Good morning. My name is Chris, and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation Third Quarter Fiscal '22 Results Conference Call. Thank you. Mr. McCall, you may begin your conference.

Good morning. My name is Matt McCall. I'm Vice President, Investor Relations and Corporate Development for HNI Corporation. Thank you for joining us to discuss our third quarter fiscal 2022 results. With me today are Jeff Lorenger, Chairman, President and CEO; and Marshall Bridges, Senior Vice President and CFO. Copies of our financial news release and non-GAAP reconciliations are posted on our website. Statements made during this call that are not strictly historical facts are forward-looking statements, which are subject to known and unknown risks. Actual results could differ materially. The financial news release posted on our website includes additional factors that could affect actual results. The corporation assumes no obligation to update any forward-looking statements made during the call. I'm now pleased to turn the call over to Jeff Lorenger. Jeff?

Thanks, Matt. Good morning, and thank you for being with us. Our members achieved strong earnings growth in the third quarter, despite softening demand due to a challenging macro environment. Today, I’ll discuss three main points. First, even with the decreased volume, we recorded strong earnings growth this quarter. Second, our residential building products segment experienced double-digit organic revenue and earnings growth. Third, we are ready for potential short-term challenges and remain dedicated to our core strategies. After my remarks, Marshall will provide an updated outlook for 2022, and I will wrap up with some closing thoughts before we open the floor to questions. To begin, we saw substantial earnings growth this quarter, driven by favorable pricing and an improved product mix. Despite the ongoing demand softness, we achieved solid margin expansion year-over-year and experienced a 65% increase in non-GAAP earnings in the third quarter. Both consolidated gross and operating margins improved quarter-over-quarter and year-over-year, backed by positive pricing dynamics. We are making significant gains with pricing strategies, and we anticipate that by the end of this year, we will fully recover the shortfall experienced last year due to rapid inflation. In the workplace furnishings segment, we made headway in our goal to enhance operating margins, with a 150 basis point improvement compared to the prior year, driven by favorable pricing and strategic actions taken to improve the product mix. While organic revenue growth was flat during the quarter, excluding recent restructuring impacts in one of our e-commerce businesses, segment shipments grew by 7% due to price realization. Although the restructuring had a negative effect on our revenue growth, it contributed positively to margin expansion, demonstrating our commitment to enhancing profitability in workplace furnishings. Moving on to my second point, our residential building products segment saw double-digit organic revenue and earnings growth, with revenue increasing 10% compared to the same period last year. We experienced growth in both the new construction and remodel segments, with both channels performing similarly during the quarter. Although third-quarter orders slightly declined year-over-year, we remain optimistic about our leading market positions and favorable demographics in housing, which strengthens our long-term outlook for this high-margin, high-return business. Segment profitability was strong, with a 19% year-over-year increase in operating profit and a 50-basis point expansion in operating margin to 17.7%, largely driven by positive price costs. Our long-term strategy remains steady; we plan to grow revenue by expanding our category and leveraging our competitive position while maintaining our margins. Our unique position in the market coupled with our track record of outperforming the competition, even during downturns in housing demand, sets us apart. Several factors distinguish us: firstly, our vertical integration enhances our margins and gives us better control over our marketing and service levels. We will continue pursuing vertical integration opportunities to drive long-term growth. Secondly, our extensive regional distribution network ensures exceptional customer service and minimizes capital requirements for our partners. Thirdly, our diverse price points, depth of products, and broad channel access cater to customers of all sizes across the market. Lastly, our lean manufacturing and product development capabilities are unmatched in the industry, allowing us to continuously differentiate ourselves. Lastly, we are preparing for a challenging near-term environment, but we are committed to our core strategies. Current macro indicators suggest increasingly difficult operating conditions as we head into 2023. In workplace furnishings, corporate profit outlooks are softening and executive sentiment is at recessionary levels, leading to cautious spending from companies. In residential building products, we anticipate revenue declines for 2023 due to the negative effect of rising mortgage rates on affordability, which is impacting new home construction and remodel activities. In response to the anticipated weaker macro conditions and softer demand trends, we initiated a company-wide cost reduction plan aimed at improving long-term profitability. This plan will enhance our earnings and cash flow during the expected economic slowdown in 2023 and support our long-term strategy to expand margins in workplace furnishings. Once fully implemented, we estimate annual savings from these actions to be around $30 million. Our experienced team will remain focused on our long-term objectives despite these macroeconomic challenges. Before I hand it over to Marshall, I want to touch on recent trends in the workplace furnishings market. Throughout the third quarter, we observed varying demand patterns. Orders from larger contract clients in major markets were subdued as business leaders became more cautious amid the weakening economy. Many of these clients are grappling with their office reentry plans, leading to a more complex sales process with slower decision-making and many deferring decisions. Conversely, smaller transactions through national supply dealers and wholesalers were also weak in the quarter, as this segment traditionally reacts quickly to macro uncertainties. Despite these areas of weakness, demand from the mid-market, where we have a strong presence, showed resilience this quarter. Compared to larger contract customers, mid-market clients are actively returning to the office, whether through traditional or hybrid models, which is driving growth despite rising economic concerns. This positive mid-market activity reflects underlying demand related to the return to office and the adoption of hybrid work models, encouraging us as it signifies potential broader demand recovery once the economy stabilizes. Our research has revealed several trends over the past two to three quarters: first, full-time remote work is declining in favor among both employers and employees as they recognize the limitations of lacking face-to-face interaction. Second, hybrid work models are becoming more popular as both groups appreciate the balance they provide. Importantly, our findings indicate that this shift to hybrid work comes with a readiness to invest more in furniture. While some client activity may be paused due to current conditions, we believe we are strategically positioned in terms of market presence, product offerings, and pricing to capitalize on the eventual market recovery. Now, I will turn the call over to Marshall to discuss our outlook for the remainder of the year. Marshall?

