Q3 2025 HNI Corp Earnings Call

Speaker #3: Hello, everyone, and welcome to the Happy Third Quarter results conference call. Please note that this call is being recorded after the speakers' prepared remarks.

Speaker #3: There will be a question and answer session . If you'd like to ask a question during that time , please press star followed by one on your telephone keypad .

Speaker #3: Thank you . And now like to hand the floor over to Mr. Matthew McCall . Please go ahead , sir .

Speaker #4: Good morning . My name is Matt McCall . I'm vice president , investor relations and corporate development for HNI Corp Corporation . Thank you for joining us to discuss our third quarter 2025 results .

Speaker #4: With me today are Jeffrey Lorenger chairman , president and CEO and VP Berger , Executive Vice President and CFO . Copies of our financial news release and non-GAAP reconciliations are posted on our website .

Speaker #4: 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.

Speaker #4: 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 .

Speaker #4: I'm now pleased to turn the call over to Jeffrey Lorenger Jeff . Thanks , Matt .

Speaker #5: Good morning and thank you for joining us . I'm going to divide my commentary today into three sections . First , I will provide some comments about our third quarter results .

Speaker #5: non-GAAP earnings per share increased 7% year over year , driven driven by a record third quarter . non-GAAP operating margin . Next , I will discuss our expectations for the fourth quarter of 2025 .

Speaker #5: Our full year earnings outlook is unchanged from what we provided on last quarter's call . We continue to anticipate a fourth consecutive year of double digit non-GAAP earnings improvement .

Speaker #5: And finally , I will provide additional detail about recent demand activity and how we see our markets playing out in the fourth quarter .

Speaker #5: And as we move into 2026 . Following those highlights , VP will provide additional color around our fourth quarter outlook . He will also comment on the strength of our balance sheet .

Speaker #5: Both currently and what we anticipate after the completion of the pending acquisition of Steelcase . I will conclude with some closing comments , including some additional thoughts on our Steelcase transaction .

Speaker #5: Before we open the call to your questions , I'll begin with the third quarter . Our members delivered another strong quarter despite ongoing tariff driven volatility and continuing macro uncertainty .

Speaker #5: The positive momentum of our strategies , the benefits of our diversified revenue streams , our focus on items within our control , and the merits of our customer first business model continue to deliver a strong shareholder value for the quarter , we delivered non-GAAP diluted earnings per share of $1.10 .

Speaker #5: EPs grew 7% versus last year , which was modestly ahead of our internal expectations . Total net sales in the third quarter increased 3% organically over the same period a year ago , and profit margins in the third quarter were strong .

Speaker #5: Our non-GAAP operating margin expanded ten basis points year over year . 10.8% . This non-GAAP Ebit margin was the highest on record for the third quarter in the workplace furnishings segment .

Speaker #5: Organic net sales increased 3% year over year , fueled by growth across all major brands . We delivered similar organic growth rates in our brands , focused on small and medium sized businesses and on contract customers .

Speaker #5: From a profitability perspective , workplace furnishings non-GAAP segment operating profit margin expanded 40 basis points year over year and exceeded 12% . Third quarter profitability benefited from our profit transformation efforts .

Speaker #5: Recognition of key synergies and modest volume growth in residential building products . Third quarter revenue was roughly unchanged versus the prior year period .

Speaker #5: New construction revenue was down slightly while remodel retrofit sales grew modestly , both on a year over year basis . We delivered this top line performance despite continued challenging housing market dynamics .

Speaker #5: As we continue to compete well in our internal growth . Investments are bearing fruit consistent with expectations discussed on last quarter's call . Third quarter segment operating profit margin contracted year over year , driven by continued investment .

Speaker #5: However , segment operating margins still came in at a strong 18% despite expectations of ongoing uncertainty . We remain encouraged about the opportunities tied to the broader housing market , and we continue to invest to grow our operating model and revenue streams and the consistently strong profit margins in this segment are evidence of the businesses unmatched price point , breadth and channel reach , along with the benefits of its vertically integrated business model and overall operational agility .

Speaker #5: To summarize, our third-quarter performance demonstrates the strength of our strategies and our ability to manage through varying macroeconomic conditions while remaining focused on investing for the future.

