Good morning. My name is Audra, and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation Fourth Quarter Fiscal 2022 Results Conference Call. All lines have been muted to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. 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 fourth 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 joining us. On the call today, I will highlight four key topics. First, we delivered strong earnings growth in the quarter despite a soft macro environment. Second, our workplace furnishings margin expansion initiatives are delivering results. Third, we are prepared for 2023. And fourth, we are positioned for strong growth beyond 2023. Following those comments, Marshall will review our outlook. I will then conclude with some general closing commentary. We will then open the call to your questions. Moving to the first topic. We delivered strong earnings growth in the quarter, even though we experienced a softer demand environment. We generated solid year-over-year margin expansion and 47% year-over-year non-GAAP earnings growth in the fourth quarter. This was despite volume pressures associated with macroeconomic concerns. Consolidated gross and operating margins expanded on a year-over-year basis led by favorable price costs, which continued to improve in the quarter. And for the full year, we fully recovered the price cost shortfall driven by the rapidly rising inflationary pressures we experienced in 2021. Fourth quarter profit improved in both segments. Residential building products, operating margin expanded 170 basis points year-over-year, reaching nearly 20%. Our fourth quarter results demonstrate the strength of our differentiated business model in residential building products. In workplace furnishings, fourth quarter non-GAAP operating profit more than doubled despite lower sales. The year-over-year top-line decline was driven by divestitures and restructuring activities implemented earlier in 2022. Excluding these actions, fourth quarter year-over-year segment revenue growth was just over 4%. Although these streamlining efforts negatively impacted our top-line, they contributed to our margin expansion, reflecting our commitment to improving profitability in workplace furnishings. That leads to the second topic. Our initiatives to expand workplace furnishings margins are delivering results. Non-GAAP operating margin expanded 150 basis points year-over-year in the fourth quarter and in the second half of 2022. Favorable price costs and benefits from our cost reduction and simplification efforts drove the improvement. As we have discussed on prior calls, we are driving multiple initiatives to expand margins in workplace furnishings. These efforts are in three broad categories. First, we are simplifying our business to focus on our most attractive markets. Actions taken in 2022, including the sale of Lamex, the e-commerce business restructuring, and the discontinuation of a small workplace brand, reflect our efforts to drive profit improvement through simplification and focus. Second, we are lowering our cost structure. We announced a $30 million cost reduction plan last quarter. That plan is well underway and we are now on track to reduce costs by $30 million to $35 million in 2023. Approximately $25 million of that total will impact workplace furnishings this year. Third, we are driving productivity and we'll see future benefits from ongoing operational investments. Our fourth quarter productivity improved versus the prior year as we continue to benefit from our lean actions in improving supply chain health. We expect our productivity momentum to continue and possibly impact 2023. Regarding investments, our largest operational investment is our new facility in Mexico. In 2021, we started up a new seating plant in Saltillo, Mexico. We plan to expand that operation and shift to a larger building during 2023. Although these actions have negatively impacted our short-term results, they will drive margin expansion as they mature. The third topic is we are prepared for some headwinds in 2023. In workplace furnishings, we expect to drive profit improvement notwithstanding anticipated top-line pressures. Our margin expansion initiatives focused on simplification, cost, and productivity will continue to gain traction this year. We expect those efforts, when combined with favorable price costs, will more than offset lower volume driven by macroeconomic concerns and inconsistent office reentry patterns. In residential building products, we are prepared for a slowing near-term demand environment. Cost actions and favorable price costs will partially offset volume pressures, while we continue to position for growth beyond 2023. Overall, our cost structure has improved. Our balance sheet is strong, and we expect a strong free cash flow year despite an overall weaker demand environment in 2023. That brings me to my fourth topic for today. We anticipate and are positioned for strong growth beyond 2023. In workplace furnishings, our research indicates the market will recover and demand patterns will change in a way that aligns with our market positions. Specifically, population migration patterns towards secondary and tertiary geographies, positive employment, and demand trends with small to mid-size offices and feedback from large corporate customers regarding return-to-office plans and adoption of hybrid work models all align with our strong market coverage and product and price point breadth and depth and point to the return of sustained volume growth post-2023. In residential building products, we are continuing to invest in our growth initiatives in the areas of category awareness, new product innovation, online capabilities, and the expansion of our wholly-owned installing distributor footprint. Overall, the housing market has strong fundamentals. It is undersupplied, and demographic trends support future demand growth. Additionally, an aging housing stock will drive remodeling activity. The average home is now 40 years old, supporting robust renovation growth. Given the market's strong fundamentals, our unique growth opportunities, and our category-leading positions, we are bullish about our growth in this high-margin, high-return business beyond 2023. I will now turn the call over to Marshall to discuss our initial outlook for 2023. Marshall?

