Hni Corp Q4 FY2025 Earnings Call

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to HNI Corporation Fourth Quarter and Fiscal Year-End 2025 Conference Call. After the speaker's remarks, there will be a question-and-answer session. I would now like to turn the conference over to 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 Fourth Quarter and fiscal year 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. 2025 was a seminal year for HNI Corporation. Our members delivered excellent results as we reported a fourth straight year of double-digit non-GAAP EPS growth despite persistent soft and uncertain macro conditions. The positive momentum of our strategies, the benefits of our diversified revenue streams, our ongoing focus on items within our control, and the merits of our customer-first business model continued to deliver strong shareholder value. And late in the year, we completed the acquisition of Steelcase. This combination will not only transform our company, but also the Workplace Furnishings industry. On today's call, we will review our fourth quarter and full year 2025 results and provide some commentary around our expectations for 2026 and beyond including the benefits of the Steelcase acquisition. Before I discuss our recent performance, I want to reflect on the fundamental improvements we have driven at HNI. Our transformation has taken multiple steps in years. I will begin with Workplace Furnishings where margins have been reset. Three years ago, our legacy Workplace Furnishings business launched a profitability improvement initiative that was instrumental in expanding operating margin nearly a thousand basis points. In 2023, price/cost recovery following the period of elevated inflation drove the first phase of expansion. Since then, multiple portfolio management moves, ongoing network optimization efforts, KII synergies and the benefits of ramping our Mexico facility have supported consistent profitability improvement. Based on the initiatives already underway, including the recently announced plans to close our Wayland New York manufacturing facility, we have line of sight to continued operating margin expansion in the coming years. And our margin expansion story is increasingly supported by affirming macroeconomic picture in our Workplace Furnishing segment. I will provide more macro commentary later in the call. Shifting to our Residential Building Products segment, our evolution started with the strategic shifts following the great financial crisis. Since then, we have adjusted our cost structure, fully embraced lean manufacturing and continue to pursue a vertically integrated business model with the leading brands in all product categories. The result was more than a thousand basis points of operating margin expansion over the decade post 2009. In addition, since 2019, the efficiency, nimbleness and uniqueness of our Building Products business have supported consistently strong profitability with sustained operating margins in the mid- to high teens. This consistency of both margins and cash flow are foundational elements to HNI's financial strength. We expect this profitability and cash generation to continue into 2026 and beyond. More recently, our focus in Residential Building Products has shifted to the front end of the business and on driving top line growth. Structural changes have been implemented to organize around the customer and ensure we have laser-focused go-to-market strategies to support our growth initiatives. These front-end investments are paying off in the absence of cyclical support. In 2025, we reported segment revenue growth of 6% despite continued weakness in the new home market. We expect to outperform again in 2026. This historical context helps set the stage as we enter the next exciting chapter of the HNI story. The acquisition of Steelcase unites two industry leaders to meet the dynamic marketplace and evolving needs of the workplace and accelerating in office work trends. We have brought together two highly respected companies with shared values, talented teams, strong financial profiles and highly complementary capabilities, innovation, thought leadership and operational excellence, chief among them. This strong foundation combined with expected synergies will accelerate our ability to invest in long-term operational enhancements, digital transformation, customer-centered buying experiences and products to meet evolving customer needs. Our integration efforts are underway, and we are leveraging a disciplined and proven approach informed by recent experience, while continuing to build on the iconic brands for which both companies are widely respected. HNI will now have total revenue of more than $5.8 billion, including all synergies, total adjusted EBITDA will be nearly $750 million and annual free cash flow will approximate $350 million. We are now the market leader in both of our industries, Workplace Furnishings and hearth products. I can report that the integration of the Steelcase acquisition is off to a strong start. Six months following the announcement, we're even more confident in our move to add Steelcase to the HNI family. The complementary go-to-market nature of the two businesses from a capability, product, brand, customer and cultural perspective has been reinforced as we have begun to work together. We also remain confident in our ability to deliver the targeted synergies of $120 million and drive margin expansion at Steelcase. Our current synergy projections are focused on the Americas business and do not include any revenue synergies. And importantly, we are laser-focused on minimizing any front-end disruption across our Workplace Furnishings businesses. As we have consistently stated, there are no plans to change dealer partnerships, sales forces or brand distribution. And as I've been traveling and engaging with our teams, it is clear that this continuity is being received positively by customers, industry influencers and our dealers. Now I will turn the call over to VP to provide some additional detail about 2025, discuss our outlook for the first quarter of 2026 and give some thoughts on how we see the full year playing out. I will then provide a longer-term perspective on the opportunities surrounding our businesses before we open the call to your questions.

