Good day, and thank you for standing by. Welcome to the HNI Corporation Third Quarter Fiscal 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded [Operator Instructions]. I would now like to hand the conference over to your speaker today, Matt McCall, Vice President, Investor Relations and Corporate Development. Please go ahead.

Good morning. My name is Matt McCall, I'm Vice President, Investor Relations and Corporate Development for HNI Corporation. Thank you for joining us to discuss our third quarter fiscal 2021 results. With me today are Jeff Lorenger, Chairman, President and CEO; and Marshall Bridges, Senior Vice President and CFO. Copies of our financial news release, earnings presentation and non-GAAP reconciliations are posted on our website. Statements made during this call that are not strictly historical facts are forward-looking statements, which are subject to known and unknown risk. Actual results could differ materially. The earnings presentation posted on our website includes additional factors that could affect actual results. The corporation assumes no obligation to update any forward-looking statements made during the call. I'm now pleased to turn the call over to Jeff Lorenger. Jeff?

Thanks, Matt. Good morning, and thank you for joining us. In the third quarter, our members stayed focused on servicing our customers, while we continue to experience ripple effects from the pandemic, which are creating constraints in the near-term. While we drove strong order growth, ongoing difficulties tied to labor availability, supply chain disruptions, and inflation across all input cost categories negatively impacted our results. Despite these pressures, we are increasingly encouraged about 2022, given the actions we are taking, the ongoing recovery in workplace furnishings and strength in residential building products. Our two differentiated business segments are well-positioned to benefit from multiple secular trends and numerous HNI specific growth initiatives. We have a track record of effectively deploying capital, driving annual productivity and cost savings and managing through macro and operational challenges. On today's call, I will cover three key points. First, we are addressing the constraints negatively impacting our second-half results. Second, our residential building products segment continues to deliver strong revenue and profit growth. And third, demand at workplace furnishings continues to improve. I will cover these three key points, Marshall will then go through our fourth quarter outlook. I will conclude with some general comments. And finally, we will open up the call to your questions. I will now cover our first key point. What we are doing to address the near-term macro dynamics impacting our business? As we discussed in our business update on September 23, we continue to generate strong order growth across our businesses. Workplace furnishings orders in the third quarter increased 31% versus the prior year period, and were 5% above third quarter 2019 pre-pandemic levels. Residential building products orders in the third quarter were 35% higher year-over-year. We have market momentum and are capturing demand. However, our third quarter profit was…

Okay. Let's start with our outlook for fourth quarter revenue growth. We expect consolidated fourth quarter revenue to grow in the mid to high-single digit percent range compared to the prior year quarter, including the impact of acquisitions. Labor and supply chain issues are expected to limit our output in both segments again, in the fourth quarter. In workplace furnishings, we expect growth in the mid-single digit percent range on a year-over-year basis, including acquisition impacts. In residential building products, we expect year-over-year growth rates in the high-single digit percent range including acquisitions. Next, let's cover fourth quarter profitability. We expect the margin pressures we faced in the third quarter to continue in the fourth quarter. As a result, we expect operating profit and earnings per share to be added below what we just reported in the third quarter. As Jeff mentioned earlier, as we look to 2022, we are increasingly optimistic. The combination of our order trends, backlog levels, increased capacity and strengthened supply chains points of revenue strength, particularly for workplace furnishings in the seasonally lower first-half. From a profitability perspective, we are addressing price costs. In 2021, we estimate price cost will be approximately a $60 million headwind. Next year, we expect a positive price cost and recover much of 2021’s deficit. As a result, we expect profitability, margins and earnings to recover in 2022. Finally, some comments on our cash flow and balance sheet expectations. Quarter ending debt levels were approximately $178 million, that was modestly lower than last quarter, and up slightly from the third quarter of last year. The gross leverage ratio at the end of the third quarter was approximately 0.9, unchanged from last quarter. And our projected cash flow will provide ample capacity for continued growth investment, dividend payments, and opportunistic M&A and buyback activity. I'll now turn the call back over to Jeff.