Thanks, Jeff. Let's start with seasonality. This is important because we are expecting 2023 seasonality to be different than what occurred in 2022, and that difference will distort quarterly year-over-year comparisons of sales and profit. Specifically, we expect sales and earning seasonality in 2023 to be more in line with pre-pandemic trends that follows three years of abnormal seasonality. 2022 seasonality was particularly unusual in that quarterly revenue peaked in the second quarter and first half revenue exceeded second half revenue. That unusual pattern was primarily driven by backlog dynamics that positively impacted the first half and deteriorating workplace furnishings demand that negatively impacted the second half of 2022. As a result, our first half comparisons will be more challenging on a year-over-year basis and our second half comparisons less so. Due to the change in seasonality, we expect more than 85% of our annual profit will be generated in the second half of 2023. That compares to 60% in the second half of 2022. All right. Let's move on to our outlook for the first quarter. In workplace furnishings, we expect first-quarter revenue to decline at a year-over-year rate in the low 20s. This decline is the result of last year's unusual seasonality, the continued negative impact of broader macroeconomic concerns, and the sale of Lamex. With respect to seasonality, first quarter 2022 benefitted from the unwind of backlog built up during 2021. That unwind will not repeat in this year's first quarter and accounts for more than 10 percentage points of our expected year-over-year sales decline. In addition, the sale of Lamex will lower growth in workplace furnishings by 5 percentage points or $17 million in the first quarter. First quarter residential building products revenue is expected to decline at a year-over-year rate in the mid-to-high teens. It is important to note that segment backlog is currently approaching normal levels, which means our revenue after the first quarter should trend more closely with pre-pandemic seasonality and be fully impacted by weakening new construction and remodel retrofit activity. In total, consolidated revenue for HNI overall is expected to decline at a high-teens rate in the first quarter. We expect consolidated non-GAAP operating income to be approximately breakeven in the first quarter of 2023. Let's move to our outlook for 2023 overall. During 2023, we plan to drive $80 million to $85 million of year-over-year profit support through improved price costs, better productivity, and reduced structural costs. These items will partially offset the earnings pressure associated with top-line trends. Importantly, our efforts do not come at the expense of future growth. We will continue to invest throughout 2023. Looking at the segments, we expect the $80 million to $85 million of profit support to drive profit growth in workplace furnishings and offset much of the negative impact from lower volume in residential building products that's being driven by the weakening housing market. Shifting to the balance sheet, we have a strong financial position, which provides flexibility for investment and positions us well for a slowing economy. Gross debt-to-EBITDA, as calculated per our debt covenants, was 0.7 at the end of the fourth quarter. We have a history of generating strong free cash flow through a variety of economic conditions, and we expect free cash flow in 2023 to benefit from a return to more normal working capital levels. Our low leverage and continued free cash flow generation will provide flexibility for the dynamic environment and continued investment. I'll now turn the call back over to Jeff.

