HNI (US:HNI)2023-08-08 20:38Financial Data and Key Metrics Changes - Non-GAAP EPS grew by 6% year-over-year despite a 15% decline in organic sales, indicating effective profit transformation efforts [4][19] - Non-GAAP gross margin expanded by 270 basis points and non-GAAP operating margin expanded by 150 basis points, driven by the profit transformation plan [17][19] - The company ended Q2 2023 with a debt to EBITDA ratio of 2.3 times, which would have been approximately 1.6 times if private notes were repaid [13][27] Business Line Data and Key Metrics Changes - Workplace Furnishings segment saw a 3% year-over-year growth in orders for the first half of 2023, with non-GAAP operating margin expanding by 550 basis points to 8.5% [7][19] - Residential Building Products segment experienced a 16% decline in orders compared to Q2 2022, but this was an improvement from a 37% decline in Q1 2023 [10][46] - The company expects Residential Building Products revenue to decline in the high teens during the second half of 2023, with a moderation in year-over-year declines [11][46] Market Data and Key Metrics Changes - The company noted strong demand trends in Workplace Furnishings, particularly among small to midsized customers, which are expected to continue [7][39] - The housing market remains undersupplied, with demographic trends indicating robust future construction growth, despite current volume pressures [42][49] Company Strategy and Development Direction - The company is focused on profit transformation and margin improvement, particularly in Workplace Furnishings, and is committed to expanding margins in both legacy HNI and Kimball International [19][49] - The divestiture of Poppin is expected to enhance annual operating profit by $20 million while reducing annual revenue by $56 million, allowing for a clearer focus on core business strengths [21][28] - The company is investing in initiatives aimed at expanding market presence, including new product innovation and online capabilities [23] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the benefits of the Kimball International acquisition, anticipating significant synergies and improved market positioning [8][28] - The company expects organic revenue growth rates in Workplace Furnishings to be in the low single-digits for the second half of 2023, with a positive outlook for the fourth quarter [24][26] - Management acknowledged the challenges in the Residential Building Products segment but remains optimistic about long-term growth prospects [49] Other Important Information - The company has increased its cost reduction efforts to a total of $40 million to $45 million, up from $35 million previously announced [22] - The divestiture of Poppin is expected to negatively impact non-GAAP EPS until finalized, with an estimated operating loss of $3.5 million to $4 million for the quarter [12] Q&A Session Summary Question: Can you discuss demand trends in Workplace Furnishings? - Management noted solid positive orders in Workplace Furnishings since the start of Q3, running ahead of the first half rate of 3% [31] Question: What is the target margin for Residential Building Products? - Management indicated that they are focused on improving profitability in the Residential Building Products segment, with expectations for improved margins in the future [32] Question: What drove the decision to divest Poppin? - The decision was made to streamline the business and focus on core profitable growth areas, as Poppin's operating losses masked the strength of Kimball International's core businesses [58][68] Question: How do you expect margins to trend in the second half? - Management expects margins to improve significantly in the second half, aiming for mid to upper teens range [52][66] Question: What are the expectations for the impact of Kimball International? - The company anticipates Kimball International to add $290 million to $320 million in revenue and $0.10 to $0.15 to non-GAAP EPS in the second half, excluding Poppin [44]