HNI CORP Q3 FY2024 earnings call

• Third quarter results were strong with non-GAAP EPS of $1.03, 11% higher than prior-year despite revenue pressure.
• Fourth quarter expected to be impacted by near-term demand pause; Workplace Furnishings seeing moderate demand with SMB transactional business soft and contract furniture project delays; Residential Building Products impacted by interest rate volatility, inflation, etc.
• Optimism beyond fourth quarter: Two initiatives (Mexico and KII synergies) to deliver $0.70-$0.80 of EPS growth in 2025 and 2026; Workplace Furnishings profit transformation plan doesn't require revenue growth; Residential Building Products adjusting cost structure with $5 million cost reduction actions in fourth quarter.
• KII acquisition: Highly accretive, synergies now expected to total $60 million, with $30 million to be realized in '25 and '26; KII provides new revenue growth opportunities and is complementary.

Workplace Furnishings: Profit transformation plan and acceleration of KII synergies drove segment non-GAAP operating profit margin to a 20-year high for the third quarter. 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. Revenue contribution details not explicitly provided in terms of percentages but focus on profit margins and segment performance.

• Fourth quarter revenue in Workplace Furnishings expected to decline at a low- to mid-single-digit rate year-over-year, and in Residential Building Products expected to decrease at a low-single-digit pace versus prior year.
• Full year 2024 expected to be record non-GAAP EPS, third consecutive year of double-digit non-GAAP EPS growth.
• 2025 and '26 have elevated EPS visibility due to initiatives like Mexico and KII synergies, and Workplace Furnishings profit transformation plan not relying on revenue growth.

• Near-term demand pause impacting fourth quarter results.
• Economic and election uncertainty affecting SMB transactional business and Residential Building Products.
• Lengthening selling cycles in contract furniture business due to customers sorting through real estate decisions, budget challenges, and supply chain disruptions.

Q: Can you go into more detail on the near-term softness in Residential Building Products, including new construction vs R&R and destocking signs?

A: It's in the stove business (part of remodel/retrofit), short cycle purchase, normalizing slower than expected due to economy, warm weather, election; new construction seeing some growth but slower than thought. No significant destocking signals beyond normalizing.

Q: With leverage back to pre-Kimball levels, how to think about capital allocation priorities, including acquisitions?

A: Generate strong free cash flow, committed to reinvesting in business, funding dividend, and assessing share repurchase and M&A opportunities on a case-by-case basis; no immediate need to delever.

Q: On Workplace, after near-term pause, what causes would recompress timelines and divergence between office and non-office demand?

A: Initial wave of activity likely in lengthened cycle near term, most of next year cycle remains lengthened; some verticals like education and healthcare strong, but office and non-office demand expected to converge more positively next year.

Q: Breakdown of Workplace Furnishings business between SMB, contract, etc., and future mix?

A: Higher in contract KII vs SMB; near term contract business showing strength with order pattern trend upwards; SMB well-positioned due to population migration; transactional headwind is short term, no major mix shift expected soon.