Thanks, Marshall. Before we take your questions, I want to take a moment to mention that in December, HNI was again named one of America's most responsible companies, ranking number six in Newsweek's fourth annual list of America's 500 most responsible companies. These rankings are based on public data that analyzes the top performance across environmental, social, and corporate governance categories. Important components in our HNI members' daily efforts include a commitment to reducing our environmental impact, making a positive social impact, and practicing good corporate governance. Our goal of enhancing where people work, live, and gather shines a light on our decades-long commitment to sustainability and good corporate citizenship. And most importantly, on the commitment and efforts of all HNI members who make a positive difference every day. In closing, we remain focused on our two primary long-term objectives: improving the profitability of our workplace furnishings segment by driving margin expansion, and delivering strong top-line growth in residential building products by leveraging our differentiated business model. We'll now open the call to your questions.

Thank you. Our first question comes from Rex Henderson at Water Tower Research.

Good morning and congratulations on a really impressive quarter. The margin performance was terrific. I have some questions about the order trends in the two segments as we moved from December into January and February. What are you seeing directionally in those order trends in the two segments?

Okay, let me start with workplace. I'll break it down into three parts. In our mid-market segment, performance remains strong, with orders in Q4 and year-to-date showing substantial double-digit growth. This aligns with market trends, where large cities are losing office jobs and smaller cities are seeing growth in employment, particularly among small and mid-sized businesses. Moving on to our contract segment, it is stabilizing or showing improvement, with orders remaining flat year-to-date. Pre-sale activity is getting better as customers emphasize hybrid work environments, and we anticipate more improvement in the second half. Lastly, our transactional business is still experiencing a decline, with trends now in the double-digit negative range. These are short cycle, small orders that are highly affected by broader economic headwinds.

Okay.

And Rex, as it relates to the situation.

Yes. Go ahead.

Residential building products, our orders were down 18% in the fourth quarter, and we saw some pressure in both the new construction as well as remodel retrofit. They were down similarly. Now we do expect new construction to be down more than remodel retrofit during 2023.

Okay. So you've already answered one of my other questions, which is some differentiation between what's happening in new build and retrofit and remodel in the RBP segment. And so new constructions worse than the retrofit business, is that right?

Yes. We expect it to be worse. Traditionally, at least historically, the remodel retrofit business is just not as volatile. And we basically track single-family construction activity in the new home side exactly. So we're seeing some pressure there, and expect it to really be fully impacted in the second quarter and the quarters thereafter.

And then one other question, your gross margin performance here was really quite impressive. I'm wondering if you're beginning to see any competitive pressure or customer pushback on prices as commodity prices come down. Are you seeing anyone pushing back on prices at all?

Rex, that's a good question. We monitor that closely and haven't observed any changes yet. In the workplace sector, some companies are still announcing price increases, and we've been aligned with what we've seen in the market. We remain vigilant about this, but so far, there hasn't been any significant pushback. The initial shock of inflation has generally been accepted by most people.

Okay.

And Rex, there's still inflationary pressures out there that we have to cover. And we are still recovering our margin, so we're still making progress there. And it seems like the market is behaving pretty similarly.

Okay. Very good. Thanks. I'll pass on to questions to someone new. Thanks.

Thank you.

We'll move next to Budd Bugatch at Water Tower Research.

Yes. Good morning, and thank you for taking my questions. I hope everyone is doing well. I want to follow up on Rex regarding Hearth. Are we seeing any changes in the product mix? I know you've managed logistics effectively, but I'm curious about penetration in new housing and whether the mix of electrical products is having an impact.

Yes, we've been working on that for a while. In the electric segment, we're seeing many opportunities as we launch new products. This is helping to grow the category rather than replace it. For instance, in some areas, the internal rate of return went from zero to 50% due to the availability of electric units. We are also observing increased interest in our insert business, as customers recognize that an insert can be easier to install compared to a complete remodel, allowing us to introduce a new unit without a full overhaul. This represents category growth, particularly as some customers weren’t considering a remodel just yet.

