Thank you for waiting. My name is Carly, and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation Second Quarter Fiscal 2025 Results Conference Call. I will now turn the conference over to Mr. Matt McCall. You may begin.

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 second quarter 2025 results. With me today are Jeff Lorenger, Chairman, President and CEO; and VP Berger, Executive Vice President and CFO. Copies of our financial news release and non-GAAP reconciliations are posted on our website. 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. First, I will provide some comments about our second quarter results. Non-GAAP earnings per share increased more than 40% year-over-year with solid revenue growth in both segments. Next, I will discuss our expectations for the remainder of 2025. Our earnings outlook has modestly increased from what we provided on our last quarter call. We continue to anticipate a fourth consecutive year of double-digit non-GAAP earnings improvement. And finally, I will provide additional detail about recent demand activity and how we see our markets playing out over the rest of the year. I will also discuss the confidence we have in our strategies and an update on our elevated EPS growth visibility. Following those highlights, VP will provide additional color around our third quarter and updated full year outlook. He will also comment on our strong balance sheet. I will conclude with some closing comments before we open the call to your questions. Let's begin with the second quarter. Our strategies are working, and our members delivered another excellent quarter. The benefits of our diversified revenue streams and the merits of our customer-first business model continue to deliver strong shareholder value. For the quarter, we delivered non-GAAP earnings per share of $1.11. The 41% year-over-year EPS growth was ahead of our internal expectations. Much of the earnings upside was driven by better-than-expected volume growth. Both segments generated year-over-year top line growth in excess of 5%, with both modestly exceeding the expected ranges we discussed on last quarter's conference call. Profitability in the second quarter was also strong. Consolidated non-GAAP gross margin expanded 90 basis points on a year-over-year basis to 42.9%. Our non-GAAP operating margin expanded 200 basis points year-over-year to 11%. This EBIT margin was the highest on record for the second quarter, driven by the impact of volume growth, along with our profit transformation efforts and synergies. In the Workplace Furnishings segment, organic net sales increased more than 8% year-over-year, fueled by broad-based growth across the portfolio. We experienced noteworthy strength in our contract brands with revenue up nearly 15% year-over-year. We also saw a return to growth in our brands focused on small- and medium-sized businesses, where revenue was slightly up year-over-year. From a profitability perspective, Workplace Furnishings non-GAAP EBIT margin expanded 120 basis points year-over-year to a strong 13.1%. Our profit transformation efforts and realization of synergies continue to deliver benefits, driving segment EBIT margin to record second quarter levels. Broadly, while there was some revenue and profit pull-forward activity driven by pricing actions, the impact during the quarter was modest. Finally, in Residential Building Products, second quarter revenue increased more than 5% year-over-year. Revenue from the new construction channel was up more than 4% and remodel-retrofit sales grew over 7%, both on a year-over-year basis. We delivered this top line growth despite continued challenging housing market dynamics as we are competing well and our internal growth investments are beginning to bear fruit. Residential Building Products profitability was also strong in the quarter. Segment operating profit grew 20% year-over-year, and segment operating margin expanded 190 basis points from the same period of 2024 to a solid 15.7%. The consistently strong profit margins in this segment are evidence of the business' unmatched price point breadth and channel reach, along with the benefits of its vertically integrated business model and overall operational agility. To summarize our collective results, our revenue growth and profit improvement demonstrate the strength of our strategies and our customer-first business model, the resilience of our members and our proven ability to manage through varying macroeconomic conditions. That leads me to my comments about our outlook for the remainder of 2025. Our margin expansion efforts and expectations for continued revenue growth will support ongoing year-over-year EPS improvement as we move through the second half of the year, all while we continue to invest to drive future growth. In Workplace Furnishings, orders grew in the quarter across all major office brands. We saw a return to order growth in the SMB space with orders up 3%. Our contract brands outperformed with orders growing 5% year-over-year when excluding hospitality. We are excluding hospitality for the metric as the business experienced a meaningful tariff-related pause in activity during the quarter, which has temporarily skewed results. I will discuss our positive outlook for the hospitality market more in a moment. As was the case with revenue and profits, we did see some order pull forward in the quarter. However, adjusted segment orders, which exclude hospitality and the impact of pull-forward activity, were still up for the quarter on a year-over-year