Thanks, Jeff. I will start with some additional comments about 2025. Fiscal 2025 non-GAAP diluted earnings per share for our legacy business was $3.74, which increased 22% from 2024 levels. Again, this was our fourth consecutive year of double-digit earnings growth with the average annual growth rate exceeding 15%. Total net sales for the year increased 12% overall and 6% on an organic basis. Excluding all impacts from Steelcase, full year adjusted operating margin for HNI expanded 80 basis points, reaching 9.4%. The improvement was driven by volume growth, productivity gains, Kimball International synergy capture and price cost benefits. From a segment perspective, in our legacy Workplace Furnishings business, full year organic net sales increased 6% year-over-year, fueled primarily by the strength of our contract brands and the benefit of an extra week in fiscal 2025. Full year profitability, excluding the Steelcase stub period benefit from volume growth, our profit transformational efforts, KII synergy capture while we continue to invest in future growth initiatives. Full year non-GAAP operating profit margin expanded a hundred basis points year-over-year to 10.5%, as we delivered on our previously stated goal of achieving double-digit operating margin. Non-GAAP operating margin has expanded nearly 900 basis points over the past three years. Looking ahead, we expect revenue growth and margin expansion in our legacy Workplace Furnishing business for the full year 2026 even as we continue to invest to drive growth. In Residential Building Products, fourth quarter revenue grew more than 10% versus the same period of 2024, driven by the strength in the remodel retrofit market and the benefits of the extra week. For the full year, revenue increased nearly 6% versus 2024. New construction revenue was flat with the remodel retrofit up a double-digit pace with solid volume improvement. Segment non-GAAP operating profit margin in 2025 expanded 60 basis points year-over-year to a strong 18.1%. We remain encouraged about the long-term opportunities tied to the broader housing market, and we continue to invest and grow our operating model and revenue streams. As we look to 2026, we expect modest segment revenue and profit growth despite ongoing challenges in the new construction market. Overall, as Jeff mentioned, 2025 was an outstanding year for HNI. Before I move to our outlook, a couple of comments about Steelcase's impact on the quarter. We completed the acquisition of Steelcase on December 10. Thus, we consolidated Steelcase's performance for the final three weeks of December into our reported results. The second half of December is a lower shipment and production period for our industries. Consequently, that stub period included seasonally lower levels of daily shipment activity while were more than offset by the recognition of full cost and expenses for the period. We excluded this impact from our adjusted results as it does not provide any fundamental insight into our performance. And as Jeff mentioned, the expected timing and magnitude of our projected $120 million of synergies and $1.20 of accretion are unchanged and unimpacted by the stub period. For the fourth calendar quarter, Steelcase generated strong results. Revenue grew approximately 5% year-over-year, and earnings grew about 9% from the fourth quarter 2024 levels, absent purchase accounting, restructuring and acquisition-related costs. Now I'll transition to our outlook. For 2026, as Jeff mentioned, we expect a fifth year of double-digit non-GAAP EPS growth. Revenue growth is expected to continue while we drive bottom line improvement. In addition, our network optimization efforts continue to support our ongoing earnings visibility story we've been discussing with you. Our favorable fourth quarter '25 results included accelerating the benefits of these efforts. Looking forward, these initiatives, which include KII synergies, the ramp-up of our Mexico facility, the closure of Hickory and the planned closure of Wayland are expected to yield an incremental $0.25 to $0.30 over the next three years. Approximately $0.10 of this will be recognized in 2026. Finally, we now are expecting modest EPS accretion from Steelcase in 2026, excluding the impact of purchased accounting. Finally, a few additional comments to assist you with your 2026 modeling. Combined, depreciation and amortization is expected to be approximately $175 million to $180 million. Interest expense is expected to be between $75 million and $80 million, and our tax rate should be approximately 25%. For the first quarter of 2026, we expect total net sales to increase by more than 130% year-over-year. Non-GAAP EPS is expected to decrease slightly from 2025 levels. Temporarily, first quarter earnings pressure is expected to be driven by revenue and expense recognition timing and the increased investment. Modest year-over-year revenue pressure in workplace is expected to be limited to the first quarter and we expect mid-single digits for the full year. Building Products revenue is expected to be up low single digits for the first quarter and the full year, and we expect year-over-year adjusted earnings per share to return in the second quarter and accelerate as the year progresses. Finally, a comment on cash flow and the balance sheet. Post the closing of the Steelcase acquisition, our balance sheet ended the year with a net debt-to-EBITDA ratio of 2x. We expect our cash flow strength to continue and accelerate with the addition of Steelcase. As a result, leverage is expected to return to pre-deal levels in the 1 to 1.5x range in the next 18 to 24 months. Finally, we remain committed to payment of our long-standing dividend and continue to invest in the business to drive future growth. I will now turn the call back over to Jeff for some long-term thoughts and closing comments.

