Hello, and thank you for waiting. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation First Quarter Fiscal 2024 Results Conference Call. I will now turn the conference over to Matt McCall. Please proceed.

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 first quarter fiscal 2024 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. During the first quarter, our teams continued to build upon the strong progress we have made over the past 2 years. We delivered earnings that were nearly triple the prior year period, with operating margin and EPS reaching first quarter levels not seen since 2007. First quarter non-GAAP EPS of $0.37 was up 185% year-over-year. This was despite an 8% organic revenue decline, which was primarily driven by continued housing market softness. Our strong results continue to be fueled by our legacy Workplace Furnishings profit transformation plan and the inclusion of Kimball International, which combined to deliver the highest first quarter Workplace Furnishings operating profit margin since 2016. In Residential Building Products, our recent cost actions helped support profitability despite a continued soft housing market. Longer term, we remain bullish about the prospects of the housing market broadly and our market-leading position specifically. Overall, we started the year on a very strong note. On the call today, I will highlight 3 key topics. First, our profit transformation actions continue to drive improvement in Workplace Furnishings. When excluding the benefits of Kimball International, legacy Workplace Furnishings non-GAAP operating margin expanded 560 basis points year-over-year. Looking forward, we expect profit growth and margin expansion to continue. Second, Kimball International delivered strong accretion. The addition of KII is already providing significant value creation to our shareholders, and there is more to come. We continue to expect annual cost synergies resulting from the combination with KII to total $35 million when mature. Third, Residential Building Products posted solid profit despite ongoing housing market challenges. Recent cost reduction actions continue to support profitability, and we expect revenue growth and margin expansion to return through the year. Following those highlights, Marshall will review our outlook. I will conclude with some general closing comments before we open the call to your questions. Moving to the first topic. Our profit transformation actions continue to drive improvement in Workplace Furnishings. As I mentioned, first quarter non-GAAP operating profit margin for legacy Workplace Furnishings improved 560 basis points year-over-year. That was the eighth straight quarter of year-over-year operating margin improvement in the segment, and there is more to come as we expect additional benefits from our profit transformation plan during 2024 and beyond. As a reminder, our legacy Workplace Furnishings profit transformation plan consists of 4 primary actions: first, we are driving increased productivity; second, benefits from positive price-cost are helping to drive improved profitability; third, we have streamlined our cost structure; and finally, we continue to simplify our business. Some of these benefits of this plan are recognized in our results and have helped drive the recent strength in our margins. We also continue to see opportunity. Our operational investments, primarily in our new facility in Mexico, will help drive substantial productivity benefits as they mature over the next couple of years. This will add to our continued lean efforts and help drive additional profit growth. Next, we expect continued net price-cost benefit through the remainder of 2024 from pricing actions announced over the past 12 months. Finally, the rollover benefits from our corporate-wide cost savings program will provide incremental profit support in 2024. All of this gives us line of sight to additional margin improvement. As I said earlier, we expect year-over-year profit growth and margin expansion in Workplace Furnishings to continue in 2024 and beyond. Let's shift to Workplace Furnishings' demand. Our view of the market is mostly unchanged from our last call. First quarter organic revenue was down 2.5% year-over-year, consistent with our expectations. SMB again outperformed the contract. In the near term, demand remains choppy but is stable within a range. SMB orders grew 1% year-over-year in the first quarter on top of an 18% increase in the first quarter of 2023, which was positively impacted by price increase timing. This segment of our business continues to benefit from healthy dynamics, including population shifts to markets outside the top 10 and relatively higher office usage in those markets. We expect these factors, along with increasing preorder metrics, to continue to support SMB demand. Switching to contract demand, trends further improved in the quarter. Orders from contract customers were also up 1% in the first quarter on a year-over-year basis. The year-ago comp was also challenging in contract, with first quarter 2023 order growth of 14%, which was also positively impacted by timing of price increases. The 2-year order trend is encouraging and is consistent with many of the other demand indicators. Our preorder activity and quoting remain elevated, return-to-office metrics continue to tick up and reached post-pandemic highs in recent weeks. Lease churn is expected to accelerate as tenants take advantage of attractive lease economics and nonviable office space is repurposed, while the need for companies to adapt their spaces for hybrid work will further support demand. In summary, we continue to see encouraging trends related to future demand, particularly given our unique market position and overall market coverage. However, as we have communicated for several quarters, our profit transformation plan does not require volume growth. Volume growth will only enhance our profitability. Moving to my second topic. Kimball International delivered strong accretion. KII generated an operating profit margin of 9.3% and added an estimated $0.10 to non-GAAP EPS in the first quarter. We continue to expect annual cost synergies to reach $25 million in 2024, and total synergies are expected to reach $35 million when fully mature. From a revenue perspective, KII solidly outperformed the expectations we shared with you last quarter. The upside came from the hospitality segment. Hospitality has been performing well. However, entering the quarter, we had expected revenue recognition to be negatively impacted by shipping delays related to disruption in the Red Sea. Those delays did not materialize, which helped drive hospitality revenue above our expectations. We continue to be encouraged by the complementary nature and attractive post-pandemic positioning of KII's offering. The addition of KII is providing significant value creation. As we have highlighted, Kimball International is complementary from a product, market, and cultural perspective. KII strengthens our exposure to several important trends and markets, namely ancillary products, secondary geographies, health care, and hospitality. Each provides new opportunities for profit growth, and our confidence in the combination's strategic and financial benefits continues to prove out and accelerate. My third topic, Residential Building Products posted solid profit despite ongoing housing challenges. Recent cost reduction actions continue to support profitability. Segment non-GAAP operating margin for the first quarter was 14.4%. This represents the seventh consecutive year with first quarter segment non-GAAP operating margin at or above 14%. We were able to extend this level of performance in '24 despite a 17% year-over-year revenue decline as housing market weakness continued to pressure demand trends in the quarter. Let me provide some color on the first quarter revenue decline in Residential Building Products. First, the year-over-year rate has some noise in it. We are comparing against the prior year period that benefited from unwinding demand that had built up during the back half of 2022. Our first quarter revenue and order growth rates are somewhat distorted due to that issue. Second, consistent with broader housing trends, R&R performed worse on a year-over-year basis than new construction. And third, the year-over-year revenue decrease was modestly worse than expected, primarily due to slower new construction, which was negatively impacted by weather early in the quarter, and more recently by incrementally higher interest rates and inconsistent builder sentiment. Looking forward, year-over-year single-family permits and starts are showing healthy growth, which supports new construction improvement going forward in 2024. Segment orders showed improvement consistent with the broader market indicators in the first quarter. Orders in new construction outperformed remodel/retrofit, with new build orders down only low single digits year-over-year. Despite some near-term headwinds, we are bullish on the intermediate to long-term dynamics for the business. In addition to the solid long-term market fundamentals, we have unique growth opportunities and continue to invest in the areas of category awareness, new product innovation, online capabilities, and the expansion of our wholly-owned installing distributor footprint. In summary, order trends in our Residential Building Products segment improved during the quarter and the intermediate to long-term demand dynamics continue to remain encouraging for this business. Looking to the remainder of 2024, we expect growth and margin expansion to return through the year. I will now turn the call over to Marshall to discuss our outlook for 2024. Marshall?