Thanks, Jeff. Demand in most of our markets continues to be negatively impacted by concerns around the economy. As a result, we're lowering our outlook for the rest of the year. In workplace furnishings, we expect fourth quarter revenue to decline at a low teens year-over-year rate, that equates to a full year revenue growth rate in the low to mid-single digits. That's lower than our prior expectation of low teens full year growth. The reduced outlook is driven by slower demand activity. As a reminder, the sale of Lamex and the previously announced restructuring of an e-commerce business will reduce reported segment growth in 2022. Without these actions, which helped drive our margin expansion efforts, full year growth would be approximately 12 percentage points higher, and the fourth quarter revenue growth rate would be in the positive low single digits. In residential building products, pricing benefits and revenue from acquisitions are expected to drive year-over-year growth rates in the low to mid-single digits in the fourth quarter. This implies a full year growth rate in the mid to high teens in residential building products. We had previously projected a full year growth rate in the high teens. Again, a lower volume outlook is driving the reduction. I'd like to point out that our revenue growth rates in residential building products are currently being supported by elevated backlogs. We expect the backlogs to normalize by early next year, after which we expect our growth rates will track more in line with the overall new construction and remodel retrofit markets. Fourth quarter non-GAAP earnings are expected to decrease sequentially from third quarter 2022 levels but be modestly above prior year results primarily due to favorable price costs. From a balance sheet perspective, we expect to maintain a strong financial position in 2022 and beyond. Debt to EBITDA, as calculated per our debt covenants, was 0.8 at the end of the third quarter, and we expect it will improve in the fourth quarter as debt levels further decline. Our strong balance sheet and capacity to generate free cash flow positions us well for the slowing economy. We have a history of generating strong free cash flow during both periods of economic expansion and recession. Our low leverage and continued free cash flow generation will provide flexibility for the dynamic environment and ample capacity for continued capital deployment. I'll now turn the call back over to Jeff.

Thanks, Marshall. We remain focused on our two primary long-term objectives: improving the profitability of our workplace furnishing segment by driving margin expansion, and delivering strong top line growth in residential building products by leveraging our differentiated business model. As we move forward, we do so with an experienced team that is prepared to confront an increasingly difficult economic environment while remaining committed to our long-term core strategic initiatives. We'll now open up the call to your questions.

Our first question is from Reuben Garner with The Benchmark Company. Your line is open.

Thank you. Good morning, everybody.

Good morning.

If we could start on the cost-saving initiative, Marshall, could you provide any insights on the timing of when we might see results? Additionally, it seems like you're still quite optimistic about the long-term prospects in building products. How do you approach the growth investments you've been making over the past few years given the current environment? Thank you.

