Release Date: October 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- HNI Corp (HNI, Financial) reported a strong non-GAAP EPS of $1.03 for the third quarter, exceeding internal expectations and marking an 11% increase from the prior year.
- The company's workplace furnishing segment achieved a 20-year high in non-GAAP operating profit margin for the third quarter.
- HNI Corp (HNI) has elevated EPS visibility through 2026, with initiatives in Mexico and KII synergies expected to deliver significant EPS growth.
- The company has a strong financial position, with a gross leverage ratio of 1.1 times, returning to pre-Kimball acquisition levels.
- HNI Corp (HNI) anticipates record non-GAAP EPS for 2024, marking the third consecutive year of double-digit non-GAAP EPS growth.
Negative Points
- HNI Corp (HNI) expects a near-term demand pause to impact fourth-quarter results, with profit expected to decline compared to the same period in 2023.
- The transactional business within the workplace furnishings segment has been particularly soft, showing volatility and sensitivity to economic changes.
- Economic and election concerns are causing small business leaders to hesitate on discretionary spending, impacting demand.
- In the residential building products segment, builder and homeowner sentiment has been negatively impacted by interest rate volatility and ongoing inflation.
- The contract furniture space is experiencing project delays and a lengthening selling cycle, which will negatively impact fourth-quarter shipments.
Q & A Highlights
Q: Can you provide more detail on the near-term softness in residential building products? Is it more related to new construction or R&R, and are there any signs of further de-stocking?
A: The softness is primarily in our stove business, which is a large part of our remodel and retrofit segment. The demand for this business has been predictable outside of extreme conditions. We expected stabilization in the second half, but it's normalizing slower than anticipated. On the new construction side, we are seeing growth, but it's slower than expected. Home buying conditions haven't improved as much as we thought, but we remain optimistic for the future. - Jeffrey Lorenger, CEO
Q: With leverage back to pre-Kimball levels, how should we think about capital allocation priorities? Are acquisitions a consideration again?
A: We are generating strong free cash flow and remain committed to reinvesting in the business, funding dividends, and assessing share repurchase and M&A opportunities on a case-by-case basis. We have been ramping up share repurchases and feel comfortable with our current leverage. - Marshall Bridges, CFO
Q: How do you see the workplace furnishings demand evolving, particularly between office and non-office segments?
A: This year, verticals like education and healthcare have been ahead of general office demand. We expect these to converge positively next year, with office demand catching up to other verticals. However, office may not lead the recovery. - Jeffrey Lorenger, CEO
Q: Can you discuss the impact of the lengthened sales cycle in workplace furnishings and whether it will persist?
A: The lengthened sales cycle is due to complex real estate decisions, more decision-makers, and inflation challenges. We expect this cycle to remain lengthened through most of next year. However, we are adjusting our business to this new rhythm and see positive demand activity for the future. - Jeffrey Lorenger, CEO
Q: What are your expectations for cash flow generation in 2025, considering operational moves and working capital impacts?
A: Working capital is normalized, and we don't anticipate significant usage next year. CapEx is expected to increase slightly as we complete ongoing projects. We expect a healthy level of free cash flow next year, providing ample cash for positive deployment. - Marshall Bridges, CFO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