Thanks, Jeff. Let's start with our demand outlook. We expect 2024 organic revenue in Workplace Furnishings to grow at a low-single-digit rate year-over-year. That outlook is unchanged from what we communicated on our last call. We expect demand conditions to remain generally in line with those experienced over the last 9 months, and we continue to expect demand will be choppy, but stable in the range. In Residential Building Products, revenue trends are expected to improve as the year progresses, with year-over-year growth returning in the second half. For the full year, Residential Building Products revenue is expected to be flat to slightly down versus 2023 levels. All right. Let's shift to our outlook for 2024 earnings. We expect full year EPS to strongly increase from 2023 levels, primarily due to continued margin expansion in Workplace Furnishings and the full year benefit of accretion from KII. Looking at the second quarter of 2024, we expect earnings per share to solidly increase year-over-year. Again, we expect the benefit of Kimball International and continued profit transformation in legacy Workplace Furnishings to drive the increase. I'd like to point out that we are now facing increasingly difficult year-ago comps as the second quarter of 2023 showed noticeable benefits from our profit transformation initiatives. We expect second quarter Workplace Furnishings' organic revenue to be down slightly versus the same quarter of 2023. Moving to Kimball International. For the second quarter of 2024, we expect KII to be accretive to non-GAAP EPS, generally in line with first quarter results. KII is expected to add $75 million to $80 million of incremental revenue to the second quarter. As a reminder, this is reflective of 2 months of incremental revenue as we anniversary the closing of the transaction in June. Finally, in Residential Building Products year-over-year declines are expected to moderate, with second quarter revenue down in the low single digits versus the year-ago period. This reflects new construction growth and moderating declines in R&R. Shifting to the balance sheet. We maintained our strong financial position. Our gross leverage ratio of 1.9x remained below 2x for the second straight quarter as higher profit offset a modest seasonal increase in debt. Looking forward, we expect to modestly reduce leverage and improve our already strong balance sheet over the rest of the year. In addition, during the quarter, we accelerated our share repurchase activity. While the total outlay during the quarter was modest, our ability to hold leverage steady while deploying cash speaks to our strong cash flow characteristics. Our low leverage and consistent cash flow generation provides substantial financial flexibility and ample capacity for capital deployment. Our current priorities for cash deployment remain reinvesting in the business, funding dividends, and pursuing share buybacks and M&A opportunities.