basis. In addition, total segment backlog is up 5% year-over-year. So we continue to see encouraging signs that support our view of volume improvement, while at the same time, we are increasingly focusing our investments on driving revenue growth in this segment. Moving to Residential Building Products. Orders in the second quarter decreased approximately 2% year-over-year. Going back to the first quarter, we saw some order pull ahead in March, which negatively impacted order growth in the month of April. However, as the impact of pull-forward activity abated, year-over-year order improvement returned in both May and June. Builder sentiment continues to reflect the impacts of elevated interest rates, ongoing affordability issues, and weaker consumer confidence, and housing trends have broadly followed builder sentiment. Despite the current environment, however, we believe in the long-term opportunities tied to the housing market and in the strength of our market-leading positions and profitable operating model. This supports our ongoing level of investment. I will finish by making a few comments about our markets and provide additional detail around our elevated 2025 EPS growth visibility. On our last 2 earnings calls, we highlighted an increased focus on investing to drive growth in both segments. Our first half 2025 revenue strength and encouraging leading indicators provide added support for our growth initiatives. As we look at our Workplace Furnishings segment, we experienced solid revenue and order growth across all major office brands. SMB orders rebounded and grew in the quarter after a brief pause in late 2024 and early 2025. We remain bullish about the fundamentals of this business. We believe our strength in the SMB space and our broad price point breadth continue to be competitive differentiators. This is especially true as more cost-conscious customers embrace price mixing across projects, increasingly co-mingling SMB products in the contract settings. In our contract business, we expect growth to continue in the back half of 2025. We see encouraging signs associated with larger projects across all our key verticals and saw customers return to a business-as-usual mentality. We believe we are seeing the release of pent-up demand as they focus on in-office work continues to highlight the need to refresh and reset spaces to adapt to the new ways work is done and the more people in office. As a result, presale activity, orders, and backlog were all up. Finally, I'll comment on our hospitality business. As I mentioned, we saw a tariff-related demand pause during the quarter. This business relies heavily on imported product, primarily from Vietnam and China. As a result, many customers tapped the brakes on new projects as tariff uncertainty spiked. We have seen an improvement in activity and our pipeline has rebounded significantly. So while this business can be lumpy, we remain enthusiastic about hospitality demand prospects as macro volatility subsides. Looking ahead, we believe we are particularly well positioned to benefit as the workplace furnishings market continues to improve. We have a portfolio of brands with unmatched product and pricing breadth and depth, allowing us to meet any furniture need a customer has. 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, health care facilities, and hotels. Moving to Residential Building Products. We continue to believe in the position in the positive long-term market fundamentals. We are performing well despite an ongoing soft new construction and remodel-retrofit environment, and we acknowledge a market-driven revenue recovery will take time. We are, however, optimistic about our opportunities to increase revenue through our growth initiatives. Specifically, we continue to invest in developing market-leading new products that offer customers more options and features. We are driving new programs to increase homeowner and homebuyer awareness of their fireplace options, ensuring our products are considered in all remodel and new construction projects. And we are strengthening our already strong relationships with builders across the country, helping them deliver the best overall value to the homeowner. Encouragingly, we are driving growth in this segment while still being in the early days of each of these initiatives. And while we invest in growth, we will continue to deliver high-margin results and strong profits in this business. Longer term, single-family housing remains undersupplied and demographics will support additional demand growth. The results of our ongoing investments, which will enhance our connection to customers and build on our leading brands will fortify our position of strength in the industry. Finally, and importantly, we continue to have elevated earnings visibility this year and next. Our outlook for 2025 continues to include full-year revenue growth in both segments. In addition, our earnings per share outlook moves modestly higher. We continue to have high visibility to significant profit growth driven by operational efficiencies. As a reminder, we have 2 initiatives underway in this area, Mexico and synergies. In recent quarters, we highlighted an expected benefit of $0.70 to $0.80 of additional EPS through 2026. To date, we have recognized approximately $0.24 of EPS benefit, leaving $0.50 to $0.60 to be recognized over the next 18 months. This is a modest increase from our previously communicated range and continues to provide visibility into a fifth consecutive year of double-digit EPS growth.

