Q3 2024 HNI Corp Earnings Call
Amy: Thank you for standing by. My name is Amy and I will be your conference operator for today. At this time, I would like to welcome everyone to the H&I Corporation 3rd quarter fiscal 2024 results conference call.
Amy: All lines have been placed on mute to prevent any background noise.
Amy: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press the star, followed by the number one on your telephone keypad.
Amy: If you would like to withdraw your question, again, press star in the number one. It is now my pleasure to turn the call over to Mr. McCall. Please go ahead.
Matt McCall: Good morning. My name is Matt McCall, I'm Vice President, Investual Relations and Corporate Development for H&I Corporation. Thank you for joining us to discuss our third quarter fiscal 2024 results.
Matt McCall: with me today of Jeff Lorenger, Chairman, President and CEO, Marshall Bridges, Senior Vice President and CFO and VP Burger Executive Vice President.
Matt McCall: Copies of our financial news release and non-gap reconciliation are posted on our website.
Speaker Change: Statements made during this call that are not strictly historical facts are forward-looking statements which are subject to known and unknown risk. Actual results could differ materially.
Speaker Change: The financial news release posted on our website includes additional factors that could affect actual results. The corporation assumes no obligation to update any forward-looking statements made during the call. I'm now pleased to turn the call over to Jeff Lorenger. Jeff?
Jeff Lorenger: Good morning and thank you for joining us.
Jeff Lorenger: I'm going to divide my commentary today into three sections.
Jeff Lorenger: I will start by providing some highlights on our third quarter results, which were strong.
Jeff Lorenger: Non-GAAP EPS of $1.03 exceeded our internal expectations.
Jeff Lorenger: and was 11% higher than the prior year period despite continued revenue pressure.
Jeff Lorenger: Then I will discuss our expectations for the fourth quarter, where we expect a near-term demand pause to impact results.
Jeff Lorenger: Finally, I will cover why we are confident in our ability to continue to drive profit growth in the upcoming years.
Jeff Lorenger: Specifically, I will highlight three key points that underscore our positive outlook for 2025 and 2026.
Jeff Lorenger: We have elevated EPS visibility through 2026.
Jeff Lorenger: Our workplace demand outlook remains encouraging, and our unique position and strong long-term market fundamentals provide reasons for optimism in residential building products.
Jeff Lorenger: Following those highlights, Marshall will review our outlook and discuss our strong financial position.
Jeff Lorenger: I will conclude with some general closing comments before we open the call to your questions.
Jeff Lorenger: Let's start with the third quarter.
Jeff Lorenger: Our members again delivered strong profit growth.
Jeff Lorenger: Our 11% non-GAAP EPS growth in the third quarter was on top of a very strong year-ago comparison when profit grew more than 30% year-over-year.
Jeff Lorenger: Third quarter EPS has more than doubled in the past three years.
Jeff Lorenger: and we delivered those results without top-line support.
Jeff Lorenger: In the Workplace Furnishings segment, our Profit Transformation Plan.
Jeff Lorenger: and acceleration of KII synergies drove segment non-gap operating profit margin to a 20-year high for the third quarter.
Jeff Lorenger: and residential building products, despite ongoing housing market volatility, non-GAAP operating profit margin expanded year-over-year and exceeded 18% for only the third time in the third quarter.
Jeff Lorenger: Our strategies, our dedicated member-owners, our customer-first business model, and our proven ability to manage through all parts of the economic cycle again helped deliver strong results.
Jeff Lorenger: Next, a few comments about the fourth quarter.
Jeff Lorenger: We are optimistic about the opportunities that we see in both segments.
Jeff Lorenger: However, in the very near term, we are seeing a pause in demand across our businesses.
Jeff Lorenger: As a result, fourth quarter profit is expected to decline versus the same period of 2023.
Jeff Lorenger: In workplace furnishings, we are seeing demand moderate with small and medium-sized customers.
Jeff Lorenger: Within the SMB space, our transactional business has been particularly soft.
Jeff Lorenger: As you may recall, our transactional business primarily flows through wholesalers and national supply dealers.
Jeff Lorenger: This business can be volatile. The selling cycle is short.
Jeff Lorenger: It typically involves smaller item purchases.
Jeff Lorenger: and historically has been very sensitive to changes in the economy and general business sentiment.
