Thank you for standing by. My name is Amy, and I will be your conference operator for today. At this time, I would like to welcome everyone to the HNI Corporation Third Quarter Fiscal 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. It is now my pleasure to turn the call over to Mr. McCall. Please go ahead.

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 2024 results. With me today are Jeff Lorenger, Chairman, President and CEO; Marshall Bridges, Senior Vice President and CFO; and VP Berger, Executive Vice President. 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?

Good morning, and thank you for joining us. I'm going to divide my commentary today into three sections. I will start by providing some highlights on our third quarter results, which were strong. Non-GAAP EPS of $1.03 exceeded our internal expectations and was 11% higher than the prior-year period despite continued revenue pressure. Then, I will discuss our expectations for the fourth quarter, where we expect the near-term demand pause to impact results. Finally, I will cover why we are confident in our ability to continue to drive profit growth in the upcoming years. Specifically, I will highlight three key points that underscore our positive outlook for '25 and '26. We have elevated EPS visibility through 2026. Our workplace demand outlook remains encouraging, and our unique position and strong long-term market fundamentals provide reasons for optimism in Residential Building Products. Following these highlights, Marshall will review our outlook and discuss our strong financial position. I will conclude with some general closing comments before we open the call to your questions. Let's start with the third quarter. Our members again delivered strong profit growth. Our 11% non-GAAP EPS growth in the third quarter was on top of a very strong year ago comparison, when profit grew more than 30% year-over-year. Third quarter EPS has more than doubled in the past three years, and we delivered those results without top-line support. In the Workplace Furnishings segment, our profit transformation plan and acceleration of KII synergies drove segment non-GAAP operating profit margin to a 20-year high for the third quarter. In Residential Building Products, despite ongoing housing market volatility, non-GAAP operating profit margin expanded year-over-year and exceeded 18% for only the third time in the third quarter. Our strategies, our dedicated member-owners, our customer-first business model and our proven ability to manage through all parts of the economic cycle again helped deliver strong results. Next, a few comments about the fourth quarter. We are optimistic about the opportunities that we see in both segments. However, in the very near term, we are seeing a pause in demand across our businesses. As a result, fourth quarter profit is expected to decline versus the same period of 2023. In Workplace Furnishings, we are seeing moderate demand with small- and medium-sized customers. Within the SMB space, our transactional business has been particularly soft. As you may recall, our transactional business primarily flows through wholesalers and national supply dealers. This business can be volatile. The selling cycle is short. It typically involves smaller item purchases and historically has been very sensitive to changes in the economy and general business sentiment. Currently, economic and election concerns have small business leaders increasingly hesitant about discretionary spending. Indicative of this sentiment is the September Small Business Optimism survey. The monthly uncertainty index hits a record high ahead of the US elections. We expect business leaders' hesitation to moderate as we move past the elections and into next year. In the contract furniture space, we are seeing further project delays and continued lengthening of the selling cycle. Encouragingly, activity and dealer sentiment are improving. However, customers are still being cautious, and our fourth quarter shipments will be negatively impacted. A recent Deloitte survey illustrates these concerns. Of 130 large company CFOs that were surveyed, only 12% said now is a good time to take greater risks. This is the lowest level in the past 10 years, even lower than the worst stages of the pandemic. But again, we view these pressures as temporary. Finally, in the Residential Building Products segment, during the quarter, builder and homeowner sentiment was negatively impacted by interest rate volatility, ongoing inflation and affordability issues and the same economic and political uncertainty that is impacting our Workplace business. Reflecting these concerns, the Housing Market Index fell to 39 in August after reaching a peak of 51 in March and April. As 2025 develops, we do expect interest rate reductions to eventually result in increasing housing turnover and improved demand for our products in both new construction