Thanks VP. Our fourth quarter and 2025 results demonstrate the strength of our strategies and our ability to manage through uncertain macroeconomic conditions, while we remain focused on investing for the future. We expect strong results to continue in 2026 driven by our margin expansion efforts, synergy recognition and continued revenue growth. As we look forward, the timing was right for the acquisition of Steelcase from a strategic, financial and cyclical perspective. We are increasingly bullish about the Workplace Furnishings demand dynamics as the macroeconomic picture continues to firm. Return to office continues to be a positive driver of activity with levels of remote work expected to continue to fall in 2026. Office leasing activity established a new post-pandemic high in the fourth quarter with annual leasing activity up more than 5% for the full year 2025 and net absorption of office space, which has historically been a leading indicator of future industry demand was meaningfully positive in the second half of 2025. In fact, JLL believes a new expansionary cycle in the office space has begun. While new supply of office space will remain a headwind, we see multiple cyclical drivers of growth outside of new construction. Moving to housing. Headlines continue to point to ongoing softness, especially in the new build space. Interest rates remain relatively elevated, prices remain high and affordability remains low. As a result, we expect continued new construction weakness in 2026. However, our structural changes and growth investments should allow us to continue to outperform the market. In remodel retrofit, we are assuming modest growth in 2026. This is consistent with the LIRA projections. In addition, we expect continued market outperformance in our R&R business. And importantly, we expect ongoing margin and cash flow consistency in this segment. Finally, our optimism continues to build around the addition of Steelcase to the HNI family. As I stated earlier, we are confident in our projected synergies of $120 million and accretion of $1.20. And as VP mentioned, we now expect modest accretion in 2026. We entered 2026 a transformed and fundamentally stronger organization. Upon recognition of all targeted synergies, the profile of HNI will include substantially higher earnings, stronger margins, greater cash flow and a continued strong balance sheet. This will enable us to deliver exceptional value to our shareholders, customers, dealers, members and communities. Thank you again for joining us. We will now open the call to your questions.

Your first question comes from the line of Reuben Garner with The Benchmark Company.

Maybe to start just the clarification about the outlook for the year, given the stub period and your efforts to kind of show what the underlying business in the fourth quarter. Are the revenue and double-digit earnings growth comments for next year? Are they off of the base without Steelcase or the base with Steelcase?

Perfect, Reuben. I'll walk through the details. The $346 million figure includes the Steelcase stub and accounts for nearly $4.6 million in purchase accounting headwinds. When you exclude the purchase accounting, it amounts to $3.53. This is the figure you should use for comparisons in future years, as it will be reflected in the P&L. This specific number is projected to increase by 16% when discussing growth. Additionally, the $3.74 figure excludes both purchase accounting and the Steelcase stub period.

And the double-digit growth for '26 would be off of which 1 of those 3 numbers.