Jeff Lorenger: Currently, economic and election concerns have small business leaders increasingly hesitant about discretionary spending.
Jeff Lorenger: Indicative of this sentiment is the September Small Business Optimism Survey. The monthly uncertainty index hit a record high ahead of the U.S. elections.
Jeff Lorenger: We expect business leaders' hesitation to moderate as we move past the elections and into next year.
Jeff Lorenger: In the contract furniture space, we are seeing further project delays and continued lengthening of the selling cycle.
Jeff Lorenger: Encouragingly, activity and dealer sentiment are improving. However, customers are still being cautious and our fourth quarter shipments will be negatively impacted.
Jeff Lorenger: A recent Deloitte survey illustrates these concerns. Of 130 large company CFOs that were surveyed, only 12% said now is a good time to take greater risks.
Jeff Lorenger: This is the lowest level in the past 10 years, even lower than the worst stages of the pandemic.
Jeff Lorenger: But again, we view these pressures as temporary.
Speaker Change: Finally, in the Residents of Building Projects segment, during the quarter, builder and homeowner sentiment was negatively impacted by interest rate volatility, ongoing inflation and affordability issues, and the same economic and political uncertainty that is impacting our workplace business.
Speaker Change: Reflecting these concerns, the Housing Market Index fell to 39 in August after reaching a peak of 51 in March and April.
Speaker Change: As 2025 develops, we do expect interest rate reductions to eventually result in increasing housing turnover and improved demand for our products in both new construction and R&R.
Speaker Change: Moving to my first point, highlighting our optimism beyond the fourth quarter.
Speaker Change: We have two initiatives underway.
Speaker Change: Mexico and KII Synergies that by themselves will deliver 70 to 80 cents of EPS growth in 2025 and 2026.
Speaker Change: That represents approximately 25% of EPS growth on top of our already strong results.
Speaker Change: It will be our third consecutive year of double-digit non-GAAP EPS growth.
Speaker Change: This means that without help from the cycle, we expect our three-year double-digit earnings growth streak to extend through at least 2026.
Speaker Change: Remember, our Workplace Furnishings Profit Transformation Plan does not require revenue growth and our recent margin expansion has been achieved without cyclical top-line support.
Speaker Change: In addition, we continue to adjust our cost structure in residential building products to align with the current demand environment.
Speaker Change: Early in the fourth quarter, we took actions that will lower our cost structure by approximately $5 million in residential building products.
Speaker Change: Most of that benefit will be recognized in 2025, further adding to our profit visibility.
Speaker Change: Before moving to my second point, I'll cover a few additional comments on KII and the recognition of synergies.
Speaker Change: KRI continues to be highly accretive and was a major contributor to our strong third quarter profit.
Speaker Change: And total synergies expected to result from the Kimbell International Acquisition have increased another $10 million and now are expected to total $60 million, with $30 million to be realized in 2025 and 2026.
Speaker Change: KII is also providing us with new revenue growth opportunities and is highly complimentary.
Speaker Change: Kimball International's workplace offering improves our post-pandemic product and geographic positioning.
Speaker Change: and KII's hospitality and healthcare businesses are well positioned within attractive expanding segments and both are generating growth.
Speaker Change: Our confidence in the combination of strategic and financial benefits continues to prove out and accelerate.
Speaker Change: Moving to my second point supporting our optimism, the outlook for workplace furnishings demand remains encouraging.
Speaker Change: Segment orders have continued to improve early in the fourth quarter after growing 1% in the third quarter.
Speaker Change: I'll now comment on the order trends of SMB and contract separately.
Speaker Change: Our SMB activity moderated in the quarter consistent with small business sentiment trends and our exposure to transactional business.
Speaker Change: SMB orders declined 3% year-over-year in the third quarter against the challenging comp. In the third quarter of 2023, SMB orders grew 6% year-over-year.
Speaker Change: As you may recall, SMB has been an area of strength for us for some time.
Speaker Change: This segment of our business has generated consistent order growth over the past two years, and we remain bullish about the fundamental backdrop.
Speaker Change: Specifically, healthy dynamics including population shifts to secondary and tertiary geographies and relatively higher office usage in those markets point to a return to growth in 2025.
Speaker Change: In our core contract business, we see growth on the horizon.
Speaker Change: The combination of contract and KII orders were up 5% on a year-over-year basis in the third quarter.