Thanks, Marshall. We had an excellent start to 2024 as our strategies continue to deliver outstanding earnings growth. We are committed to expanding margins in Workplace Furnishings and driving long-term revenue growth in Residential Building Products. Our results to begin 2024 reflect the dedication of our member owners, the strength of our business model, and our ability to manage through all parts of the economic cycle. And we anticipate another strong year in 2024. We will now open the call to your questions.

Our first question will come from Reuben Garner with The Benchmark Company.

So maybe to start with a big picture question. Earnings or margin performance for the last 3 or 4 quarters has been pretty remarkable. You mentioned difficult comps, Marshall, kind of starting in the second quarter. Can you talk about what's left to go in terms of what you control in terms of earnings expansion as the year progresses and into next year?

Yes, Reuben. I think we still have the same primary drivers, productivity, cost control on the SG&A line, and of course, price-cost. It's just that all those are up against stronger comps. So in particular, price-cost is going to taper off here a little bit. That was a decent benefit in the first quarter, and we still expect it will be a benefit for the remainder of the year, just less so.

Yes, Reuben, I'd like to add that Marshall made a good point. We are experiencing benefits from our efficiency initiatives in both business segments, particularly in labor management and materials. Our investments, especially in Mexico and in the Workplace Furnishing area, are starting to yield early returns. Additionally, we expect savings from procurement. We anticipate realizing approximately $30 million to $35 million in benefits for 2024. Looking beyond 2024, I expect another $30 million or so on top of that figure.

And that $30 million, Reuben, would be from the Mexico investment as well as synergies from KII. We'd have our usual lean efforts on top of that. So that's after this year, just to clarify.

Okay. That's helpful. And then I guess on the Building Products side, anything in terms of the size of homes or affordability that concerns you or signs that you've seen where we might be running into headwinds on the number of fireplaces per home? Or do you guys have an offering at that price point to kind of offset it if affordability for the builders and the homebuyers becomes a bigger issue?

Yes, Reuben, that's a valid question. Affordability has been a concern for some time now, and we have been monitoring it closely. Our product pipeline takes this into account. Additionally, we have introduced some new units in the electric category that effectively address these issues, and we have a lot of innovation happening in that area. Therefore, I don't anticipate the headwinds being any greater than what we've experienced candidly over the past couple of years.

Okay. And last 1 for me. Rates moving up again here of late. Your conversations, I guess, specifically on the SMB side, it doesn't sound like the outlook has changed a lot. Any risk to that? Or do you think the other drivers are more than offsetting it on a go-forward basis?

Yes. I think 2024 is an interesting time considering the economic cycle and the election year. However, for the most part, we see that business and the drivers remain quite strong. I would say that the orders in most of the areas we are monitoring are either in line with or slightly above where we've been.

Yes, Reuben, that business has performed well for the past several quarters, and we're still experiencing growth alongside those strong comparisons. We're feeling quite positive about it. An encouraging sign is that we're starting to see contracts align with that growth. Contract numbers increased in the first quarter, and we're anticipating reasonable growth in the second half from both contracts and small to medium-sized businesses.

Your next question will come from the line of Greg Burns with Sidoti & Company.