Sure, I'll take that cost savings question first, Ruben. The $30 million we expect to be basically fully realized in 2023. The first quarter may be a little bit below that run rate as it becomes mature, but it'll become mature during that quarter.

Yes, Ruben, it's Jeff. We still believe in the long-term potential of residential building products and are actively working to grow the category in both new construction and renovation. Our product pipeline is strong, and we are significantly entering the electric category. We've also made some strategic growth moves through our distribution network. While the economy is facing challenges, especially in the housing market, we are optimistic about our ability to mitigate some of that with our growth initiatives, and we're already seeing positive signs.

Okay, great. And then on the building products side, you mentioned new construction held up better than R&R in the quarter, I think, at least from an orders perspective. Can you talk about on the R&R side, is that a product that’s inventoried? Was there a destocking that took place in the channel at all that impacted things? And then I assume as kind of the backlog in new housing unwinds that part of the market, you would expect to kind of see more pressure than R&R moving forward. Is that the right way to think about it?

Yes, Ruben, maybe just to take these in order, we did see the R&R orders in the quarter to be down more than the segment average. And that reflected maybe two things. One is timing, in that we had a lot of orders placed earlier in the year for fourth quarter deliveries. So even though orders were down in the third quarter, we expect shipments in the fourth quarter and remodel retrofits to grow pretty decently. It also probably reflects a little bit of impact from the decline in consumer spending trends around the house, but there's definitely some timing impact there. And then I think as we look forward, historically remodel retrofit is just less volatile than new construction. So yes, we do expect new construction to decline more than remodel retrofit when all this housing impact hits.

Okay. And as a follow-up to that, as you think about where the business is today versus maybe 3, 4 or 5 years ago, is there any way for us to gauge how much either increased penetration there is in the use of fireplaces, on the new construction side, or during incremental share gains in the segment just trying to see maybe what revenue. And I guess pricing in there to what revenue might look like? It starts with a return to what we kind of saw back in '17, '18, '19?

There's a lot of moving parts to that equation. We're definitely watching affordability and lots of other pressures. We got a lot of good strategic initiatives that Jeff mentioned around every product. But I think in general, Reuben, the way to think about it is that we should track single-family construction, plus or minus a few percent at least over the near term.

I think that's right, Marshall. Reuben, the other thing I would say is the business is much more in tune to the customer journey and to creating pull for our products. We've deployed a lot of digital assets early in the customer buying process. And despite the fact that we're kind of in a near-term pinch, I think that's a change in the business longer term that's going to pay dividends. So like I said, we're even seeing it now relative to being in touch with customers, being in touch with design aesthetics, and influencing those purchase decisions earlier in the process with much more specificity and, particularly, with our owned footprint. And where we can control that content and work closely with the builders. And so that we've got a lot underway there, which I think if you ask about change from '18, to say, let's project to '24 or '23 even, that, I think, is going to pay dividends. They will be muted, given the overall macro, but those will, I think, accelerate once we get through some of the affordability issues.

Okay, great. Thanks, guys. Good luck going forward.

Thank you.

The next question is from Rex Henderson with Water Tower Research. Your line is open.

Good morning, and thanks for taking my question. And congratulations on the work you've done on margins in bringing them back. That's really quite encouraging and impressive. Let me get to the workplace segment. We've just recently begun to see a little bit of uptick in back to office according to this capital systems index. I'm wondering if you're seeing any correlation between a market where there's a positive result with that index and positive results in back to office customer activity and orders?

That's a good question, Rex. In discussing the mid-market, I believe we are experiencing solid growth despite the economic outlook. In several mid-tier cities, businesses have either adopted traditional or hybrid models and have returned to work. This indicates that we maintain a strong position in those areas. Furthermore, as this trend continues and customer activity picks up in other markets, it serves as a positive indicator for future demand.

I'm curious about the new construction on the residential side. You mentioned that you're tracking new construction starts in line with orders. Can you provide more details on the order trends and how you expect it to look by the end of the year?

Yes, Rex, you're asking about residential building products orders?

Yes.