and R&R. Moving to my first point, highlighting our optimism beyond the fourth quarter. We have two initiatives underway: Mexico and KII synergies, that by themselves will deliver $0.70 to $0.80 of EPS growth in 2025 and 2026. That represents approximately 25% of EPS growth on top of our already-strong results. Even with the slower fourth quarter, we expect to generate record non-GAAP EPS in 2024, which will be our third consecutive year of double-digit non-GAAP EPS growth. This means that without help from the cycle, we expect our three-year double-digit earnings growth streak to extend through at least 2026. Remember, our Workplace Furnishings profit transformation plan does not require revenue growth, and our recent margin expansion has been achieved without cyclical top-line support. In addition, we continue to adjust our cost structure in Residential Building Products to align with the current demand environment. Early in the fourth quarter, we took actions that will lower our cost structure by approximately $5 million in Residential Building Products. Most of that benefit will be recognized in 2025, further adding to our profit visibility. Before moving to my second point, I'll cover a few additional comments on KII and the recognition of synergies. KII continues to be highly accretive and was a major contributor to our strong third quarter profit. Total synergies expected to result from the Kimball International acquisition have increased another $10 million and now are expected to total $60 million, with $30 million to be realized in '25 and '26. KII is also providing us with new revenue growth opportunities and is highly complementary. Kimball International's workplace offering improves our post-pandemic product and geographic positioning, and KII's hospitality and healthcare businesses are well-positioned within attractive expanding segments, and both are generating growth. Our confidence in the combination of strategic and financial benefits continues to prove out and accelerate. Moving to my second point supporting our optimism, the outlook for Workplace Furnishings demand remains encouraging. Segment orders have continued to improve early in the fourth quarter after growing 1% in the third quarter. I'll now comment on the order trends of SMB and contracts separately. Our SMB activity moderated in the quarter, consistent with small business sentiment trends and our exposure to transactional business. SMB orders declined 3% year-over-year in the third quarter against a challenging comp. In the third quarter of 2023, SMB orders grew 6% year-over-year. As you may recall, SMB has been an area of strength for us for some time. This segment of our business has generated consistent order growth over the past two years, and we remain bullish about the fundamental backdrop. Specifically, healthy dynamics, including population shifts to secondary and tertiary geographies and relatively higher office usage in those markets, point to a return to growth in 2025. In our core contract business, we see growth on the horizon. The combination of contract and KII orders were up 5% on a year-over-year basis in the third quarter. We have seen large projects reactivate and continued strength in the hospitality space. As a result, orders over the past two months have improved, however, most of these projects will ship next year. Further supporting our outlook, quarter-ending workplace backlog is up 5% versus the prior year. Additionally, our contract sales funnel for 2025 continues to be encouraging and is up over 10% year-over-year. Looking out, we believe we are particularly well-positioned to benefit as the Workplace Furnishings market continues to improve. We have unmatched product and pricing breadth and depth. We have products that work for customers, ranging from small businesses to the largest multinationals. Our brands are distributed widely across geographies from tertiary markets to the top MSAs. And we can broadly meet the needs of workplaces, schools, healthcare facilities and hotels. Moving to my third reason for optimism, we continue to see positive long-term market fundamentals in Residential Building Products. Single-family housing remains undersupplied, and demographics will support additional demand growth. Over the next year, we expect these fundamentals, combined with anticipated interest rate reductions, to eventually flow through, driving increased housing turnover and improved demand for our products in both the new construction and R&R spaces. In addition to the strong market fundamentals, we continue to invest in unique growth opportunities. These include new product innovations such as electric fireplaces, efforts to become more intimate with builders, homeowners and homebuyers, online capabilities and the expansion of our wholly-owned installing distributor footprint. I will now turn the call over to Marshall to discuss our outlook for 2024.