Speaker Change: We have seen large projects reactivate and continue strength in the hospitality space.
Speaker Change: As a result, orders over the past two months have improved, however, most of these projects will ship next year.
Speaker Change: Further supporting our outlook, quarter-ending workplace backlog is up 5% versus the prior year.
Speaker Change: Additionally, our contract sales funnel for 2025 continues to be encouraging and is up over 10% year-over-year.
Speaker Change: Looking out, we believe we are particularly well-positioned to benefit as the workplace furnishings market continues to improve.
Speaker Change: We have unmatched product and pricing breadth and depth.
Speaker Change: We have products that work for customers ranging from small businesses to the largest multinationals.
Speaker Change: Our brands are distributed widely across geographies, from tertiary markets to the top MSAs.
Speaker Change: And we can broadly meet the needs of workplaces, schools, healthcare facilities, and hotels.
Speaker Change: Moving to my third reason for optimism, we continue to see positive long-term market fundamentals in residential building products.
Speaker Change: Single-family housing remains undersupplied and demographics will support additional demand growth.
Speaker Change: Over the next year, we expect these fundamentals, combined with anticipated interest rate reductions, to eventually flow through, driving increased housing turnover and improved demand for our products in both the new construction and R&R spaces.
Speaker Change: In addition to the strong market fundamentals, we continue to invest in unique growth opportunities.
Speaker Change: These include new product innovations such as electric fireplaces.
Speaker Change: Efforts to become more intimate with builders, homeowners, and homebuyers, online capabilities, and the expansion of our wholly owned installing distributor footprint.
Speaker Change: I will now turn the call over to Marshall to discuss our outlook for 2024. Marshall?
Marshall Bridges: Thanks, Jeff. I'll start by summarizing our outlook for demand and profit, beginning with demand. Fourth quarter revenue in workplace furnishings is expected to decline at a low to mid-single-digit rate year over year.
Marshall Bridges: Our new outlook represents a reduction from what we provided in our July earnings release, which implied fourth quarter growth.
Marshall Bridges: Shifting to our profit outlook, we expect margins in workplace furnishings to move modestly lower year-over-year, driven by lower volume.
Marshall Bridges: Margins in residential building products are expected to be mostly unchanged to down slightly.
Marshall Bridges: In total, fourth quarter earnings are expected to decline year over year. Despite that decline, we expect full-year EPS to increase and extend our streak of growing full-year EPS by 10% or more to three years.
Marshall Bridges: I'll wrap up with a few comments on our balance sheet. We improved our already strong financial position. Gross leverage at the end of the quarter was 1.1 times, as calculated in accordance with our debt agreements.
Marshall Bridges: That ratio was down from 1.5 times at the end of the second quarter due to higher profit and lower debt levels.
Marshall Bridges: I would also like to point out that we are very near the same leverage ratio that we had before the Kimbell International Acquisition. So it took us just over five quarters to deliver, which is a testament to our ability to consistently generate strong free cash flow.
Marshall Bridges: During the quarter we also accelerated our share repurchase activity with more than 11 million dollars of buybacks.
Marshall Bridges: The combination of our strong balance sheet and consistent cash flow generation provides a high degree of financial flexibility and capacity for capital deployment.
Marshall Bridges: Our current priorities for cash deployment remain reinvesting in the business, funding dividends, and pursuing share buybacks and M&A opportunities.
Marshall Bridges: I'll now turn the call back over to Jeff.
Jeff Lorenger: Thanks, Marshall. We remain committed to expanding margins in workplace furnishings and driving long-term revenue growth in residential building products.
Jeff Lorenger: We drove strong results through the first three quarters of 2024, delivering year-to-date earnings growth of 33%, and we anticipate record EPS for the full year.
Jeff Lorenger: Beyond this year, we are positioned for continued success.
Jeff Lorenger: In summary, we have elevated earnings visibility in 2025 and 2026.
Jeff Lorenger: Broad and diverse product and market coverage in workplace furnishings.
Jeff Lorenger: and market-leading positions in residential building products.
Jeff Lorenger: All supported by a strong balance sheet and the ability to drive continued free cash flow.
Jeff Lorenger: I want to thank each HNI member for their continued dedication and congratulate them on delivering another quarter of excellent results.
Jeff Lorenger: Before we take your questions, today will be Marshall's last earnings call as CFO.