Yes, so as we stated in the press release, orders were down about 6% in the third quarter versus the prior year. New construction is stronger with our retrofit, as I said earlier. In that new construction, strength really reflects that builder backlogs, the backlogs at our installing distributors, so there's still orders coming in. We do expect that to fall off and interact more in line with housing permits, and just general housing activity. Remodel retrofit orders have declined more. As I said earlier, there's some timing to that. There's also probably some consumer impacts there. But we have a big backlog to work through there. Our backlog and remodel retrofit is elevated due to the orders that were placed earlier in the year. And that's going to buffer and soften any kind of decline we have, probably takes the rest of the year, maybe into 2023, early 2023, to normalize that backlog.

Okay. Do you expect that the backlog will be cleared by January or February? Based on current trends, what do you think will happen to orders between now and then? Do you have any insights on that?

The easier part of that question answer is yes. The backlog should be normalized by, say January, February. The harder part is to speculate on what orders are going to do. Certainly, we see weakness in the new construction activity around permits, which are running roughly 20% down versus prior year. Remodel retrofits are a little bit hard to gauge, and there's not as many leading indicators to that. But signs show that's going to be soft as well. We're prepared for it to be down, Rex. I don't know that we're able to offer a quantitative outlook, how much it's going to be down right now.

Yes, Rex, I would add that we are taking a step back from the specifics regarding short-term order trends. The economy is in a challenging position as we enter 2023, with most leading indicators showing a slowdown, and we are experiencing some of that as well. We are prepared for softer demand and are adjusting the business with cost-saving measures and other initiatives. Historically, we have successfully managed through downturns, and our balance sheet remains strong while generating cash flow. While the short-term may be difficult, we are optimistic about the opportunities that will arise once the economy stabilizes. Our unique operating models support our long-term strategic goals. The midmarket is showing promise, especially as return-to-office activities resume and hybrid work continues to grow. There remains a competitive environment for talent, and our presence in these markets, particularly in North America, positions us well. Regarding the residential side, we have made substantial investments in recent years to connect with customers, broaden our category presence, build awareness, understand design trends, and leverage our strong distribution network. These factors point to a positive outlook as we navigate through the current challenges.

Okay. Well, thanks for your time. Good luck.

Thanks. Appreciate it.

The next question is from Greg Burns with Sidoti. Your line is open.

Good morning. What percent of your business is contract midmarket and SMB? Can you just segment out the sizing of those three segments of your business?

Yes, Greg, we like to talk about contract and SMB, roughly being a 50-50 split. It's not a precise split. SMB might be slightly bigger. I think what you're getting at is SMB actually, we've chosen to break out a couple subcomponents of SMB here by talking about the mid-market and the transactional business. We don't offer a precise split on that. The mid-market would be larger than the transactional business, but we don't give a precise mix.

Okay. And then relative to $30 million in cost savings, there was a $5.6 million charge this quarter for some restructuring, is that tied to the $30 million? Is that a separate set of cost savings? How should we think about that?

No, that's directly related to the $30 million. The corporate-wide cost savings program will save $30 million, which will fully mature next year, and we incurred $5.6 million of charges related to it in the quarter.

Okay. And total SG&A was down. It was lower than we expected down pretty significantly sequentially. And I'm assuming some of that's variable. But once '23 rolls around and goals reset, I'm assuming maybe some of that variable comp comes back online. So I'm just trying to figure out based on the better-than-expected operating expenses this quarter, what's a good run rate to build off of as we go into '23 and start factoring in some of those cost savings?

Yes, that's a good observation, Greg. In the third quarter, the profit and loss statement benefited from lower variable compensation, which was a one-time adjustment. Consequently, none of those figures include the $30 million. We will continue to adapt the business, as Jeff mentioned earlier, for the challenging short-term outlook we anticipate. We do not have an estimate for SG&A. We will always invest to some extent, but we are bracing for a more difficult 2023. I can share that we have some compensating actions in place. Specifically, the cost actions we discussed, including the $30 million program, are one of three strategies that could provide some benefit next year. The other two expected positive factors are favorable price costs in 2023 and improved net productivity due to normalizing supply chains and the maturation of our operation in Mexico. Altogether, these factors are likely to bring benefits in the range of $80 million next year, which we believe will help to partially offset the volume pressure. However, we do not have a forecast for the SG&A run rate at this time.