Speaker #5: We expect strong results to continue , driven by our margin expansion efforts and continued volume growth . That leads to my comments about our outlook for the fourth quarter .

Speaker #5: Overall , we expect our margin expansion efforts and continued revenue growth will support ongoing year over year EPs improvement , all while we continue to invest to drive future growth in workplace furnishings .

Speaker #5: Segment orders increased 2% after excluding the estimated impact of prior quarter pull forward activity and hospitality orders . We are again excluding hospitality from our adjusted order growth and backlog metrics as the business has experienced meaningful tariff related volatility over the past two quarters , which has temporarily skewed results .

Speaker #5: Adjusted orders from contract customers performed better than those from small to medium sized businesses . Our adjusted segment backlog at the end of third quarter was up 7% from the third quarter of 2020 for .

Speaker #5: I will discuss our outlook for our workplace markets, including hospitality, more in a moment. Moving to residential building products, orders in the third quarter increased 2% year over year.

Speaker #5: Remodel . Retrofit orders outperformed and were up mid-single digits from third quarter 2020 . Four levels , while new construction orders were down low .

Speaker #5: Single digits overall year over year . Segment order growth accelerated toward the end of the quarter . Builder sentiment has weakened in recent months and continues to reflect the impacts of elevated interest rates .

Speaker #5: Ongoing affordability issues , and weaker consumer confidence and housing trends have broadly followed . Builder sentiment , with permits moving lower despite expectations of ongoing uncertainty and headwinds .

Speaker #5: We remain encouraged about the opportunities tied to the broader housing market, and we continue to invest to grow our operating model and revenue streams.

Speaker #5: I will finish by making a few comments about our markets and provide additional detail around our elevated EPs growth , visibility on our last few calls , we highlighted an increased focus on investing to drive growth in both segments .

Speaker #5: Our 2025 . To date revenue strength , and encouraging leading indicators have provided added support for our growth initiatives and investments . As we look at our workplace Furnishings segment , we are encouraged about the .

Speaker #5: Developing fundamentals of this business . The macro and industry backdrops have shown consistent improvement in recent months . Return to office data appears to be indicating an inflection .

Speaker #5: The Castle card swipe data following Labor Day reached post-COVID highs, with Class A buildings in the top ten markets approaching 98% peak day occupancy.

Speaker #5: Further , in a recent KPMG KPMG survey , nearly 80% of CEOs surveyed now expect employees to be full time in office over the next three years .

Speaker #5: This is up from fewer than 40% in the April 2020 survey , and according to CBRE , non-viable space is being converted at record levels .

Speaker #5: This positively impacts our business in two ways . First , it results in more forced moves as landlords encourage current tenants of this non-viable space to relocate .

Speaker #5: And second, it will accelerate the expected Class A square footage shortage, which will either drive the addition of new space or increased investment in upgrading existing Class B space.

Speaker #5: Each of these dynamics result in more furniture events . Finally , calendar year 2025 is expected to see the highest net absorption of office space since 2019 .

Speaker #5: Historically , absorption has been an important indicator of office furniture demand . JLL estimates more than 6,000,000ft² was absorbed on a net basis in the third quarter of 2025 alone .

Speaker #5: This compares to total negative net absorption of more than 150 million ft² over the past five years. Office vacancy rates are falling for the first time in seven years.

Speaker #5: As we enter what JLL has deemed a new office growth cycle in New York City alone , businesses leased 23,000,000ft² of additional office space during the first nine months of 2025 .

Speaker #5: This is the largest amount of new workspace rented for that period in two decades , and in total , 18 of the largest U.S.

Speaker #5: markets are exceeding pre-pandemic . Leasing activity . Over the past year , the macro and industry backdrops are clearly improving , and we expect our contract business to disproportionately benefit from these trends .

Speaker #5: As much of the industry growth cycle to date has been in secondary and tertiary markets, I will finally comment on our hospitality business.

Speaker #5: As I mentioned earlier, compared to our other businesses, this vertical has seen more tariff-related demand volatility over the past two quarters.

Speaker #5: Despite this pressure , we expect revenue in this business to be relatively flat in 2025 . Overall , we have seen recent improvement in pre-order activity and our pipeline continues to build .