Jeff Lorenger: Marshall joined HNI 23 years ago and he and I have worked side-by-side now for close to 15 years.
Jeff Lorenger: On behalf of the Board of Directors and the entire HNI team, I want to thank Marshall for his many contributions to the Corporation through the years.
Jeff Lorenger: While Marshall will no longer be our CFO, we are happy he will continue to be part of H&I and we will be working in a part-time role assisting with strategic projects focused on artificial intelligence.
Jeff Lorenger: VP Berger, who is on the call with us today, will be taking over as CFO at year-end.
Jeff Lorenger: VP led our residential building products business for the last nine years and has been part of the organization for 27 years, serving in various financial operational leadership roles. We are fortunate to have VP ready to step into the role and expect a seamless transition.
Speaker Change: Thank you again, Marshall. Good luck in semi-retirement. We will now open the call to your questions.
Speaker Change: Thank you. The floor is now open for questions. And as a reminder, if you have dialed in and would like to ask a question, please press star and the number 1 on your telephone keypad to raise your hand and enter the queue. We'll pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line...
Speaker Change: of Ruben Garner with Benchmark. Your line is now open.
Ruben Garner: Thank you. Good morning, everybody, and congrats, Marshall and BP.
Ruben Garner: Look forward to working with you so
Speaker Change: Let's see, where should we start? The residential building products...
Speaker Change: near-term kind of softness that you're seeing. Can you go into a little more detail?
Speaker Change: they're what exactly
Speaker Change: You're seeing, is it more new construction slowdown we saw over the summer kind of hitting you guys?
Speaker Change: Now, is it more on the R&R side, just continued with rates being elevated? And then any signs of further de-stocking? I know last year there was, it's not a heavily inventoried product, but last year there was a bit of a reset to normalize any signals that there's more of that by chance.
Speaker Change: Yeah Reuben, I think, and this is a piece, our outlook it really falls into three equal weighted pieces and you're asking about one of them, you know
Speaker Change: of reduction in near-term demand. And it's really in our stove business, which is a large part of our remodel retrofit business. I think I'll let VP provide some color on what's happening with stoves.
Speaker Change: Sure. Ruben, I think we start with the business itself. It's a short cycle purchase.
Speaker Change: You know, anything like that provides obviously low visibility, but historically the ban for this business has been pretty predictable outside of extreme oil prices, or then obviously the pandemic. So, as we firmed up taking through the second half, we did expect this to stabilize.
Speaker Change: And with stable, I think actually would show some pretty strong growth in the fourth quarter year-over-year because of how we finished in 2023. As you recall, the prior year comps were pretty low, backlog was pretty high.
Speaker Change: starting to deteriorate and come down. And as we thought, the inventory destocking that was happening across the business went through, we would favorably see that in the back half of this year. So all of that is happening. It's just normalizing a little bit slower than we thought. And as we unpack it, whether it's the economy, warm weather certainly dependent upon this business.
Speaker Change: with the products and even the election. So I would say it's all kind of playing out as we thought, just a little slower than we thought.
Speaker Change: But also on the new construction side, not just the stoves, we are seeing some growth.
Speaker Change: It's just growing slower than we thought. We came into this plan thinking about the third quarter shooting for a 4% growth. It actually came in at 2%, so that's encouraging that we're actually seeing some activity there.
Speaker Change: But fundamentals haven't changed, and as we go into the fourth quarter, we see that this has continued to be an area for us to grow, just probably not at the same pace as we are right now.
Speaker Change: The reason for that is really about home buying conditions. You know, they haven't improved to the point where we thought they would, although there are things that, to Jeff's point, why we believe that we should know that there's optimism there as we go forward.
Speaker Change: And so would you, I know you're not providing 25 guidance yet, but would you expect that this softness might persist into the early part of next year until we can get to kind of the spring building season and see where rates and the builders and the consumer lands at that time?
Speaker Change: Yeah Reuben, I don't, we don't see something that's going to change the conditions radically from where we are right now. I think we're a bit premature to project anything in 2025 given all the uncertainty that we're facing here in the upcoming weeks, but I think that's a pretty good assessment.
Speaker Change: Agreed.
Speaker Change: And then on the workplace side, and forgive me for the near-term questions, but these are the two kind of items that seem to have changed.