Thanks, Jeff. I'll start by summarizing our outlook for demand and profit, beginning with demand. Fourth quarter revenue in Workplace Furnishings is expected to decline at a low- to mid-single-digit rate year-over-year. Our new outlook represents a reduction from what we provided in our July earnings release, which implied fourth quarter growth. Moving to Residential Building Products, we expect fourth quarter revenue to decrease at a low-single-digit pace versus the same period in 2023. This is also down from our prior outlook, which anticipated growth in the fourth quarter. Shifting to our profit outlook. We expect margins in Workplace Furnishings to move modestly lower year-over-year, driven by lower volume. Margins in Residential Building Products are expected to be mostly unchanged to down slightly. In total, fourth quarter earnings are expected to decline year-over-year. Despite that decline, we expect full year EPS to increase and extend our streak of growing full year EPS by 10% or more to three years. I'll wrap up with a few comments on our balance sheet. We improved our already-strong financial position. Gross leverage at the end of the quarter was 1.1 times as calculated in accordance with our debt agreements. That ratio was down from 1.5 times at the end of the second quarter due to higher profit and lower debt levels. I would also like to point out that we are very near the same leverage ratio that we had before the Kimball International acquisition, so it took us just over five quarters to delever, which is a testament to our ability to consistently generate strong free cash flow. During the quarter, we also accelerated our share repurchase activity, with more than $11 million of buybacks. The combination of our strong balance sheet and consistent cash flow generation provides a high degree of financial flexibility and 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. I'll now turn the call back over to Jeff.

Thanks, Marshall. We remain committed to expanding margins in Workplace Furnishings and driving long-term revenue growth in Residential Building Products. We drove strong results through the first three quarters of 2024, delivering year-to-date earnings growth of 33%, and we anticipate record EPS for the full year. Beyond this year, we are positioned for continued success. In summary, we have elevated earnings visibility in '25 and '26, broad and diverse product and market coverage in Workplace Furnishings, and market-leading positions in Residential Building Products, all supported by our strong balance sheet and the ability to drive continued free cash flow. I want to thank each HNI member for their continued dedication and congratulate them on delivering another quarter of excellent results. Before we take your questions, today will be Marshall's last earnings call as CFO. Marshall joined HNI 23 years ago, and he and I have worked side-by-side now for close to 15 years. On behalf of the Board of Directors and the entire HNI team, I want to thank Marshall for his many contributions to the corporation through the years. While Marshall will no longer be our CFO, we are happy he will continue to be part of HNI, and will be working in a part-time role assisting with strategic projects focused on artificial intelligence. VP Berger, who is on the call with us today, will be taking over as CFO at year-end. VP led our Residential Building Products business for the last nine years and has been part of the organization for 27 years, serving in various financial, operational, and leadership roles. We are fortunate to have VP ready to step into the role and expect a seamless transition. Thank you again, Marshall. Good luck in semi-retirement. We will now open the call to your questions.

Thank you. Your first question comes from the line of Reuben Garner with Benchmark. Your line is now open.

Thank you. Good morning, everyone, and congratulations, Marshall and VP. I'm excited to collaborate with you. Now, where should we begin? Could you provide more details on the recent softness in the Residential Building Products? What exactly are you observing? Is it primarily the slowdown in new construction we experienced over the summer affecting you now, or is it more related to Renovation and Repair due to continued elevated rates? Also, are there any signs of further destocking? I recall that last year there was a bit of a reset to normalize inventory levels, but I’m curious if there are indications of more of that happening.

Yeah, Reuben, our outlook consists of three equal-weighted components, and you're inquiring about one of them, which is the reduction in near-term demand. This is particularly evident in our stove business, a significant aspect of our remodel and retrofit operations. I’ll let our VP provide further insights into what’s happening with stoves.