$3.53.

Perfect. Okay. And then your comments about Workplace Furnishings in the first quarter. I don't think I heard you mention weather just seeing what's happening in some of the major cities in the Northeast and knowing that New York in particular is playing a role. Is that in the recovery? Is that driving the kind of flattish, I think you said first quarter? And what gives you confidence about the acceleration that you're expecting as the year progresses in the mid-single-digit full year guide, is there any kind of backlog or order numbers from Steelcase and HNI legacy that kind of gives you confidence in a pretty meaningful acceleration as the year moves on.

Yes, Reuben, that's a good question. I mean, weather can always have an impact. We don't really hang our hat on that. I think it probably has some impact. It's been a little choppy. Even in the fireplace business, the hearth business, because they are outside and getting the homes to install. So there's a little pent-up there probably at a little headwind. But the bottom line is both when you look at legacy and Steelcase we've got really strong, healthy activity, bid counts, both number and dollars, particularly in the contract side or in the high teens. The funnel, our funnel metrics are up in count and in dollars and particularly in large projects, over $5 million. And I'd say these are consistent across what I would call both legacy and the Steelcase business, if you look at it. And that's what's driving our confidence in addition to the macro topics that I talked about firming up on office and net absorption and things like that. So you got that going on macro and micro internally, we see these big numbers and presale activity numbers all trending nicely positive.

And then, Jeff, you've had a little over 60 days, I think, if my math is right, since the deals closed as you've been able to kind of get in and meet with people, see how they do things. What have you learned? What kind of has surprised you to the upside or downside? What opportunities do you think you've kind of developed or seen over the last couple of months?

Yes, that's a great question, Reuben. I've spent considerable time with the teams in Grand Rapids and in the market. First of all, our confidence in this transaction continues to grow. The customer reach and the complementary nature of the brands and geographies align well, and the talented teams are collaborating effectively. We have made a swift start. Furthermore, the positive feedback we have received from customers, dealers, sales force, and influencers has been very encouraging. As I visited with customers in their locations, the questions they asked and their enthusiasm for this combination have been particularly strong.

All right. And I'm going to sneak one more in. I'm not going to count that first one as a full question. So the Building Products space. Your outlook for low single-digit growth is super encouraging, very impressive given how you performed in '25. It looked like you've changed some things up about how you're selling or displaying the product down at the builder show a couple of weeks ago. I guess, talk about what's driving your outperformance of the industry. There's not a lot of categories in building products, talking about kind of even flattish volume environments for this year. So for you guys to do it on top of what you did in '25, something has to be working for you. Can you just kind of dig into what you're doing there?

Yes, we can comment on our performance. We've started to engage more closely with builders and customers in the market, focusing on what we can offer. It's still early, but the response has been positive. We have an excellent range of products that cover all price points and fuel types. As we connect more closely with our manufacturing and distribution partners, we're seeing a real impact. Our service model through our large distributors and independent channels is also making a difference. We're moving forward with a strong product lineup, especially in the electric category, and all of these efforts are gaining traction. Ultimately, it's about being closely aligned with our customers' needs, whether in the renovation and replacement segment or the new homes market. I'm not sure if you have anything else to add.

Yes, Jeff, I would add that while everyone is aware of the 7% decline in permits year-to-date and the contracting markets, we actually analyze the market on a case-by-case basis. The initiatives Jeff mentioned, particularly our focus on customer relationships, are generating better results for us. This translates into market share gains and, in some instances, an increase in fireplace specifications. We're focusing on what we can control. On the remodeling side, we've successfully consolidated to a single brand, allowing us to reach more retail and big box stores. This has contributed to growth reflected in our numbers. Our long-term investments are yielding results, and while we have more work ahead to expand into additional markets and reach more builders, we are not letting the 7% decline in permits define our situation.

Great. Thanks for the detailed guys. Congrats on the strong close to the year and the strong outlook, the stock markets been a bit rational today, but I assume all this will work itself out and good luck in '26.