Speaker Change: this quarter. The transactional business
Speaker Change: versus the order trends you're seeing, is that dichotomy something you've seen before? Does transactional typically lead the orders and maybe therefore you're anticipating some negative order growth in the fourth?
Speaker Change: Corridor, just walk me through how those two relate historically.
Speaker Change: Yeah Reuben I think that's a good good point but just to level set for you know we're seeing basically you know why the outlook for fourth quarter change and it's really I want to start with
Speaker Change: Before I get into those details, we continue to drive profit growth without top line support. So I think we're really
Speaker Change: As I said in my prepared remarks, 25 and 26, we have a lot of visibility to and we've shared those numbers.
Speaker Change: Shifting to your question, there's three areas. We've just commented on one of them. They're probably equally weighted in the fourth quarter, and the transactional business represents about a third of that weighting.
Speaker Change: We don't see that as a growth driver. We do think it'll stabilize, but it is the piece that is really leading, the short cycle stuff right now. And it's economic driven. We've seen this in the past.
Speaker Change: Whether it's indicative right now of anything else, I think that there's enough dynamics in the economy that I wouldn't say it's...
Speaker Change: a leader or a lagger. It's really, we believe, more of a temporary kind of economic short-term election cycle, what's going to happen, and it's more reflective of that than it is a lead or lag situation.
Speaker Change: And the second area I should comment on is the other third weighting that's changed in our outlook is the contract business.
Speaker Change: And as we continue to see solid indications of growth, the timing of shipments and orders continue to push out. So what we're seeing currently is our sales funnel is up 10 percent, more than 10 percent. The dealers are increasingly confident.
Speaker Change: Our order trends are improving. The combination of North American contract and KII orders was up 5% in the third quarter, and the return to office efforts continue to ramp up across most large MSAs.
Speaker Change: So on the positive side, longer timing is driving an increase in backlog, so our backlog is up 5% year-over-year, giving us better visibility to next year.
Speaker Change: But what we have seen with this lengthening, and we've talked about this for a couple of quarters now, so let me let me provide a couple more comments and a bit more color on this, this dynamic of order-to-shift dynamic.
Speaker Change: There are multiple drivers that we are seeing when we talk to customers.
Speaker Change: They're wrestling with many factors as they attempt to figure out the most productive floor plates that support their return to office initiatives.
Speaker Change: And candidly, there's more decision makers in the process than there historically has been and so Customers are asking for more data to facilitate decision-making
Speaker Change: So all that lengthens this sales process. The other thing that's going on is inflation has challenged some of the budgeting. And by the time the furniture is getting spec, budget challenges drive additional design iterations as customers do more value engineering.
Speaker Change: which by the way is good for us given our breadth and depth of price points and product coverages.
Speaker Change: So then the final dynamic there on this lengthening order to ship is they remember the disruptions caused by supply chain issues, and so when they finally order, they're ordering earlier, extending times between order and install.
Speaker Change: And then finally this, you know, economy, election timings start adding, you know, it's kind of adding to the delay. So that's really what's going on. I wanted to take a minute and kind of give you a view on what we mean and what's behind, you know, kind of the dynamics of the expanding cycle.
Speaker Change: Very helpful. Thanks for the color and good luck through urine.
Speaker Change: Morning.
Speaker Change: With the leverage now back down to, I guess, pre-Kimbell levels, how should we think about maybe your capital allocation priorities or acquisitions now a consideration again? And it seems like you're buying back stock here also. Maybe we could just talk about just generally
Speaker Change: How do you think about the balance sheet, leveraging that and using that to maybe grow inorganically?
Speaker Change: Yeah, Greg, as I mentioned in our prepared remarks, we're going to generate some strong free cash flow this year. We expect free cash flow to be somewhere in the $180 to $185 million range.
Speaker Change: for the year, which is, you know, above 375 a share. So just point out that that's a strong level and excessive net income.
Speaker Change: Now, what to do with it, you know, we remain committed to reinvesting the business, of course.
Speaker Change: The dividend is important to us and after that we continue to assess share repurchase.
Speaker Change: in M&A opportunities on a case-by-case basis. We have been ramping up our share repurchases and anticipate continuing to do that. There's really not a need to de-lever from here. We feel very comfortable with the leverage we have.
Speaker Change: Okay, and you talked about the revenue visibility highlighting Mexico and Kimball synergies.