Sure, Reuben, I think we start with the business itself. It's a short cycle purchase. Anything like that provides obviously low visibility, but historically, the band for this business has been pretty predictable outside of extreme oil prices or then obviously the pandemic. So, as we firmed up thinking through the second half, we did expect this to stabilize. And with stabilizing, it actually would show some pretty strong growth in the fourth quarter year-over-year because of how we finished in 2023. As you recall, the prior year comps were pretty low. Backlog was starting to deteriorate and come down. And as we thought the inventory destocking that was happening across the business went through, we would favorably see that in the back half of this year. So, all of that's happening. It's just normalizing a little bit slower than we thought. And as we unpack it, whether it's the economy, warm weather, it's certainly dependent upon this business with the products and even the election. So, I would say it's all kind of playing out as we thought, just a little slower than we thought. But also on the new construction side, not just the stoves, we are seeing some growth. It's just growing slower than we thought. We came into this plan, thinking about the third quarter, shooting for a 4% growth. It actually came in at 2%. So that's encouraging, that we're actually seeing some activity there, but fundamentals haven't changed. And as we go into the fourth quarter, we see that this has continued to be an area for us to grow, just probably not at the same pace as we are right now. So, the reason for that is really about home buying conditions. They haven't improved to the point where we thought they would, although there are things that, to Jeff's point, that's why we believe that we should know that optimism there as we go forward.

Do you anticipate that this softness might continue into the early part of next year until we reach the spring building season and can assess how rates, builders, and consumers are positioned at that time?

Yeah, Reuben, we don’t anticipate any significant changes in conditions from where we stand right now. It seems a bit early to make projections for 2025, especially considering the uncertainties we are facing in the coming weeks, but I believe that's a reasonable assessment.

Agree.

Okay. And then, on the Workplace side, and forgive me for the near-term questions, but these are the two kind of items that seem to have changed this quarter. The transactional business versus the order trends you're seeing, is that dichotomy something you've seen before? Does transactional typically lead the orders and maybe, therefore, you're anticipating some negative order growth in the fourth quarter? Just walk me through how those two relate historically.

Yes, Reuben. That's a good point. To clarify, we're seeing changes in the outlook for the fourth quarter. I want to emphasize that we are continuing to achieve profit growth without support from top-line sales. Looking ahead to 2025 and 2026, we have strong visibility into our numbers. Regarding your question, there are three areas to consider, and we've just discussed one. These areas are likely evenly balanced in the fourth quarter, with the transactional business accounting for about a third of that. You're correct that this business primarily goes through wholesalers and national supply dealers. It constitutes roughly 20% of our SMB sales but can be quite volatile. Discretionary purchases in this category are short cycle and have historically been sensitive to economic changes. We don't expect it to drive growth, but we believe it will stabilize; however, it is currently leading the short-cycle influences and is driven by economic factors. We've seen similar patterns in the past. Whether this is indicative of larger trends is debatable, as there are enough dynamics in the economy to suggest it's more of a temporary situation related to the economic cycle and upcoming elections, rather than indicating a lead or lag relationship. The second area to discuss is the contract business, which also represents a third of the change in our outlook, and we are observing continued solid growth indicators. However, shipment and order timings are increasingly delayed. Our sales funnel is up more than 10%, and dealer confidence is rising along with improving order trends. In the third quarter, North American contracting KII orders increased by 5%, and efforts to return to office environments are gaining momentum in larger markets. Lease turnovers are increasing as tenants take advantage of favorable lease terms while non-viable spaces are being withdrawn from the market. Much of the increased activity is anticipated to materialize in 2025 due to customer requests, positively impacting our backlog, which is currently up 5% year-over-year and provides better visibility for next year. We have observed this trend of lengthening order-to-ship timelines for several quarters. When discussing these changes with customers, we find they are navigating complex real estate and return-to-office decisions, taking longer to determine the best floor layouts needed for their initiatives. Additionally, decision-making processes involve more stakeholders than in the past, which requires customers to gather more data before making choices, further extending the sales process. Inflation has also posed challenges to budgeting, leading to additional design iterations as customers refine their preferences through value engineering, which benefits us given our diverse product ranges. Lastly, memories of past supply chain disruptions lead customers to order earlier, resulting in longer intervals between order placements and installations. All these factors contribute to extended sales cycles, with the current economic and electoral environment further adding to the delays. I wanted to provide a comprehensive view of the dynamics at play and what is influencing the ongoing cycle.

