HNI CORP Q1 FY2025 earnings call

Management Statement and Operational Highlights:

• First quarter non-GAAP EPS was $0.44, up nearly 20% y-o-y. Revenue growth returned in both segments, with Workplace Furnishings slightly up vs 2024 and Residential Building Products up 7% y-o-y.
• Consolidated non-GAAP gross and operating margins expanded to 40% and 5.3% respectively. Non-GAAP operating margin was highest first quarter level since 2007.
• Profit transformation efforts and KII synergies benefited first quarter results. Workplace Furnishings segment EBIT margin compressed, but stronger volume from large projects in commercial and government bases was dilutive.
• Expect continued earnings improvement in 2025, with earnings outlook unchanged, anticipating fourth consecutive year of double-digit non-GAAP earnings improvement.
• Workplace Furnishings order trends improved, backlog up 19% y-o-y. Residential Building Products orders up 8% y-o-y, but new construction orders declined slightly due to housing market challenges.
• Emphasized strength in SMB space for Workplace Furnishings and long-term market fundamentals for Residential Building Products, with investments in growth initiatives.

Segment Performance:

• Workplace Furnishings: Revenue slightly up vs 2024, non-GAAP EBIT margin compressed 20 basis points year-over-year.
• Residential Building Products: Revenue grew 7% year-over-year. New construction revenue increased 3% vs 2024, remodel-retrofit business grew 13% y-o-y. Operating profit grew 16% y-o-y, segment EBIT margin expanded 130 basis points to 15.7%.

Guidance:

• Second quarter Workplace Furnishings revenue expected mid-single-digit growth including tariff impact. Residential Building Products second quarter net sales projected low single-digit growth.
• Full year 2025 expects volume growth in both segments. Workplace Furnishings quarterly revenue growth mid-single digits, Residential Building Products low to mid-single digits.
• Expect double-digit non-GAAP EPS growth driven by KII synergies, Mexico facility ramp-up, and volume growth. Tariff-related margin pressure expected to be offset in second half of 2025.
• Strong balance sheet with gross debt leverage 1.3x, continued to deploy cash via dividends and $40 million stock repurchase.

Risks:

• Macro-economic uncertainty affecting SMB transactional purchase activity.
• Tariff uncertainty and rising inflation expectations causing demand volatility and temporary margin pressure.
• Challenging housing market dynamics impacting Residential Building Products, especially new construction orders.
• Volatility in hospitality demand affecting Workplace Furnishings segment due to lumpiness.

Q: Good morning. Just first, I think, you mentioned that contract orders were up 4%. What was the SMB order number last quarter?

A: Slightly down 5% for Q1 orders at SMB.

Q: Okay. Okay. And it doesn't sound like there's been any kind of meaningful change in order patterns or buying activity, but are you hearing anything given kind of the increased uncertainty that we're seeing out there? Is there anything that maybe gives you pause where you might expect maybe contract demand to slow or catch down to what you're seeing in the SMB market?

A: Greg, look, there's -- let's start with there is a lot of uncertainty out there. But I would tell you, our funnel looks good. It's encouraging. Backlog is encouraging. We've been talking quite a bit about how some of these customers have been revising, revamping, relooking at these -- their offices and their moves, their orders. And so, right now, we feel that we've got -- it's a bit mixed, but look those customers are committed. What we see is a lot of people making decisions for the long-term. Those customers tend to invest in their businesses, have more wherewithal to invest in their businesses than maybe some of the smaller SMB, who turn on and off quickly. So it could change. But right now what we see is that momentum holding up in the near-term and customers are hanging in there and are ready to invest in their business.

Q: Okay, great. And then, I guess, maybe now on the hospitality side, you mentioned there's kind of more lumpiness or volatility there. Was it just against a tough comp this quarter? Or are you seeing any change in the demand environment in the hospitality space?

A: Yes. Look, one, it was a really tough comp this quarter. That's a big chunk of it. And the demand is -- it's kind of a tale of two cities here. There's been some pull forward and then some delay. I would say that business really breaks in two ways, what we call program business and then custom business. The program business is kind of set. Those things are really kind of continuing to move forward. Some of the custom stuff is we've seen some pause on and some reflection on timing and when people want to pull the trigger. So that business will probably see that choppiness continue here for a bit less, less the tough comp in the first quarter.

Q: Thank you. And then, I guess, maybe now on the SMB business. Did you see any improvement in the transactional part of that in April when the tariffs were pulled back? Or has it kind of remained muted? And then secondarily, I think, if I recall correctly, the low end of that business historically would kind of compete with some product coming in from China. Is that an opportunity for you guys? Or do you have to bring in enough yourself that it's more of a neutral impact on you?

A: I think, Reuben, a couple of answers there. I guess, the first, the SMB, we talked about Q1 orders being down 5% transactional is obviously in there. It's a piece of it, a small piece of it. But it's also the business that goes in first, like we talked about last quarter. When there's macro uncertainty that our quick buying decisions doesn't require a lot of design help, those are the quickest to go in, but they're also the quickest to go out. So you're asked about April. We actually did see orders start to pick back up over the last five weeks in that business. So it shows you the -- it's the resiliency of it, and Jeff mentioned how important it is to us, and we're actually seeing some signs that there's some light to that. As it relates to products, we can take that on our own. So a lot of -- most of the product, if not the majority of that is stuff that we can build ourselves, we are not dependent on China for those products. So we feel like our go-to-market and support there is not indicative or needed depending on anything that happens in Asia. We can handle that right here.

Q: Okay. And then the change in the tariff impact to you or the impact in the second quarter was that mostly related to the change in the percentage on China? Or was there other factors may be reduced surcharge or others that led to that?