Speaker #5: Pointing to a solid growth year in 2026 . Looking ahead , we believe we are particularly well positioned to benefit as the workplace furnishings market continues to improve .

Speaker #5: We have strong market positions and offer compelling value to our targeted customers with a diversified portfolio of brands moving to residential , building products , we believe in the positive long term market fundamentals .

Speaker #5: We continue to perform well despite an ongoing soft new construction environment , and we acknowledge a market driven revenue recovery will take some time .

Speaker #5: We are , however , optimistic about our opportunities to increase revenue through our growth initiatives . Specifically , we continue to invest in developing market leading new products that offer customers more options and features .

Speaker #5: We are driving new programs to increase homeowner and home buyer awareness of their fireplace options , ensuring our products are considered in all remodel and new construction projects , and we are strengthening our already strong relationship with builders across the country , helping them deliver the best overall value to the homeowner .

Speaker #5: Encouragingly , we are outperforming the market in this segment despite still being in the early days of each of these initiatives . And while we invest in growth , we will continue to deliver high margin results and strong profits in this business .

Speaker #5: Longer term , single family housing remains undersupplied and demographics will support additional demand growth . The results of our ongoing investments , which will enhance our connection to customers and build on our leading brands , will fortify our position of strength in the industry .

Speaker #5: Finally , and importantly , we continue to have elevated earnings visibility this year and next . Our outlook for 2025 revenue continues to include full year growth in both segments .

Speaker #5: Our outlook for 2025 earnings reflects expectations for mid-teens percent EPs growth . In addition to increased profits and volume growth . Key synergies , and the ramp of our Mexico facility are expected to continue to drive significant savings .

Speaker #5: These two initiatives are expected to contribute a total of $0.75 to $0.80 of EPS in 2025 and 2026. I will now turn the call over to our VP to discuss our outlook for the remainder of 2025 and our balance sheet.

Speaker #5: VP thanks , Jeff .

Speaker #4: I'll start .

Speaker #5: By discussing our outlook for revenue and profit , beginning with the top line fourth quarter revenue and workplace furnishings is expected to increase at a high single digit rate year over year .

Speaker #5: Organically , the impact of divestitures is expected to reduce the year over year organic revenue growth rate in workplace furnishings by a little less than 100 basis points .

Speaker #5: The benefits of our order and backlog growth , along with an extra week in our fiscal year , are expected to drive solid revenue growth in the fourth quarter for residential building products .

Speaker #5: Fourth quarter net sales are also projected to increase at a high single digit rate compared to the same period in 2024 . Pricing actions are expected to be the primary driver of growth .

Speaker #5: However , we also expect volume growth for the segment in the fourth quarter , driven by the remodel retrofit market . For the full year , we continue to project revenue improvement without market growth .

Speaker #5: Shifting to our fourth quarter profit outlook . non-GAAP earnings per share in the fourth quarter are expected to increase slightly from 2024 levels .

Speaker #5: This improvement is expected to be driven by price , cost , volume , growth and productivity benefits . Y will be partially offset by increased investment levels and some insurance related expenses .

Speaker #5: In the fourth quarter , we expect operating margin in workplace furnishings to expand solidly year over year , driven by volume improvement and continued profit .

Speaker #5: Transformational benefits , partially offset by increased investment . Three years ago , we communicated a goal to achieve double digit operating earnings in this segment , and in 2025 , we expect to hit this target with our members delivering a full year double digit non-GAAP operating margin .

Speaker #5: Residential building products fourth quarter operating margin is expected to compress slightly year over year . As a result of increased investments for the full year , we expect the we expect modest non-GAAP operating margin expansion .

Speaker #5: I'll wrap up with a few comments on our balance sheet and cash flow . We reduced debt by $120 million during the quarter .

Speaker #5: In advance of the anticipated closing of the Steelcase acquisition . As a result , gross debt leverage at the end of the third quarter was 0.9 times , as calculated in accordance with our debt agreements .

Speaker #5: Following the closing of the Steelcase acquisition , our strong cash flow generation and available borrowing capacity will continue to provide us with significant financial flexibility .