Speaker Change: I know you typically on a year-to-year basis have your ongoing profit initiatives. Is there anything you could, any maybe color you could add in terms of maybe next year or how that might contribute to profit growth next year?
Speaker Change: If you look at our history, we typically generate something like $10 million to $12 million of year-over-year profit benefit from productivity initiatives.
Speaker Change: Now, I'm not sure.
Speaker Change: what that means for next year, Greg, because we have a lot going on. We've got the Mexico ramp up. We're finishing off the Hickory consolidation, so we're going to have some of our resources in executing those initiatives, but we would expect to generate year-over-year productivity regardless.
Speaker Change: and I think that
Speaker Change: We would be able to expand margins in 2025-2026 through the two initiatives Jeff mentioned earlier, as well as productivity benefits.
Speaker Change: Okay, and...
Speaker Change: In terms of the, maybe both segments, first on the
Speaker Change: office segment
Speaker Change: Do you have a goal in mind in terms of where you think you can get those margins given the profit improvement initiatives?
Speaker Change: You have in place and then maybe with a little maybe a little bit of volume help and then similarly on the the the building product segment. I know you're taking out some costs here. Do you have a goal in mind or a level in mind of where you?
Speaker Change: target operating that business regardless of where volumes maybe shake out for next year?
Speaker Change: Well, Greg, this is a good question. I think,
Speaker Change: You know, we are going to continue, as you just talked about, to expand margins and drive profit growth. So, in the near term, we're going to continue to see this benefit. We have momentum. I'll point out that our operating margin in workplace furnishings is now over 9.5% when looking at our last four quarters.
Speaker Change: So, you combine that with more visibility to margin expansion in the upcoming quarters and years.
Speaker Change: It's going to drive record EPS this year and then
Speaker Change: that's going to add strong free cash flow for next year.
Speaker Change: The
Speaker Change: The, you know, target is, I think if you just do the math, the 45 to 50 million of synergies in our Mexico facility ramp
Speaker Change: When fully operational, we'll drive an additional, or approximately, 250 bps of margin expansion in workplace furnishings.
Speaker Change: That would put workplace furnishings operating margin near 12%.
Speaker Change: in 2026 without the benefit of other initiatives, which we will continue to do, as Marshall just referenced. So, you know, consolidated EBIT margin would be over 10%. So that would be our expectation.
Speaker Change: All right, great. Great. Thanks for the call.
Speaker Change: Thanks.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Stephen Ramsey with Thompson Research Group. Your line is now open.
Stephen Ramsey: Good morning, guys. I wanted to think about workplace and appreciate all the color on the lengthened timelines there.
Stephen Ramsey: As you look forward and get past this near-term pause, is there any key cog that you think would recompress the timelines, or is this just kind of a state of business that you expect lasts even through 2025?
Speaker Change: That's a good question, Steven. I mean,
Speaker Change: You know, I think this initial wave of activity will probably kind of stay in this lengthened cycle.
Speaker Change: until you know people kind of run a project through and then we may start to see it return but it's it's pretty dynamic right now and I think it's it's
Speaker Change: more near-term and in most of next year we think this cycle will remain.
Speaker Change: will remain lengthened. Now, having said that, like I said, we see we should demand activity that will go into the funnel that should add to this and then you just have to tune your business.
Speaker Change: to the length and cycle.
Speaker Change: We see that a little bit in the home building side with, you know, permits and how long it takes to build houses. That's recently lengthened out from seven months to nine months.
Speaker Change: So it's really about predicting the rhythm of the business and getting it right and watching the funnel activity. But whether it returns to where it was pre-pandemic or even a couple of years ago, it's tough to say. I don't think it will immediately in the near term.
Speaker Change: Okay, helpful. And then thinking about workplace, if there's a way to parse it out between office and non-office demand, and you alluded to some of this in hospitality, but thinking about non-office demand, is the sentiment and activity
Speaker Change: between office and non-office demand moving in tandem with one another or is there any notable divergence maybe near term and then how you see it evolving kind of post this year?
Speaker Change: Yeah, I think this year, you know, if you look back, I think you could say that, you know, there's been some verticals, education comes to mind, health care comes to mind. Even some of the state and local has been running a little ahead of general office.
Speaker Change: I think with the demand metrics we're seeing on the horizon, that those things...
Speaker Change: continues to be pretty strong, health care continues to be strong, but I think they'll come closer together.