Thanks, Jeff. I'll start by discussing our outlook for revenue and profit. Beginning with the top line. Third quarter revenue in Workplace Furnishings is expected to increase at a mid-single-digit rate year-over-year organically. Including the impact of divestitures, Workplace Furnishings revenue is expected to increase at a low single-digit pace. The benefits of improving orders and backlog are expected to drive the revenue growth in the third quarter. For Residential Building Products, third quarter net sales are projected to increase at a low single-digit rate compared to the same period in 2024. Pricing actions are expected to be the primary driver of growth. However, for the second half overall, we continue to expect volume growth for this segment. We're projecting revenue improvement in 2025 without market growth. Shifting to our third quarter profit outlook. Non-GAAP earnings per share in the third quarter are expected to increase slightly from 2024 levels. This improvement is expected to be driven by productivity benefits and volume growth, which should be partially offset by increased investment levels. In the third quarter, we expect operating margin in Workplace Furnishings to expand modestly year-over-year, driven by volume improvement and continued profit transformational benefits, partially offset by increased investment. Residential Building Products operating margin is expected to compress modestly year-over-year in the third quarter as a result of slightly lower volume and increased investments. Again, we still are expecting overall non-GAAP earnings per share in the third quarter to increase slightly from 2024 levels. Moving to the full year. In Workplace Furnishings, we expect year-over-year mid-single-digit net sales growth, excluding the benefit of an extra week in the fourth quarter. Our full year volume expectations move higher. However, the overall segment sales outlook is essentially unchanged as now we see lower projected price realization, primarily related or driven by reduced impacts from tariffs. In Residential Building Products, our outlook improved slightly, with net sales now expected to grow at a mid-single-digit pace, again, after excluding the benefit of the extra week in the fourth quarter. From an earnings perspective, our outlook for 2025 increases modestly with double-digit percent EPS growth expected for the fourth straight year. I'll wrap up with a few comments on our balance sheet and cash flow. Quarter-ending gross debt leverage was at 1.4x as calculated in accordance with our debt agreements. During the quarter, we continued to deploy cash through our long-standing quarterly dividend and through stock repurchases of nearly $40 million, demonstrating our continued confidence in our future earnings and cash flow generation. The combination of our strong balance sheet and consistent cash flow generation will continue to provide a high degree of financial flexibility and capacity for investment. Our capital priorities remain reinvesting in the business, paying dividends, pursuing share buybacks, and exploring M&A opportunities.

Thanks, VP. We remain focused on investing to drive revenue growth and on expanding margins. We have multiple avenues to drive growth, and we'll continue to invest. And we expect to extend our track record of consecutive years of double-digit percent EPS growth. And beyond 2025, we are positioned for continued success. We have elevated earnings growth visibility through 2026, broad and diverse product and market coverage in workplace furnishings, market-leading positions in residential building products, and we continue to invest to drive growth. All this is supported by our strong balance sheet and the ability to generate continued free cash flow. I want to thank each HNI member for the continued dedication and congratulate them on another excellent quarter. We will now open the call to your questions.

Your first question comes from Reuben Garner with Benchmark.

Jeff, you mentioned that you have modestly increased your earnings outlook a couple of times. You also noted that the visibility for earnings between $0.50 to $0.60 over the next 18 months is higher than you expected. Can you explain what's contributing to this increased visibility and earnings outlook?

Yes, I believe we are gaining more confidence in the progress of our network optimization and synergy work. Given our performance in the first half and what we have planned, we can confidently project a modest increase in our full year EPS compared to our previous estimates.

Got it. The SMB business is showing some positive signs, which could be interpreted as an indication of improved sentiment. Does it feel different this time? Was there a delay earlier in the year due to the tariff situation, leading to some catch-up now? Or do you believe this is a potential sign of acceleration in both aspects of your office business?

That's a great question, Reuben. You've been in this for a while, as have I. I think there is some of that, but I also believe that the business has been performing quite well over the last couple of years. It seems more like a temporary lull due to the tariff impact we mentioned at the end of last year and the beginning of this year. So, I'm not sure it's a traditional pattern since our contract business is doing well right now. I think it's more about the SMB sector recovering from that brief shock and getting back on track rather than following a traditional cycle where it goes in first and comes out first.

Yes, Reuben, we discussed last time about three consecutive quarters of contracting at around an average of 5%. We began to see a rebound early in the second quarter. I think it's a sign that it typically enters first and then exits. So it supports that perspective.