Speaker #5: Moreover, while we expect our initial post-closing net leverage to approximate 2.1 times, we continue to project our debt levels will return to our targeted range of 1 to 1.5 times within 18 to 24 months of closing.

Speaker #5: In the meantime , we remain committed of payment of our long standing dividend and continuing to invest in our business to drive future growth .

Speaker #5: I'll now turn the call back over to Jeff . Thank you . During the third quarter , we remained financially disciplined , managing the middle of the income statement to drive profit improvement while pursuing revenue growth .

Speaker #5: As we look forward, several positive secular trends and our specific initiatives will help offset macro-related risks and continued tariff-driven volatility.

Speaker #5: We will remain focused , conservative and ready to adjust as required and as a result , our earnings outlook for the full year is essentially unchanged and we continue to expect the fourth consecutive year of double digit non-GAAP EPs growth .

Speaker #5: This outlook demonstrates the benefits of a stronger than expected third quarter . Our ongoing visibility story , and our proven ability to manage through changing economic conditions .

Speaker #5: Before we take your questions , I wanted to provide some thoughts on the pending Steelcase acquisition as we approach the closing , we are excited about the future of bringing together our combined capabilities to create new career growth opportunities for our team members , deliver more value for our customers and dealer networks , and further support and invest in the communities in which we operate .

Speaker #5: The deal is right from a strategic , financial and cyclical perspective , and our two companies are highly complementary on many fronts . We currently expect synergies to reach $120 million and ultimate accretion to total $1.20 per share when fully mature , excluding purchase accounting and as VP highlighted , our anticipated strong free cash flow will help us quickly deleverage our balance sheet .

Speaker #5: The addition of Steelcase will further strengthen the tenets of the investment thesis , and we are positioned for continued success . We have elevated earnings growth , visibility for several years , broad and diverse product and market coverage and workplace furnishings market leading positions in residential building products .

Speaker #5: And we continue to invest to drive growth . All this is supported by our strong balance sheet and the ability to generate continued free cash flow .

Speaker #5: I want to thank each member for their continued dedication and congratulate them on another excellent quarter . We will now open the call to your questions .

Speaker #3: And now, we are opening the floor for a question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad.

Speaker #3: Your first question comes from the line of Greg Burns of Sidoti & Co. Your line is now open.

Speaker #6: Morning . That dollar 20 of accretion from Steelcase that you just mentioned is that . Considering just the the synergies that you've already outlined , or is that like .

Speaker #6: Yeah .

Speaker #5: Yeah . Greg . That's that's the 120 million that we talked about on the investor call back in August . So that number has not changed .

Speaker #5: And just the way the share count works that now converts to about $1.20 , an accretion .

Speaker #6: Okay . So that's just your your initial outlook . Maybe there's potential upside to that . If you know , if you get your hands around the business and , you know , drive drive additional savings .

Speaker #6: Okay . Greg .

Speaker #5: I think .

Speaker #7: For that .

Speaker #5: I think just one comment there . That's the number that we're really confident in . And , you know , we're going to use our our disciplined integration process .

Speaker #5: And once we get in there, and if there's more, we'll look for more. But that's what we're on record for.

Speaker #7: Right now .

Speaker #6: Okay . Great . Thanks . And then where are you in terms of the the 75 to $0.80 from key and and Mexico .

Speaker #6: How much have you gotten so far . And what , what remains .

Speaker #7: Yeah we we had said that 45 to $50 million would be recognized between 25 and 26 . We had mentioned kind of splitting it half and half .

Speaker #7: We're seeing a little bit more come forward of 26 in the last quarter here . Of 25 . So I would tell you , you know , maybe a little bit more in 25 to 26 , but I think more importantly to Jeff's point on visibility , we do see the 45 to 50 million coming through .

Speaker #6: Okay . And you gave us a lot of data points around kind of some of the positive industry level fundamentals in the office space .

Speaker #6: We've seen kind of this slow and steady demand improvement happening over the last couple of years , kind of low single digit growth .

Speaker #6: But when we when we think about the where the industry is at relative to maybe pre-pandemic levels , I know you've you've passed along a lot of pricing .

Speaker #6: Where are we in terms of volume , like relative to maybe where we were pre-pandemic , like , where are we in terms of industry wide volumes ?