The dynamic you mentioned with Kimball affecting the revenue recognition this quarter, was that pulled forward? I'm trying to understand if you're expecting your guidance for the second quarter to be lower than it would have been otherwise. I'm trying to determine if this aligns with the normal seasonality you're anticipating for the business moving forward, or if it's simply a timing issue with some of the orders you expected to shift around.

Yes, it's a timing issue, and it did pull from the second quarter. So if you look at our guide for the incremental revenue from KII, it's pretty much the same as it was last quarter, but we got more of it in the first quarter. And that's a business that is project oriented. So there's not necessarily a seasonality to it; it just depends on when the timing of those projects occur.

Okay. And then what's the split of your revenue now on the Building Product side between new construction and remodel/retrofit? Has that changed much?

It hasn't changed much. It's very close to 50-50. Certainly, with the remodel/retrofit being down more than new construction, maybe a tad more new construction right now, but it's close enough to 50-50 to not change that ratio.

It appears that the contract side of the business is showing increased activity. Can you share your observations regarding the funnel activity, customer conversations, or any additional insights? Are you feeling more optimistic about this aspect of the business and do you anticipate an improving demand outlook?

Yes, Greg, I would describe it that way. We believe our current trends in the funnel, quoting, and preorder activity are solid, showing double-digit growth rates across all preorder metrics. There are certain segments, such as project pipeline, federal government, and corporate accounts, that are exhibiting strong activity as well. However, I anticipate a slow and steady increase rather than dramatic growth. The positive aspect is that these segments are beginning to convert, and our preorder metrics are looking good. Although the cycle might be extended, it suggests a promising outlook for growth in the contract space moving forward.

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

Congratulations on the performance in the quarter, very, very heartening. Jeff, you talked about those 4 items, and I think Marshall stressed that price-cost was important during this quarter and still remains positive, but less so going forward. Can you talk about, which rank the other 3 in terms of importance in this quarter, and what's left to get in terms of productivity, streamlining costs or simplifying?

Yes, Budd. In the first quarter, we had about $14 million of favorable price-cost. So that was the biggest item. But a very close second was productivity, which is about $12 million of benefit year-over-year. The actual SG&A cost was smaller than that. Moving forward, it's about productivity. Price-cost is still going to be positive, as I mentioned, the rest of the year, but less so, and productivity ramps up. So as Jeff mentioned, we're expecting around $35 million of incremental net productivity benefit year-over-year. You can compare that to maybe price-cost of the year of $15 million to $20 million, $14 million of which was already in the first quarter.

Okay. And by the end of the year, where do you think the legacy HNI Workplace Furnishings margins will be? And what's still the goal? Is the goal still double-digit?

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

Okay. I'm going to ask you to define a word for me, and that word is solidly, which is an adjective you used, I think, to describe the performance in the second quarter. You want to put some framework on solidly?

Gosh, Budd, that's a tricky one.

That's why I asked you, Marshall. You know that better than me.

Yes. I'm not sure we've got a lot of color for you on that one. What I'd maybe point to, Budd, is that I think the consensus estimate for the second quarter is like $0.64. And so I think that would be up solidly versus the prior year to kind of give some color to it.

Okay. Well, let's approach the year from a different angle. Will we achieve the usual earnings per share seasonality performance of perhaps one-third in the first half and two-thirds in the second half? Was that your expectation?

Yes, that's exactly what we're thinking. That 70-30, 1/3, 2/3 range is right on.

In Residential Building Products, many have mentioned that the business is somewhat sluggish, but we remain hopeful about the future. I am trying to grasp the sources of this optimism and where it is evident. Are you noticing it in the orders? Is the order book strong enough to support that positive outlook?

Yes, Budd, I would like to mention that regarding new construction, our Q1 orders saw a slight decline in the low single digits, but we have since experienced a positive growth rate in new construction orders. This is likely what we are discussing. As for repair and renovation, the decline in the order book was in the low 20s, but that decline is now showing signs of moderation. This indicates a growing sense of optimism as we move through 2024 on the RVP side.

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

Got you. I just want to make sure I understand something. I'm really pleased to hear about the improvement in contracts. I didn't have an issue with the expectation that it would progress steadily until about the middle of last week when the ABI report was released and indicated a significant drop. That always raises concerns for me. Please reassure me regarding that worry.