And Jeff, that incident rate jumped sounds really fantastic. Is it really making a significant impact? Is it large enough to affect the overall category or is it still too small?

It's still in its early innings, Budd; I'd say we're in the first bottom of the first. But I think we're seeing, I believe it's going to be a material contributor to our business going forward. But the run we're off a low base right now.

Okay. And do you see much more in the way of M&A activity in that segment, in that business unit in terms of additional dealers?

Yes, that's a good question. We have a unique model, and our wholly-owned installing distributor network is a valuable asset for our business. There are plenty of opportunities for that part of our business. We work closely with our distribution and independent partners, and we have plans for succession events and geographical expansions. This area is definitely a priority for us, and I believe you will see more developments in the future.

Okay. Great. And last for me I know commodity inflation and particularly in steel was unwelcome and had to be covered over the last post-COVID period. Are we seeing some retreat in there? And Marshall said we're still seeing inflationary pressures, but I wonder if he can pinpoint where it is and maybe quantify what we're seeing in that.

Yes, we are observing inflation in two main areas. First, wage inflation has decreased but we're still experiencing year-over-year increases typical of any given year. The second area includes a broad range of commodities that are still facing some pressure, largely due to carryover effects from the previous year. Although some of this inflation is being partially mitigated by lower steel costs, overall, we expect input cost inflation to be in the range of $15 million to $20 million for the year.

Got you. And but like the return to seasonality, that's not significantly different than we see almost every year in which we cover with a small price increase once a year annually. Is that a fair way to look at it?

Absolutely. That's very fair.

Okay. Great. Thank you very much. And let me add my congratulations to Rex's; the margin performance is impressive. Thank you very much and good luck on 2023.

Great. Thanks, Budd.

We'll go next to Reuben Garner at The Benchmark Company.

Thanks. Good morning, guys. Maybe to start, you referenced profit improvement in workplace kind of in the face of this, the volume headwinds. Can you give any detail on exactly how much volume decline you can withstand with some of these changes or a way to think about decremental margins kind of ex the price cost and savings and productivity initiatives that you have?

Yes. Reuben, I mean, we do expect to see profit improvement despite the lower volumes. I think maybe the way to answer your question is that, we're roughly thinking that workplace volume for the year in terms of total top-line would be down on an organic basis in the low to mid-single-digits and that would be a big decline in the first half followed by some moderation in the second half. So under those conditions, we have enough profit support to drive our operating profit growth that we mentioned. In terms of decremental margins or incremental margins in a workplace, on average, it runs around 35%. And of course, we have offsets to help mitigate that. So really, the decremental margins for workplace would not really be calculable, right? We're expecting lower volume, lower sales, and higher profit.

Okay. And to that, that low to mid-single-digit decline in workplace, the last quarter you talked about strength you were seeing in mid-market. That low to mid-single-digit seems like a relatively modest decline relative to what the industry orders have been in recent months. Can you update us there? Is mid-market still outperforming and is that kind of what gives you confidence that maybe you'll do something better than what we've seen of late?

Yes. There's two things there, maybe to point out is, first of all, our orders in the fourth quarter when you exclude the restructuring of the e-commerce business and divestiture of Lamex, were up 3%. So we did see fourth-quarter activity that's in line with that expectation. Secondly, just to remind everyone that we saw a pretty significant step down in demand in the back half of 2022. So as we anniversary that step down, it's not that we expect a lot of demand growth when we are right now, but we'll certainly see lower comps that are going to be easier to compare against.

Yes. And I think Reuben, as I commented earlier, that the mid-market, for lack of a better term, is year-to-date running up strong double-digits. Pre-sale activity points to continued strength there. And so we just believe the migration patterns and employment trends align with our strengths. And so that's really maybe offsetting some of the other areas of the business.