Got it. And then last one for me on the Residential side. Even with the pull-forward dynamic, orders down 2% is pretty good in this environment with what we're seeing in new construction, in particular. Can you talk about where you think you're getting the outperformance? Is it more on the new side? Is it some progress in the R&R space? Is it driven by the new products? Is it a combination of everything? Can you just kind of dive into that a little bit?

Yes, Reuben, I think we can both provide insights on this. From my perspective, we are competing effectively. Our teams are focused, and although it's still early for our growth initiatives, we've started making investments in that area. The team is dedicated to enhancing market connectivity in both the R&R and new home sectors. We’ve launched gas inserts and introduced new products in the electric category. We're also exploring new channels in the home improvement retail space. While it's still early stages, I believe we are competing strongly, our focus is sharp, and our investments are beginning to show results. This is why we are managing to stay ahead of market dynamics, even though challenges remain.

Yes, I would add that, Reuben, you inquired about which segment of the market we are focusing on. It spans both new home construction and remodeling. When you analyze permit activity from the initial months of the year, it has actually decreased, yet we are still reporting an increase in revenue. This indicates our unique approach in new construction, benefiting from our own distribution, along with the initiatives we are implementing with dealers in the remodeling sector.

You provided some insights into the growth investments on the building products side of the business. Can you elaborate on where you are investing in the Workplace Furnishing area and possibly share details about the growth investments you are making there?

Yes, we have a few initiatives underway. First, we're focusing on our capacity, both externally and internally. We're also working on enhancing the dealer experience by simplifying and automating our processes to make it easier for them to do business with us, which we believe will be a significant advantage. Additionally, our teams are dedicated to reducing product cycle times and bringing products to market more quickly. These are just a few examples of the work we're doing internally to drive growth. As we've mentioned, we're committed to pivoting toward growth and will continue to invest in these areas.

Great. Regarding the margin profile of the workplace business, it's impressive this quarter. Do you have a target margin range for that business? Given your profit initiatives, it seems there's potential for margin expansion, but how do you view the longer-term margin range for that business?

Yes. I think the jump off here was about a 9.5% business. We think there's between a 200 to 250 basis point, Greg, just based on the current initiatives that we've already talked about between the synergies and the Mexico ramp. And then obviously, we'll continue to have our normal productivity that we drive in there annually to offset any inflation. So we still think there's a lot of runway there to push that thing towards a 12% return business.

Okay. Great. And then just lastly, could you just remind me what percent of the workplace business is SMB?

Yes. Greg, 40% to 45%. So certainly still an important part here.

I wanted to speak about the workplace comments on the co-mingling of SMB products in the contract settings. Can you maybe parse that out, add some nuance to why that is happening? And then put some context around that activity as it's happening in 2025 versus the prior couple of years?

Yes, that's a good question. Looking at the post-COVID environment, many dynamics have changed. As people have returned to work, we've seen a lot of discussions about hybrid, remote, and in-office arrangements developing over time. This shift has challenged traditional mindsets and encouraged new ways of thinking about workplace configurations. As organizations adapt, they're approaching their in-office productivity and work demands with a fresh perspective. This has allowed them to evaluate their long-term goals, budgeting preferences, and the types of products they want to incorporate. We notice that dealers and customers are open to exploring different options they might not have considered previously, and this shift is reflected in our presale metrics and sales by product. That's the context for that commentary.

Okay. That's interesting. I mean I would think you guys have an advantage to play a part of that trend given you play strongly in both categories. So interesting to hear that.

Yes, I think that's right.

Yes. Okay. And then flipping to the resi segment. This was touched on earlier that the sales were strong, orders in May and June were good despite the environment. Do you attribute that to share gains or maybe some comps help on the R&R side, but how you would describe the outperformance?

Yes. I think part of it, you got to break it apart here, Steven, on the new construction side, we think we're starting to see our initiatives come through. When permits are down and our unit volumes are better than that, that's a signal that we're expanding the market or taking share. So I feel that's happening. And I think we've been talking about on the remodel side, there's been a lot of initiatives around dealer activity, dealer activation, more improvement in the DIY space or home improvement retail, and we're getting more placement there. So it's kind of why we're saying we expect growth regardless of what's happening with the markets themselves. And I'll also comment on the investment side. This is also where we're making longer-term incremental investments in similar areas that Jeff talked about on the workplace side with more people capacity and adding to the selling model. So we think we're uniquely positioned to outperform the market.