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

Good morning, everyone. I wanted to begin with the synergy number of $120 million, which is focused on the Americas. First, based on your previous execution, I believe there might be potential for that number to increase. I'm interested to know what milestones or targets you would need to achieve to possibly raise that in the future. Additionally, since this number is centered on the Americas, it suggests that Steelcase International is still expected to have a negative impact. Could that aspect provide an opportunity for growth later on?

Perfect, Steven, I'll take it kind of in two pieces. The first, the $120 million that we originally announced is through our disciplined approach that we've learned through the KII process. You heard Jeff say we're still comfortable with that number. It takes every bit of three to six months to get the team working on the specific projects of how we're going to go execute it, which is why I've talked about accretion of $0.60 in the second year once these projects are up and running. And so to your question about timing, six months in, if we've learned more, we'll share more. But right now, we're focused on making sure we understand the buckets between procurement, logistics, SG&A and network optimization, and that we'll share with you as we learn more as we go. But I think the key thing from the last time we talked is we expected it to be neutral in year one. And now that we're in there, this is actually going to be modestly accretive in year one. And that's really good considering the capital structure and the additional shares that were issued that it doesn't change our total target, but it shows that we'll start seeing the benefits a little quicker. That's kind of question one. Question two, on International, that is not offsetting anything. This $1.20 stands on its own. The international business has very good assets. As Jeff said, with the business and the teams working together, we're getting up to speed on that business, whether it's APAC or EMEA, we're getting lots of insight of how the businesses in their go-to-market and their advantages. And I'd tell you the teams are energized right now to drive profit improvement plans. They're in place in all of those areas, and that will not be a drag on the $1.20.

Okay. That's great color. Wanted to think about the resi growth investments, and you talked about that being a consistent margin. Is the implication that 2026 resi margin is flattish with sales up? And is there a cadence for the year on the resi margin profile?

Yes. I think that's the right way to think about it, Steven. That business is extremely flexible in profitability as you've seen it from whether it's $500 million or $850 million, it tracks between the 17% and 18%. We are going to continue to make the investments Jeff was talking about with the builder and getting closer to the builder. So we would expect those margins with the revenue growth to stay right around the same area.

Could you provide more details on the residential growth investments and whether there have been any changes in the past year? It seems these investments are primarily focused on builders, but the growth drivers are coming from repairs and renovations. Can you explain how these investments directed at builders relate to the growth coming from repairs and renovations?

Yes. I think there's a couple of things on this one, Steve. One, when we talk about investments, this has been a three-year journey. The operational excellence of this business is what's allowed us to deliver the results. In the last three years, we've moved to a front-end structure. We brought in leaders running each of these business units that bring those front-end points of view. And they're the ones leading the charge in each of the intimacy models in both new home and existing home. We've also made a significant amount of investments in product and innovation. Part of this success and our offset against the market is we are entering new categories and new areas. Specifically, an example would be wood stoves and DIY. That's a large market we didn't have a place in. So we're making investments with go-to-market there. It's allowing us to do it as well as what Jeff said on the electric side. So I think you're seeing investments on the new home and the remodel side as well, and they just pace to how they come in through the revenue streams are not always at the same time.

Yes, I think that's a great point. We're making significant progress. I believe someone mentioned at the IBS show that we have a new approach compared to our past efforts. We are engaging more with designers, particularly interior designers, and there is a strong focus on design. Overall, we are becoming closer and more connected to our geographic areas, design trends, and customer needs. This aligns with the changes mentioned by VP. It's been a few years of effort, and we’re starting to see positive results, which motivates us to continue investing.

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

I was just hoping to get a little bit more color on the profit headwinds in the first quarter. What exactly are they? And why are they going to be rolling off as we move through the balance of the year?

Yes, Greg, it starts with the timing of the revenue, which is a bit inconsistent regarding some contracts. Everything Jeff mentioned about the overall situation is positive for us. In looking at the fourth quarter, the workplace orders increased by 5%, and Steelcase is also showing favorable order trends. The main issue is the timing of these shifts. Revenue is the first aspect to consider, and we have some comparisons from last year that we're facing, which leads us to believe this is a short-term issue; the full year is more significant. On the expense side, there are two factors at play. The integration of the Steelcase family is causing a timing issue, with expenses in the first quarter that would have appeared in the second quarter under their profit and loss statement, creating some expense pressure. We are also managing our investments while keeping an eye on the long-term perspective, as the macroeconomic environment encourages continued investment. So, while the timing of revenue growth and expenses is putting some short-term pressure on us, we expect to see double-digit earnings per share growth accelerate in the second, third, and fourth quarters due to both volume increases and the visibility of our strategy.