A: I think the easiest way to describe that it's really a delay from what we talked about three months ago and what happened with tariff delays and then our order backlog built. And as the order backlog built, we're honoring those orders that are in backlog. We're not actually applying it to them. So it's really no fundamental change that we talked about before, except we have a bigger order book. And then we have -- we're protecting that for our customers. The good news is we have the orders. So I mentioned the drag of $3 million to $5 million. We still fully expect that the actions that we've taken between surcharge and list across all the businesses, we'll cover that from a full year standpoint.

Q: Very helpful. And last one, I'm going to sneak one more in, if I can. The residential outlook for the second half some, I guess, loose peers in the building products space that's kind of been reducing end market assumptions for both new housing and R&R certainly new housing, maybe less so R&R. But can you talk about what your end market assumptions are for the second half? In other words, what do you have in your control because of the easier comparisons with inventory and the growth investments that you've got internally?

A: Yes, I think, there's a couple of things. We don't see a lot of help in the market in NCC, Reuben. Permits have been down in the last four months, low single digits. So we're not predicting any help there, and we weren't predicting a lot of help on the remodel side from a retail standpoint, but we also didn't see it as a negative. So the way we see our growth there, Reuben, is our strategic initiatives are kicking in. We started those investments last year. You saw in the first quarter, we grew 7%, primarily in the remodel-retrofit market. As the year progresses, we put out there low single digits. The new construction piece of that will be on the lower end of that and the remodel side will be on the mid-single digits. And we see that just based on the initiatives that we have in place and where we made the investments. So limited market help, yet we still expect low single-digit growth in Q2 and mid-single digits for the full year.

Q: Hi, good morning. Maybe to start out building on that residential topic, one of the focal points at the builder show a couple of months ago was the higher price point products with compelling features for the higher-end consumer. Can you talk about this rollout thus far, the traction you're getting? And in this macro environment, do you expect that could be resilient? Or do you expect any kind of pull back in the near-term, but maybe not changing your long-term view of where that product set can go?

A: Yes, Steven, I think that's good insight. I think we do believe that's a strong platform for us, and we see that nothing is totally recession proof, so to speak. But that business -- that piece of the business has held up nicely and the rate at which we are deploying that platform into the market has been well received. A lot of that product line is well received. And so we think that can provide -- will continue to provide support for us going forward. VP, I don't know if you have anything else to add? VP: Yes. I mean, it's going in a lot of custom homes, and those are relatively resilient. So I agree.

Q: Okay. That's helpful. And then I wanted to pull up high level, think about Mexico production and with the changing or evolving geopolitical situation. Is there anything that kind of changes your strategic outlook around your production base there in the near-term or long-term?

A: Steven, no, it really doesn't. We did that for supporting our growth initiative when we went down there and that's still the case. We built a seating center of excellence there and we take the long-term view. And so we have not -- we continue to invest, and we see that as a really big part of our story, and we like our position there. So we don't -- we haven't really changed our view. As we often say, we're long-term investors and it's helping our visibility story that we keep talking about as well this year and next.

Q: Okay. Great. And then last one for me, thinking about the earnings visibility that you have for this year and into next year, very solid. How do you expect that to translate into free cash flow over the next couple of years? I know you've got investments you're making, including CapEx, but curious how that translates into free cash flow?

A: Yes, I'd say, we put the number of $45 million to $50 million that are going to come from those two transformational efforts. That will obviously generate that from a free cash flow standpoint. We expect that to be split between 2025 and 2026. And all it's going to do is allow us to continue our current capital -- it will allow us make more investments. It will allow us to evaluate if we want to do more stock buybacks. So I think it just continues to create the financial flexibility. And the fact that those projects are underway, we're actually able to plan to have that cash flow in what we're doing.

Q: Good morning everyone and congratulations on the quarter. I guess, I have a tale of two cities question myself. If we take a look at the softness, especially on the order side with SMB and try and contrast that with the strength that you guys had in renovations for RBP, what do you make of that in terms of what it says about where main street and the consumer is? Because they seem to be kind of leading us in slightly different directions.

A: Yes. I think part of that is probably -- if you look at the people with mortgages under 4% remaining in place, I think, high equity in their homes, and they're -- the remodel activity has been fairly robust. I think we've seen that. And so, it's a little bit of a different, I wouldn't say they're -- I understand your question. I wouldn't say they're exactly the same. They maybe have a small business that they go and work at and they want to pull back because they're nervous. But at home, they feel more confident to do that remodel project they've been talking about. That's kind of how I see it. And we've seen this in the past as well. This one, I would tell you, is a little bit more unique relative to the remodel side just because the housing thing has been -- is more of a in place long-standing situation relative to people not moving. We all know that secondary home market has been kind of locked up. And in the other SMB business, it's behaving exactly like it behaves. Every time we see a kind of a shock to the system and the economy. And so that doesn't surprise us at all.

Q: Great. Thanks. That definitely makes sense. I guess my second question, and this is kind of a shifting focus to supply chains that you guys have, as tariffs have started to affect things, are there any constraints that have come up that have been unexpected? And kind of where are you in terms of like the adjustments that you need to make to hit your full year guidance?

A: Yes. I would say we haven't run in any constraints. In fact, we've got a pretty resilient supply chain where we're able to move product to other countries. We've talked about this really isn't just about price. There's cost reductions, there's concessions from suppliers and there's actually our ability to move stuff. So I would say that, that hasn't been an issue as it relates to how we're managing and it was just important to get our heads around what it is. What it is today is actually different than it was 90 days ago. That's allowed us to be proactive with our trade and communicate with them. That's important with them, so they can actually give good cost estimates with projects. And all of that's allowing us to be able to navigate it, I would say. And like we mentioned, we expect to offset the costs that we've already seen and the drag in the first half throughout the remainder of the year.