Okay. Great. And maybe to add on to that, on your vertically integrated part of the resi segment where you have distribution, can you talk about how that is performing versus your external sales?

If you look at it from a unit standpoint, Steven, we can see that where we own distribution is performing well. It's the absolute delta compared to non-owning distribution is hard because each market is different. And where we own distribution, we're primarily the main distributor, but we certainly think it's performing as good or if not better than independent.

Strong EPS growth is good to see. Thinking about the inputs of operating cash flow generation and CapEx, do you expect free cash flow growth year-over-year to be similar to the earnings per share change? Or how do you think about the cash flow dynamics in 2025?

Yes. I will answer that in two ways. First, we expect to keep working capital neutral as we grow. Second, we anticipate increasing our cash flow generation by about $30 million to $35 million compared to what we mentioned last quarter. Of that increase, $10 million is attributed to genuine volume growth, placing us in the $200 million to $210 million range. Additionally, another $25 million to $30 million will come from the new tax bill and the timing of our payments, which will lead to an improvement.

Congratulations on the strong results. I apologize if these questions have been addressed. I had a little technology challenge getting on here. But I guess I wanted to start off by just asking about Workplace Furnishings and specifically the volume leverage. And I think the expectation had been that Kimball in Mexico would drive volume leverage above the historical mid-30s level, but you're also seeing the negative price, cost working against that. So can you just talk about how much improvement you're seeing in the absolute volume leverage in Workplace Furnishings if we were to separate out the price cost pressures?

Yes. I believe the incremental improvement in our two projects will enhance volume. We should anticipate an increase in incrementals to be around 35% to 40% based on volume, prior to our investments. It's essential that we focus on our growth investments and remain ahead in our selling models and capabilities. So, the 35% to 40% figure represents the incrementals before considering investments.

Okay. Good. So you're still seeing progress that gives you confidence in those numbers. That's great. You also mentioned the savings from Kimball in Mexico of $0.24 for the first half. With all the progress to date and the volume growth, how would you assess the likelihood of upside to those numbers?

I think Jeff signaled that there is a little bit of upside just based on us taking our outlook up. So we gave a range of $0.70 to $0.80 as we started to kick off those projects. I think it's fair to say we're leaning closer to the $0.80 based on where we are and what's in flight. So I would push on the right side of that range and if not a little bit more.

Okay. And then just on the share repurchase activity, $40 million in the quarter, kind of matched the first quarter pace. Should we be modeling kind of $150 million, $160 million for the full year? Or was there something that you thought of as being maybe opportunistic in the first half? How should we be modeling that?

Yes. I think the modeling is how we're going to use our free cash flow, but we reevaluate that, David, every quarter, and that's going to be a quarter-by-quarter decision.

And your final question comes from Brian Gordon with Water Tower Research.

I also had some technical issues connecting earlier. So also, I'll apologize if these questions have been asked before. I guess my first question would be, when you're talking with the large contract customers, how are they feeling about business conditions? And maybe more explicitly, how are they feeling about their CapEx decisions going forward? And how would that differ maybe from what you're seeing in the SMB side of the business?

I can't provide specifics on CapEx for each customer. However, I can say that the general mindset is they are investing, and we refer to this as business as usual. This indicates that they are making movements in our sector and likely exploring other investment categories as well. Specifically in terms of in-office operations and workflow productivity, customers see this as standard practice and are proceeding with their investments. I believe you mentioned that some clients are returning to the market, and we don't observe much caution in that regard. Most of these clients are engaged and eager to progress. Over the past couple of years, some were in a phase of evaluation or reevaluation. I believe we have moved beyond that, and now companies are allocating funds for projects that support their in-office models, regardless of what those models entail.

Great. Second question that I have today is on the RBP side. How much of this is volume versus how much is pricing?

Yes, it's mainly price. If you look at the first half of the year, it's about one-third volume and two-thirds price. However, when you consider the entire year, you will notice an increase in volume, especially in the latter half.

That concludes the Q&A session. I will now turn the conference back over to Mr. Lorenger for closing remarks.

Appreciate everybody taking the time to join us today. Have a great day. Thanks so much.

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