Okay. No, that's definitely helpful. I guess, I maybe kind of answered part of this next question. But it sounds like you're catching up on price costs. So it seems like inflation is becoming less of a concern. But any update on supply chain freight, any labor, any of these other kind of moving parts that have been impacting the margins over the last year or so? Are you seeing any improvement on that front?

Yes, we are. We, in the last call, we talked about price costs for the corporation mean favorable $60 million to $70 million. For 2022, we're expecting that to be in the $75 million to $80 million range. The reason for the increase is more stabilization in the commodities.

Yes, I would say, Greg, relative to supply chain it is stabilized as well, although it's not at pre-pandemic stability. But it is operationally it's still a bit of a challenge. But it's much more stable than it was a year or two years ago.

Yes. All right. Thank you.

Thanks.

The next question is from Steven Ramsey with Thompson Research Group. Your line is open.

Hey, good morning. I'm sorry, I got disconnected for a minute. So sorry if I'm asking the same question again. Maybe to start with on resi, where is inventory now? And entering the slowing period, do you think the channel and HNI specific inventory is in a good place to adjust for that?

Yes, I mean, look, there's probably some inventory there that needs to be adjusted. But recall, we've got this unique regional distribution center network in which we hold inventory and deliver in just a few days to a majority of our dealer partners. So I don't know that there's a big inventory correction, although there's probably a little bit there.

Yes, I think there's probably some inventory that needs to be adjusted. We've been monitoring the situation throughout the year. Some distributors clearly loaded up based on lead times and supply chain issues, but they've reduced a significant portion of that inventory. I believe we're nearing the end of this process, and the backlogs should be mostly normalized by the end of the year.

Okay, helpful. And then on resi margins increasing again and at their pretty normal high teens levels, can you talk to price cost, specifically there, and with the investments, can you talk to the impact on investments for growth in the third quarter and how you think about it in the coming quarters with the near-term slowing?

In residential building products, we did generate positive price cost, approximately $10 million that added to operating margins. We did invest in the quarter. In that segment, it was around a $1 million of investment, spread across the go-to-market activities we discussed, to grow the category, new products, etc.

Okay, helpful. And then looking forward on signals of inflection, you talked about how transactional activity in the workplace segment is moving with the economy. Are you looking for that internally as your key signal for optimism and activity turning up? Or are there other internal metrics that you're looking at?

Steven, we examine all facets of the business. Historically, transactional activity has been a good indicator of general economic trends. However, we are currently in a post-pandemic phase that is reshaping office environments, and we are analyzing it from various perspectives, which is why we discussed the mid-market. We are noticing regional variations and differences in business activity. I believe that the mid-market, as I mentioned earlier, could reflect trends in other segments related to the return to the office and hybrid work models. Even amid uncertainty, there are signs of resilience. We are navigating through uncharted territory following the pandemic, so we will evaluate everything closely. The focus on the mid-market was our way of introducing a fresh perspective. To address your earlier question about residential, we will keep investing in our core strategies to enhance workplace furnishing margins and stimulate top-line growth, despite facing some short-term challenges in the housing sector.

Okay, helpful. Thank you, guys.

Thanks.

Thanks, guys. My follow-up question was that I couldn't figure out how to get out of the queue. So I have one more clarification while I have you. Last quarter, you mentioned that smaller businesses were struggling as macro conditions worsened. Can you clarify if there's been any rebound from them this quarter? I know the mid-market is showing strength, but does that mean that small businesses have improved as well? Can you discuss their performance compared to contracts on the order front? Thanks.

Yes, I believe Reuben that Greg was asking a similar question. The SMB encompasses what we refer to as transactional business, which involves everyday operations, as well as mid-market business. I would say that the mid-market customer, which includes many small businesses, has remained quite strong. However, the transactional business has continued to decline, as we noted last time, and there are no signs of recovery. This area is heavily influenced by macroeconomic trends, which primarily affect small business customers.

Got it. Thanks. That makes sense. Good luck, guys.

Thanks.

We have no further questions at this time. We'll turn it over to Mr. Lorenger for any closing remarks.

Great. Thanks for your interest in HNI, and thanks for taking the time to join us today to chat about the business. Have a great day. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.