want to make sure I understand something I'm very.

I am delighted to hear that you are you seeing improvement in contract and had no problem with the thought that it was going to grind forward until about sometime middle part of last week when the Abi came out and hit me in the face with it with a pretty sizable drop.

And that always is a worrisome issue.

This is dissuade me of that concern.

But I think that the.

The drivers in contract our mix Theres, a theres a lot of reasons to believe we're going to see some good growth our preorder metrics are up.

Certainly the adoption of hybrid and keep them moving space, taking advantage of attractive lease rates create furniture events. Those are all good but then there's things like when you just mentioned the Abi is down and people are worried rates are up. So that's why we kind of think that mixes together to be a kind of a slow grind up.

So that's where we're at we're not thinking we're seeing dramatically high growth in the back half, but maybe something in a small.

Mid single digits in the back half year over year for contract, yes, but it's clearly still choppy out there.

All of those factors Marshall just mentioned, but a slight as you kind of snap. The line on this we see as just slightly ticking up which which is which is great news for us because.

We're able to kind of deliver expanded margins without that and once that volume growth even even a couple of points comes that's that's good lever through pretty good for us.

Thanks.

And I lied.

I do have one more question on that $75 million to $80 million of increment incremental Kimball revenue does that above the 50 or 52 or $56 million that you reported in the second quarter of 'twenty three.

Correct, yes.

Yes, correct, but thats incremental versus last year. So that's not their total revenue for the quarter, that's just the incremental year over year.

So it'll be in that $135 million to $140 million range as your best guess now.

Correct.

Okay.

Well, thank you very much and Jeff and team congratulations on a really as you would say solid quarter.

Okay.

Thanks Budd.

Yeah.

Reuben Garner: Your next question comes from the line of Kathryn Thompson with Thompson Research Group. Please go ahead.

Thank you for taking my question Paul following.

Non roslyn market at <unk>.

Our primary research empty back to Brookdale piece, a little bit different texture in terms of the API.

Large commercial contractors are sharing with us Scott Mega projects and some projects simply arent being captured on the globe.

Which I guess leads to the question.

Look at Mega projects and rolls as <unk> participate.

Ah.

And.

Or ways that you can win.

Hey, Catherine good. Good question, just just to clarify youre, referring to workplace furnishings, and how we would participate in large projects there.

Yes Catherine.

Yeah, Yeah, Yeah, we participate.

Strongly in those projects we have.

We have corporate account sales teams. We've got dealers that are that are well positioned and we have a lot of activity in that space.

And I tend to agree with you there is activity that the people have been on the sidelines for quite some time and a lot of people now have kicked the can and.

The leases can't be kicked anymore, and so people are starting to to get active in that space and so we have exposure to that space. We always have we talk about SMB a lot because we're kind of uniquely positioned there, but where we're clearly positioned in the top 10 markets for those mega projects as well in and routine.

<unk>.

Have those in our funnel.

Track them and.

I would say that there is there is more dialogue on on those types of events. Then there has been last couple of years.

All of you and I am just once again on the commercial Comm conference calls.

Historically <unk> has been focused on Middle America, whereas proposed compound for some of your peers.

Just relative strength.

And with population ship much talked about southeast southwest. So a lot of it still is on Middle America, but that's just kind of shuffled shall.

As you look as Chris Chris on these big cities.

Are you able to capture your fair share.

The southern half.

Okay.

Versus just kind of go into the Midwestern.

Questions of the U S and hope that question makes sense, just mainly about capturing your fair share.

Population incentives going.

Yes, just maybe to clarify.

We participate broadly through the U S. We are in large cities. We're in large coastal cities, we have good share in those cities. So.

Just want to make sure that don't get the impression that we're just to just in the Midwest that's definitely not the case for Brian.

For sure, Yes, yes, yes.

Mainly like.

Tom Patton first tolls cargo.

That's that type.

Normal parcels Nashville.

Right I think we look a lot like the U S employment base, where it is spread out.

And of course, we've got a unique position.

In the non top 10 markets, where we really have very strong position, but that's not to say were not also.

<unk> been in the larger markets and I think better positions us for that population shift as well as the.

The product shift that's going on so we feel pretty good about bill to catch the growth that is out there Catherine yeah.

Yeah, absolutely I think I think.

We kind of have been sitting.

In.

And neutral in some of these larger markets like a lot of people have been because the clients have been sitting in neutral.

As I just commented those those are starting those engines are starting to warm up a bit and we like it we like the population migration and.

As Marshall said, only strengthens that because the secondary geographies the product breadth and depth of price points the product mixing thats going on for flexibility at all allows us to capture our fair share if not more than our fair share in those markets.

Okay, Great and then a final question for the wall on Campbell, if given some great detail.

The comparable current model.

Clearly made some solid progress from margin expansion standpoint.

Stepping back from I think of course, the team sneak cantor on a restaurant.

Ill.

Clutter.

Two or three things Scott has done.

Outside <unk>.

That may be learned after Macquarie capital. Thank you.

Hum.

Optimism for the future.

Yes, Catherine I would say I kind of said that in my in my opening remarks, I would say the product application that they have the exposure, we like that but I think thats, probably stronger than we even imagined.

The hospitality space, which you know we didn't know a lot about but is has been a nice surprise in upside.

And then health care, we didn't have a lot of exposure to healthcare.

And they have a they have a nice piece of healthcare business as well.

<unk>.

Has has really added and then you wrap all that in in what I say is the real Super ingredient is the cultural fit.

These deals tend to turn on culture and people.

You stack that and wrap that around the three things I just mentioned in and it's all been.

Plus we knew was a plus but it's been a plus plus from my perspective.

Perfect. Thanks best of luck.

And there are no further questions at this time I will turn the call back over to Mr. Lawrence <unk> for any closing remarks.

Yes. Thank you. Thank you for your interest in <unk> and thanks to everybody taking the time to join US on this Monday morning have a great day.

That will conclude our call for today. Thank you all for joining you may now disconnect.

[music].

Okay.