Speaker Change: Stephen is the way I think about it, but there's probably gonna be some front runners there. And I don't think Office will probably lead it, but I think Office will probably catch up to what some of these other verticals have been as we head into next year.
Speaker Change: Okay, helpful. And then last one for me, I know it's maybe too early to talk about the sales outlook for 2025 and clearly volumes matter on this question, but I'm thinking about cash flow generation. You've got the operational moves to raise margins.
Speaker Change: With the plants and the shifting of operations, how do we think about the working capital impact and the CapEx needs for 2025? Just trying to, in order of magnitude, maybe think about cash generation next year.
Speaker Change: Yeah, working capital is pretty well normalized at this point. If you look at sequentially we improved working capital but we're pretty similar where we were last year. Remember last year we freed up over 70 million dollars from working capital. So we're not anticipating any kind of working capital usage on a year-of-year basis and of course we'll have the seasonal fluctuation.
Speaker Change: CapEx this year, we're running a little bit below what we had planned, so in that 180 to 185 million dollars of free cash flow we expect to generate this year.
Speaker Change: That includes about 65 million dollars of CapEx. I would expect that to go up a bit next year as we kind of catch up to the projects we've been working on and finish out the operational moves that we've talked about before, but still think we're gonna have a healthy level of free cash flow next year and plenty of cash to deploy in a positive way.
Speaker Change: Great. Thank you, Marshall.
Speaker Change: The next question comes from the line of Brian Gordon with Water Tower Research. Your line is now open.
Brian Gordon: Hi everyone. Thank you for taking my question this morning. I just want to follow up on the last set of questions. Looking out kind of towards, you know, the intermediate to the longer term, how should we think about workplace furnishings, the breakdown in business between the SMB, the contract, and the other categories, the government, the hospitality, the health care?
Speaker Change: Are you talking kind of demand patterns or... Oh, it's just sort of overall, yeah, overall percentage of the business.
Speaker Change: We're a little higher in contract KAI versus S&B.
Speaker Change: I think as you look forward, the growth rates in those are going to move around depending on conditions.
Speaker Change: kind of all these return to office mandates that we're seeing, lease churn, et cetera, that we mentioned earlier. So I think you got some strength in the near term from that, and I think S&B, we feel well-positioned there. We still have some population migration going on, so really well-positioned to take advantage of the strength there. Now, in the short term, we've got this.
Speaker Change: transactional headwind that we discussed. But I think it's a little premature to call a major mix shift between those businesses. I think we're going to benefit as the market recovers and from our own unique initiatives as well.
Speaker Change: Okay, I mean that definitely makes sense. When we're looking at the contract business specifically within Workplace Furnishings, any sort of breakdown between the projects that clients are coming to you about, between Greenfield and maybe kind of more refurbishment for getting people back to office or work from home.
Speaker Change: I think we're seeing pretty healthy activity in both buckets.
Speaker Change: You know, you've got the Lee Shearn that we talked about, people, you know, moving up in class of building and that's kind of
Speaker Change: as well.
Speaker Change: and they are, you know...
Speaker Change: looking at how do they redo that campus or redo a building on the campus and and trial it out We're seeing a lot of you know trial and you know experimentation so to speak so I think it's um I think it's both I think that that people on return to office whether they have a lease event that drives something
Speaker Change: They're active because of the lease. We've always talked about a furniture event, and then they go into the return-to-office dynamics, and others are just trying to figure out how to make the office more productive in the hybrid work environment, as they age in place, so to speak.
Speaker Change: Great, thank you very much. That's all I have today.
Speaker Change: At this time, there are no further questions, so I would like to turn the call back over to Mr. Lorenger. Please go ahead.
Jeff Lorenger: Thank you. Before we end the call, this summer we lost a longtime analyst and friend, Bud Bugach, passed away unexpectedly in August.
Speaker Change: For many decades, Bud was a great supporter of H&I and our industry in general.
Speaker Change: He was an outstanding analyst, mentor, and friend.
Speaker Change: He was supportive, but also unafraid to challenge.
Speaker Change: And he earned the respect of those lucky enough to know him.
Speaker Change: Bud will be severely missed.
Speaker Change: Thank you for joining us today. Have a great day.
Speaker Change: This concludes today's conference call. You may now disconnect.
Speaker Change: [music]