Okay. And then on the housing side, new construction I think is a little bit easier for us to get a handle on or at least kind of guess where the market's going. Can you give us any color on the R&R side of your business? How you expect that to hold in any kind of other puts and takes, whether it'd be share gain opportunities or any other drivers outside of the market specific to your fireplace business.

I think Jeff mentioned a couple of the strategic growth initiatives that probably hit a little more on the R&R side than they do on the new construction side. And as I mentioned earlier, the R&R side is historically less volatile. So we're expecting new construction decline, like I said, in line with single-family housing activity and the existing home or remodel retrofit activity side of the business to be down less, expecting a little pressure in both sides that's for sure though.

We'll move next to Steven Ramsey at Thompson Research Group.

Hi, good morning. I'm curious about how much of your inventory is still reflecting higher costs due to inflation and how that will impact the profit and loss statement early in 2023 to improve margins. Additionally, what are your thoughts on cash generation this year and is working capital a positive factor in that?

The quick answer to your inventory question is that our inventory was essentially flat year-over-year. We have normalized much of the inventory we brought in during 2022, so it won't have a significant impact on our margins. Regarding your question about working capital, this remains a focus for us. We have utilized working capital over the past two years while addressing supply chain disruptions, bringing in some inventory as a buffer. We are working on improving inventory efficiency as well as overall working capital efficiency. As I mentioned in our prepared comments, we expect to achieve more normalized working capital levels in 2023, which should be a source of cash for us this year.

Great. And then thinking about cash generation for this year as well as a low leverage level, can you talk about cash deployment? The willingness to do acquisitions on the resi side of things in an uncertain period if people are willing to deal and how you think about share buybacks in the slower time period? Thanks.

Yes, Steven. As I mentioned earlier, we are continually assessing the marketplace for opportunities on the residential side. We have demonstrated both the capability and desire to pursue these opportunities in the past, and we will continue to do so whenever attractive prospects arise on the residential side.

In terms of our priorities, we expect to deploy capital. Historically, our primary objective is to invest in the business. We also aim to maintain and modestly grow our dividend. Additionally, we pursue acquisitions on a case-by-case basis depending on conditions and opportunities, and we should continue to do that.

And we'll go next to Greg Burns at Sidoti.

Marshall, you'd mentioned the backlog normalizing on the building product side of the business, and that will kind of get the business more back to a normal cadence. Could you just talk about what historically the typical seasonality of that business is? And I guess maybe what you're expecting in terms of the current demand trends there?

Yes. So historically residential building products sort of hits a trough in the second quarter and then builds in the back half and then starts to decline again and then again bottoms out in the second quarter. So that did not happen last year. Last year, if you look at our quarterly revenue, we were pretty consistent from quarter-to-quarter, and that's because the backlog buffered the seasonality. We had more demand than we really had capacity. And so we pretty much had the same revenue plus or minus a few percent each quarter. So this year, in the first quarter, we're basically normalizing the backlog. So as we enter the second quarter, we're going to start to experience that typical seasonal dip as well as start to begin to feel the impact of the housing market declines.

Okay. And then you did talk about the improved profitability you expect on the workplace furnishing side of the business, but in total, I guess with the $80 million to $85 million of savings you're projecting, do you expect to grow earnings next year?

In workplace furnishings, we do expect to expand margin and grow profit dollars in the segment.

I mean, on a consolidated basis, like are you going to be able to offset the declines in volume on the building product side of the business and generate consolidated earnings growth next year?

Our expectation right now is that there's a pretty significant decline in residential building products, which is going to even though we're going to offset a good chunk of it with our actions, that the net impact of that is going to be more than the profit growth in workplace furnishings. So consolidated earnings, we expect to be down just maybe not nearly as down as you might think, given the amount of volume that that's was being declining.

And that does conclude our question-and-answer session at this time. I would like to turn the conference back over to Mr. Lorenger for closing remarks.

All right. Well, thanks everybody for joining us today. Have a great day and we'll talk to you next time.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.