Very helpful. Thanks for the color, and good luck through year-end.

Thanks.

The next question comes from the line of Greg Burns with Sidoti. Your line is now open.

Good morning. With the leverage now back down to, I guess, pre-Kimball levels, how should we think about maybe your capital allocation priorities? Are acquisitions now a consideration again? And it seems like you're buying back stock here too. Maybe you can just talk about, just generally, how you think about the balance sheet, leveraging that, and using that to maybe grow inorganically?

Yeah, Greg. As I mentioned in our prepared remarks, we're going to generate some strong free cash flow this year. We expect free cash flow to be somewhere in the $180 million to $185 million range for the year, which is above $3.75 a share. So, I just point out that, that's a strong level in excess of net income. Now, what to do with it? We remain committed to reinvesting in the business, of course. The dividend is important to all of us. And then after that, we continue to assess share repurchase and M&A opportunities on a case-by-case basis. We have been ramping up our share repurchases and anticipating continuing to do that. There's really not a need to delever from here. We feel very comfortable with the leverage we have.

Okay. You mentioned revenue visibility, particularly in relation to Mexico and Kimball synergies. I understand you usually have ongoing profit initiatives on a year-to-year basis. Can you provide any additional insights regarding next year and how that might impact profit growth?

If you look at our history, we typically generate something like $10 million to $12 million of year-over-year profit benefit from productivity initiatives. Now, I'm not sure what that means for next year, Greg, because we have a lot going on. We've got the Mexico ramp up, we're finishing off the Hickory consolidation. So, we're going to have some of our resources in executing those initiatives, but we would expect to generate year-over-year productivity regardless. And I think that we would be able to expand margins in '25 and '26 through the two initiatives Jeff mentioned earlier, as well as productivity benefits.

Okay. In terms of the office segment, do you have a target for where you believe you can achieve those margins, considering the profit improvement initiatives you have implemented and possibly some assistance from volume? Similarly, for the Building Products segment, since you are reducing certain costs, do you have a target or level in mind for how you plan to operate that business, regardless of the potential volume fluctuations for next year?

That's a good question, Greg. We plan to continue expanding margins and driving profit growth. In the short term, we expect to maintain this momentum. Notably, our operating margin in Workplace Furnishings is now over 9.5% for the past four quarters. With greater visibility into margin expansion in the upcoming quarters and years, we anticipate record EPS this year, leading to strong free cash flow for next year. The $45 million to $50 million in synergies from our Mexico facility, when fully operational, will contribute an additional approximately 250 basis points of margin expansion in Workplace Furnishings. This could bring the operating margin in that segment close to 12% by 2026, even without the impact of other initiatives, which we will continue to pursue. Therefore, we expect the consolidated EBIT margin to exceed 10%.

All right, great. Thanks for the color.

Thanks.

Your next question comes from the line of Steven Ramsey with Thompson Research Group. Your line is now open.

Good morning, guys. I wanted to think about Workplace, and appreciate all the color on the lengthened timelines there. As you look forward and get past this near-term pause, is there any key cause that you think would recompress the timeline, or is this just kind of a state of business that you expect lasts even through 2025?

That's a good question, Steven. I mean, I think this initial wave of activity will probably kind of stay in this lengthened cycle until people kind of run a project through, and then we can start to see it return, but it's pretty dynamic right now, and I think it's more near term. And in most of next year, we think the cycle will remain lengthened. Now having said that, like I said, we see demand activity that will go into the funnel that should add to this, and then you just have to tune your business to the length and cycle. We see that a little bit in the homebuilding side, with permits and how long it takes to build houses. That's recently lengthened out from seven months to nine months. So, it's really about predicting the rhythm of the business and getting it right and watching the funnel activity, but whether it returns to where it was pre-pandemic or even a couple of years ago, it's tough to say. I don't think it will immediately in the near term.