Speaker #6: I'm just trying to get a sense of , you know , where we're at in the cycle and maybe what the potential uplift from here could be if we do get , you know , a more , more positive demand environment going forward .

Speaker #5: Yeah . Great . I think we're we're probably , you know , with all the pricing , it's a little tough to say .

Speaker #5: But I think confidently we probably are 30% to 35% on the volume side. Still down, just given your pricing actions and tariffs.

Speaker #5: But so that's kind of you know , I think as you think about that , that's how we think about the , you know , the post-Covid kind of cycle .

Speaker #5: And some of these other macro backdrop items starting to , to , to turn around , you know , so that's , that's that's how I think about that's how we think about that's why we're bullish about the space .

Speaker #7: Yeah . Even if it returns half back Greg you know you're looking at mid-single digit volume growth for a significant number of years .

Speaker #7: So the backdrop is set up even if it doesn't get back to the 30% more there's still a lot of volume growth opportunity .

Speaker #6: All right great . Thank you .

Speaker #3: Your next question comes from the line of Reuben Garner of Benchmark. Your line is now open.

Speaker #8: Thank you . Good morning everyone . Can we can you kind of give us a compare and contrast about your full year guidance ?

Speaker #8: I guess what's embedded in the fourth quarter now versus maybe how it looked a few months ago? It looks like maybe the top line is a little higher, but there's some more cost in there as well.

Speaker #8: Can you just kind of give us the breakout of that ?

Speaker #7: Yeah , I can walk you through that . Reuben . I starting with revenue , I think it's probably , you know , if I look at work pace and residential revenue , it's mostly actually in line with prior expectations .

Speaker #7: Both are expected to be in the fourth quarter. A high single digits with the extra week. So, I think we're seeing a little bit of the pressure.

Speaker #7: Is the product mix . When we look at what's come through in backlog and the pipeline , there's more project driven business and systems .

Speaker #7: So that's really a timing issue . You know , it draws a little bit lower margin . But on the backside of that comes other other business that goes with that with ancillary products that will come probably in Q1 .

Speaker #7: So little timing there . I think the second part of our Q3 beat is going to be timing of investments . Some of it slid in the fourth quarter or into the fourth quarter , and it's part of that actually saved in the third quarter .

Speaker #7: So those are going to come back . I think the key there is our second half is still unchanged . I think you got a little bit going between the two quarters .

Speaker #7: And then a couple of other things to mention . Jeff mentioned , I mentioned , you know , insurance related pressure year over year .

Speaker #7: That's hitting us on the CA side . And I think we probably need to update our tax rates . Our second half tax rates now at 24.4% , that's about 80 bips higher than we talked about prior in the year .

Speaker #7: For the second to a full year tax rate of 23% . So when you you boil that all together , the back half is really not changing .

Speaker #7: He's got a little bit of timing and dealing with one-time expenses.

Speaker #8: Okay . That's really helpful . And then on the residential buildings product side , you guys have definitely outperformed kind of what the end markets have been like so far this year .

Speaker #8: And I know you've got some investments ongoing there for to drive growth . How much runway do you have on that front ? I guess maybe to ask it differently , if we're looking at kind of a a flattish environment next year , like , can you do you think you can still grow above and beyond the market on the volume side ?

Speaker #5: Yeah , yeah . Reuben , it's a good question . I think I think we can it's all relative to the macro environment .

Speaker #5: Right ? I mean , but we I think given the investments we're making , you know , like right now , the new construction business , I'll give you an example .

Speaker #5: Where we're outperforming , for instance , in October , our orders were flat and permits 90 days prior to that were down high single digits .

Speaker #5: And that's kind of the lag time we've been seeing. So that tells you, you know, we believe we can outperform this market.

Speaker #5: The question is , you know , where is the market ultimately going . And , you know , your guess is as good as ours .

Speaker #5: But we definitely think we can outperform . We got retail performing well . Our gas inserts are up year over year . We've got stoves now going into the big box channel .

Speaker #5: And that's early innings . Our wholesale business is actually up year over year because the operating model is is strong . And that that part of the world to support smaller independent dealers and just overall investments in our superior service model , you know , our vertical integration and builder intimacy efforts are starting to take shape .