Budd, I believe the factors influencing the contract segment are mixed. There are several reasons to anticipate positive growth. Our preorder metrics have improved. The adoption of hybrid models and the movement towards attractive lease rates are leading to furnishing events, which is positive. However, there are also concerns, such as the decline in ABI and rising interest rates. Consequently, we expect a gradual increase in growth. While we do not foresee exceptionally high growth in the second half of the year, we anticipate a modest increase in the mid-single digits compared to the previous year for the contract segment.

Yes, Budd, it's clearly still choppy out there with all the factors Marshall just mentioned. However, we see it slightly ticking up, which is great news for us because we're able to deliver expanded margins. Once that volume growth comes in, even if it's just a couple of points, it will leverage quite well for us.

Is the incremental Kimball revenue of $75 million to $80 million above the $50 million to $52 million or $56 million that you reported in the second quarter of '23?

Correct. Yes, that's incremental compared to last year. So that's not their total revenue for the quarter; that's just the incremental year-over-year.

So it will be in that $135 million to $140 million range is your best guess now?

Correct.

And Jeff and team, congratulations on a really, as you would say, solid quarter.

Thanks, Budd.

Your next question comes from the line of Kathryn Thompson with Thompson Research Group.

Following up on the nonres end market and the ABI, our primary research and feedback from the field paints a little bit different picture than the ABI and what large commercial contractors are sharing with us is that the mega projects and some projects simply aren't being captured by the ABI, which I guess leads to the question, as you look at mega projects, in what ways does HNI participate and ways that you can win?

Kathryn, good question. Just to clarify, you're referring to Workplace Furnishings, and how we would participate in large projects there?

Correct. Correct.

Yes, Kathryn. We actively participate in those projects. Our corporate account sales teams and well-positioned dealers are engaged in that space. I agree that many people have been hesitant for a while, but now they are starting to take action, as leases can no longer be delayed. We have always had exposure in that area. While we often discuss small and medium-sized businesses because of our unique positioning, we are also well-placed in the top 10 markets for those major projects and consistently track them in our pipeline. I believe there is now more conversation about these types of events than we have seen in the past couple of years.

Yes. Following on just once again on the commercial contractor space. Historically, HNI has been focused on middle America, whereas the coasts have been for some of your peers in terms of just relative strength. And with population shift, it's been much talked about the Southeast and Southwest, so a lot of it still is in Middle America, but it's just kind of shifted south. As you look at growth in these big cities, are you able to capture your fair share in the southern half of middle America versus just kind of for the midwestern portions of the U.S.? I hope that question makes sense. It's just mainly about capturing your fair share where that population shift is going.

Yes. Just maybe to clarify, we participate broadly through the U.S. We're in large cities. We're in large coastal cities. We have good share in those cities. So just want to make sure that don't get the impression that we're just in the Midwest. That's definitely not the case. We are broadly distributed.

Well, yes, it was mainly about comparing areas like Midtown Manhattan to other locations, similar to how Miami contrasts with Nashville.

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

Yes, absolutely. We have been somewhat stagnant in larger markets, similar to many others, because our clients have also been inactive. However, as I mentioned earlier, things are beginning to pick up. We are optimistic about the population migration and KII, as Marshall highlighted, which only enhances our position. Factors like secondary geographies, product variety and depth, pricing strategies, and flexible product combinations enable us to seize our fair share, if not more, in those markets.

Okay. Great. And then a final question for today on Kimball. You've given some great detail on the call today and in the Q&A. It clearly made some solid progress from a margin expansion standpoint. But stepping back and looking at the big picture as we come to anniversarying that deal, what are 2 or 3 things that have been upside to you that maybe you learned after you acquire a company that gives you hope and optimism for the future?

Yes, Kathryn, I mentioned that in my opening remarks. The product application they have and the exposure is something we really appreciate, and it seems to be stronger than we anticipated. The hospitality sector, which we weren't very familiar with, has turned out to be a pleasant surprise and offers significant potential. Additionally, we didn't have much exposure to the health care sector, but they have a substantial health care business that has contributed positively. The key factor here is the cultural fit, as these deals often rely on culture and people. When you combine that with the three aspects I just discussed, it has all been extremely beneficial. While we knew it would be advantageous, it has exceeded our expectations from my perspective.

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

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

And that will conclude our call for today. Thank you all for joining. You may now disconnect.