Okay. Helpful. And then thinking about Workplace, if there's a way to parse it out between office and non-office demand, and you alluded to some of this in hospitality, but thinking about non-office demand, is the sentiment and activity between office and non-office demand moving in tandem with one another, or is there any notable divergence maybe near term, and then how you see it evolving kind of post this year?

This year, looking back, it's clear that some sectors like education and healthcare have outperformed the general office market. Based on the demand metrics we're observing, I believe these sectors may align positively in the future. However, education and healthcare remain strong on their own. While I think they will draw closer together, there will still be leaders among them. I don't anticipate that office will lead, but I expect it to keep pace with the growth seen in other sectors as we move into next year.

Okay. Helpful. And then last one for me. I know it's maybe too early to talk about the sales outlook for 2025, and clearly, volumes matter on this question. But I'm thinking about cash flow generation. You've got the operational moves to raise margins. With the plant and the shifting of operations, how do we think about the working capital impact and the CapEx needs for 2025? Just trying to, in order of magnitude, maybe think about cash generation next year.

Working capital is now well stabilized. Sequentially, we have improved our working capital, and it is quite similar to where we were last year. Last year, we were able to free up over $70 million in working capital, so we do not expect any significant changes year-over-year. There will naturally be seasonal fluctuations. This year, our capital expenditures are slightly below our initial plans. In the anticipated $180 million to $185 million of free cash flow for this year, we have included around $65 million in capital expenditures. I expect that amount to increase a bit next year as we progress on our ongoing projects and complete the operational changes we've previously discussed. However, I still believe we will maintain a strong level of free cash flow next year, with sufficient cash available for positive deployment.

Great. Thank you, Marshall.

The next question comes from the line of Brian Gordon with Water Tower Research. Your line is now open.

Hi, everyone. Thank you for taking my question this morning. I just want to follow up on the last set of questions. Looking out kind of towards the intermediate to the longer term, how should we think about Workplace Furnishings, the breakdown of the business between the SMB, the contract and the other categories, the government, the hospitality, the healthcare?

Are you talking kind of demand patterns or...

We're seeing stronger performance in the contract sector compared to SMB. As you look ahead, growth rates in these areas may fluctuate based on various conditions. Currently, the contract business displays significant strength, with an upward trend in order patterns influenced by office return mandates and lease turnover. This suggests we will experience some near-term strength. We also feel confident about our position in the SMB sector, as there is still ongoing population migration that we can leverage. However, in the short term, we are facing some transactional challenges. It may be too soon to declare a significant shift in the mix between these businesses, but we expect to benefit as the market improves and through our unique initiatives.

Okay. I mean, that definitely makes sense. When you were looking at the contract business specifically within Workplace Furnishings, any sort of breakdown between the projects that clients are coming to you about between greenfield and maybe kind of more refurbishment for getting people back to office or work from home?

I believe we are observing strong activity in both areas. There is the lease churn we previously discussed, with people upgrading to higher-quality buildings, which creates new opportunities. Additionally, many companies have established campuses and are considering how to renovate those spaces or specific buildings within them and are experimenting with different approaches. Therefore, the activity is twofold. Companies returning to the office are often driven by lease events, followed by factors like furniture upgrades. Others are focused on enhancing the productivity of their offices within a hybrid work model as they adapt over time.

Great. Thank you very much. That's all I have today.

At this time, there are no further questions. I would like to turn the call back over to Mr. Lorenger. Please go ahead.

Thank you. Before we end the call, this summer, we lost a long-time analyst and friend. Budd Bugatch passed away unexpectedly in August. For many decades, Budd was a great supporter of HNI and our industry in general. He was an outstanding analyst, mentor and friend. He was supportive, but also unafraid to challenge. And he earned the respect of those lucky enough to know him. Budd will be severely missed. Thank you for joining us today. Have a great day.

This concludes today's conference call. You may now disconnect.