Speaker #5: So these are these are in the early innings , but they are bearing some fruit . So we do believe we'll be able to stay ahead of the demand curve if you will .

Speaker #5: The question is , you know , where is that macro demand curve . And and you know what gap can we put on top of that .

Speaker #8: Okay . And I'm going to sneak one more in on the contract business . It seems like some good momentum on that side .

Speaker #8: And the timing of you guys adding Steelcase seems nice . Can you talk about any risks out of the gate as you're integrating the company ?

Speaker #8: And if we did see an acceleration in demand , just kind of what gives you confidence that that you'd be able to kind of , I guess , participate in that upswing as you're , as you're putting the two companies together .

Speaker #5: Yeah , that's a great point , Reuben . Let me start with , first of all , you know , we're going to there's really no change on the front .

Speaker #5: You know , our dealer partnerships are going to remain intact as they are the brand distribution is going to remain intact . Salesforce is intact , both for Steelcase companies .

Speaker #5: So I think our approach there will avail us the ability to take advantage of some of those trends because everybody's heads down in that regard and and , you know , the cultures are are good .

Speaker #5: We're out of the blocks, and so we're bullish about being able to work on what we need to work on.

Speaker #5: As we've talked about cost synergies and some of those areas . While keeping , you know , the front end of these businesses separate and focused on their unique brand positions so that we can continue to work to build on those .

Speaker #5: So we would we would anticipate being able to participate in any of this . As these trends continue to evolve , particularly in some of these larger markets .

Speaker #8: Great . Thank you guys and good luck through the end of the year .

Speaker #5: Thanks .

Speaker #3: Question comes from the line of Steven Ramsey with Thompson Research Group . Your line is now open .

Speaker #9: Hey good morning . This is Brian Burrows on for Steven . Thank you for taking my questions today .

Speaker #5: Sure .

Speaker #9: The on the side I guess you know sales are flat . Orders grew 2% and really accelerated end of quarter . It sounds like so I guess can you just pass out maybe like why orders grew and if there was anything to call out really that drove the acceleration into the quarter end ?

Speaker #7: Yeah. Are you talking about the residential side or workplace, Brian? Just make sure I'm...

Speaker #9: Sorry. The rescue side.

Speaker #7: Yeah , yeah . You kind of nailed it . So the if you look at orders for the quarter , we were up 2% for the segment .

Speaker #7: The actual remodel retrofit was up seven . And it actually was accelerating as we went through the quarter . We're actually grew backlog to 13% .

Speaker #7: So that's that's giving us confidence in the high single digits for the quarter . The backdrop of everything that Jeff just talked about is supporting that , which is allowing us to outpace the market .

Speaker #7: We're starting to see good signs for the retail season in most of the country outside the West Coast. All of this supports our high single digits with the extra week.

Speaker #7: So when we look at that business for the full year, I think it’s more important; you know, we’re going to grow mid-single digits in a very tough market that didn’t grow.

Speaker #7: And although most of it will be priced , we actually are going to show unit volume growth in the fourth quarter and a bit for the full year .

Speaker #9: Got it . Helpful . And secondly , I guess just on the the workplace segment , the the opportunity set there , I guess maybe by sector , is there a way to think of how much that reflects return to office compared to non office verticals ?

Speaker #5: Oh , so yeah , I think that's that's it's pretty hard to parse that . I think it's some of both the verticals have been holding up .

Speaker #5: Well you know you look at education . You look at healthcare . Obviously federal government is is in you know , kind of in a weird spot right now .

Speaker #5: But I think , I think the return to office stuff , if I had to say , is , is probably in the earlier innings , definitely than some of the other vertical plays .

Speaker #5: But we do see some of those verticals as we look out , you know , into into the future that still still staying strong .

Speaker #5: But but I'd say verticals have been a little stronger than return to office and return to office is just really getting going .

Speaker #9: Understood . Thank you .

Speaker #3: Thank you . I'd now like to hand the call back to Mr. Lawrence for final remarks .

Speaker #5: Great . Appreciate it . Thanks . Thank you for taking an interest in H . And I and have a great day . Appreciate the time .