Release Date: July 25, 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 record non-GAAP EPS of $0.79 for Q2 2024, exceeding internal expectations and marking a 44% increase year-over-year.
- Workplace Furnishings segment achieved a multi-decade high operating margin of 11.9%, reflecting strong productivity gains and efficiency improvements.
- The acquisition of Kimball International (KI) has been highly accretive, contributing significantly to earnings and providing new growth opportunities.
- Residential Building Products segment posted a 17% year-over-year increase in non-GAAP operating profit, despite ongoing challenges in the housing market.
- HNI Corp (HNI) expects revenue growth in both Workplace Furnishings and Residential Building Products segments in the second half of 2024, driven by improving market dynamics and strategic initiatives.
Negative Points
- The outlook for Workplace Furnishings revenue growth has been revised down from mid-single digits to low-single digits for the second half of 2024, primarily due to timing issues in the contract space.
- Despite positive pre-order metrics, the translation of orders in the Workplace Furnishings segment is taking longer, indicating potential delays in revenue realization.
- New construction in the Residential Building Products segment has been slower than expected, reflecting ongoing affordability pressures and a mix of housing challenges.
- The company faces ongoing volatility in order trends, particularly in the contract business, which could impact future revenue growth.
- HNI Corp (HNI) has acknowledged that the market for fireplaces in new single-family homes remains flat, with affordability and construction lags posing challenges to growth in this segment.
Q & A Highlights
Q: Can you provide more color on the revenue expectations for each segment?
A: We expect Workplace Furnishings revenue to increase at a low single-digit rate year over year in the second half, driven by SMB and Kimball International (KI). The contract business is performing below average but shows signs of future growth. In Residential Building Products, we expect mid-single-digit revenue growth, driven by improvements in both new construction and remodel retrofit segments. (Jeffrey Lorenger, CEO)
Q: How are the top-of-the-funnel metrics translating into actual orders and competitive bids?
A: Pre-order metrics are healthy with double-digit increases in the funnel and quoting activities. However, the translation to actual orders is taking longer, particularly in the contract business. We expect revenue to be pushed to subsequent quarters. (Marshall Bridges, CFO)
Q: What is driving the better expectations in Residential Building Products despite higher mortgage rates and lower housing activity?
A: The remodel retrofit segment showed 4% order growth in Q2, which is encouraging. We expect growth in both new construction and remodel retrofit in the second half. Our initiatives like electric fireplaces and online capabilities are also contributing to better expectations. (Marshall Bridges, CFO)
Q: Can you clarify the incremental cost savings expected from the Kimball International acquisition and other initiatives?
A: We expect $45 million to $50 million in incremental cost savings from 2024 to 2026. This is on top of the benefits already realized. Additionally, we aim for $10 million to $11 million in annual productivity gains from ongoing efficiency initiatives. (Marshall Bridges, CFO)
Q: What are the expectations for Workplace Furnishings margins going forward?
A: Our operating margin in this segment is now 10% over the last four quarters. We are not satisfied with 10% and aim to push this margin higher. Historically, our Residential Building Products segment moved from low single digits to high teens, and we aim for similar improvement in Workplace Furnishings. (Jeffrey Lorenger, CEO)
Q: How does the current cost structure impact incremental margins if volumes grow in 2025 and 2026?
A: The improved efficiency will benefit our incremental margins, which typically run in the mid-30s. With the recent progress, we expect to trend slightly above that historical average. (Marshall Bridges, CFO)
Q: What is the status of the M&A pipeline, and are there potential deals in the near future?
A: We are always evaluating opportunities but are not in a hurry. We will stay active at a strategic level but have no immediate M&A announcements. (Jeffrey Lorenger, CEO)
Q: How is the consolidation in the building products distribution landscape affecting your strategy?
A: We primarily sell to specialty dealers and installing distributors, so the overall trend has less impact on us. We also own about 25% of our distribution, which provides stability. (Marshall Bridges, CFO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