Okay. Great. I think last quarter, you called out some hospitality orders or the timing on hospitality orders. Could you just maybe update us on the hospitality market and if there's any change there?

Yes. No, there is not. The hospitality market is solid. We were up against the comp. But look, similar to the contract market, pipeline is strong. Our business is making investments performing well. They have a market leader position in in-room furniture. And so we like that business a lot, and we expect that it will perform at or above prior year.

Your last question comes from the line of David MacGregor with Longbow Research.

Based on our discussions with dealers this quarter, it is evident that the demand for design support has significantly increased. Could you share your thoughts on the volume of work that is emerging in the pipeline, even if it hasn't yet made it into the order backlog, and how you anticipate that converting into orders and eventually into sales revenue?

Yes, that's a great question, David. I think you're noticing the same trends we are, which indicate a lot of activity. I believe it’s substantial. To address this, many of our businesses are assigning extra resources to assist dealers and customers with processing orders, as there tends to be a backlog in getting designs finalized. We are also developing AI tools and other digital resources to support this in the long term. Historically, our business has maintained a fairly consistent conversion cycle from specifications to orders. However, post-COVID, things have been quite variable and haven't stabilized yet. Once projects begin and there is commitment, particularly on larger projects, they proceed effectively, though they may not always align perfectly with our expectations. Additionally, with the Steelcase acquisition, we are recognizing their involvement in major projects that, once initiated, show strong momentum. We are still collaborating with them to understand their approach to timing and the conversion from orders to revenue and specifications to orders. Therefore, I can’t provide a precise timeframe of 90, 60, or 30 days. However, the activity is genuine and fluctuates regarding when things are initiated. Nonetheless, we remain optimistic.

Yes, it's out there. There’s no doubt about it. The second question is about the discussion around synergies and the $120 million. It seems like you’re adjusting the 2026 expectation slightly. I understand that there hasn’t been any change to the $120 million, but I’m wondering if the improved outlook for 2026 is due to potentially additional synergies you've identified or if it's more about timing. Additionally, regarding the discussion on commercial synergies, I recognize why you might not want to go into too much detail right now, but could you provide a high-level overview of the actions you’re taking to ensure you can ultimately capture those commercial synergies?

Yes, I'll address the first part of that, David. The timing and the amount for the first year regarding the synergies has not changed. We initially expected slightly higher transition costs and some offsets in our original analysis when combining the businesses. As a result, we will see a bit more of that two-year outlook of $0.60 a little earlier. I want to emphasize that our philosophy and approach remain the same as we established that figure.

Yes, David. Regarding the synergies, it's still early. However, as I have traveled, I’ve noticed some positive organic connections between our networks that support revenue synergies, especially with some of our open line brands. As these connections become more formalized and structured, we will allow things to unfold naturally to understand how the system operates, and then we can assess further. We are already observing some natural demand for that revenue. It’s still in the early stages, but we will likely discuss this more in the future. For now, I am encouraged by what I am seeing.

Can I squeeze maybe one more in. And just maybe for the model, if you will, working capital in 2026 and how we should be modeling working capital.

We benefited from the pooling on the Steelcase balance sheet and have seen a slight sequential improvement. Due to the timing of expenses, we will need to invest a little, but it won't be significant when considering the net working capital as we move into 2026 and beyond.

I would like to add that there is an opportunity for operational discipline within the HNI segment as we integrate it into our balance sheet, especially as we look ahead in the coming years.

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

Thank you for joining us today and your interest in HNI. We look forward to speaking with you again in April. Have a great day.

Ladies and gentlemen, that does conclude our conference call for today. Thank you all for joining, and you may now disconnect. Everyone, have a great day.