Thanks, Marshall. Let me wrap up by stating that as we look forward, we remain optimistic about our businesses and our ability to drive profit growth. Our members continue to effectively manage through the post-pandemic environment, allowing us to maintain our revenue momentum. Our focus in our workplace furnishings is on expanding margins. Our focus in residential building products is on driving above market revenue growth, while maintaining strong margins. As we move past the recent headwinds, we'll do so well-positioned to grow revenue, expand margins and increased cash flow. I would like to conclude by stating I'm extremely proud of and thankful for the efforts of all HNI members, particularly given how hard everyone is working to overcome the constraints we have described. We will now open up the call to your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Greg Burns with Sidoti & Company.

Good morning. Just want to start with the order patterns, order trends you're seeing throughout the quarter on both sides of the business. How they how they trended throughout the quarter and how you're -- what you're seeing in the early part of the fourth quarter? And then, secondly to that on the workplace side of the business. So you’ve seen any change in forward indicators like mockups, pipeline opportunities, like in terms of dollar value, or number of project opportunities you're seeing, any change there that might indicate a shift in demand going forward, given what we're seeing with COVID? Thank you.

Yeah, sure, Greg. Let's start with orders and workplace furnishings. For the segment, their orders were up 31% versus the prior year for the third quarter. And if you look at the individual components, you just click down to each business, we were pretty consistent. So we saw similar growth rates in the contract business, as well as the business focused on small to midsize offices. And the growth rates through the quarter were pretty similar. There were some noise related to timing of price increases, but we exited the quarter pretty similar to the rate that we had for the whole quarter there. So there's no change in trajectory. It feels pretty decent. In residential building products, orders were up 35% versus the prior year, remodel/retrofit was up a little more. And new construction was about low 30% growth range there. New construction was really consistent through the quarter, remodel/retrofit has started to taper off. Now it's not an issue of the dollar intake tapering off. That remains good. It's just we're starting to come up against some tougher comps in the prior year period. So the growth rate is slowing as we might expect, given the growth rates we saw late last year and early this. As it relates to forward-looking indicators, when I tell you that we probably have a little bit less visibility than we normally would have on that front right now, Greg. The customers and the dealers have maybe shifted a little bit more their focus to dealing with the here and now, given the construction delays that are out there, and just overall supply chain disruptions that we're seeing. So, I'm not sure we have great view of that. What we do see is that contract is strengthening and SMB business continues to be strong.

Okay. And you mentioned a focus on improving margins on the workplace side of the business. How should we think about -- I guess, what your goal is or where you think that business can get to? Because I know you were starting to see a little bit of improvement in ‘19 before the pandemic hit. So I just wanted to get a feel for what your aspirations are for that segment and where you think you can get the margins over time, if inflation and some of the supply chain issues improve?

Yeah. Long-term, Greg, we believe we can get back to the margins we are at in that 2015 2016 timeframe the workplace furnishings. In the short-term, we've got two big levers that will help us out in next year. And the first one is, improving price cost. Price cost is a major headwind this year. We're looking at about a $44 million negative price cost for workplace furnishings. And we think we can recover the majority of that next year, which can add proximately 300 basis points of margin. The second big lever in the short-term is just capturing the volume it’s out there. Our backlogs are extended, demand continues to run. As we increase our capacity and get more productive with the capacity we do have, we can capture some volume maybe get another 150 basis points of margin expansion there. As you look into subsequent years, we're committed to expanding margin. We've got some efforts underway to improve underperforming businesses. And of course, we've got our ongoing annual cost savings initiatives.

Okay. So when you referenced like 2015, ‘16, so that would be like a high single digit kind of number for back and it looks like you're in that range of 8 to 10 kind of range?

Yes.

Okay. All right. Thank you.

Thanks, Greg.

Our next question comes from the line of Reuben Garner with The Benchmark Company.

Thank you. Good morning, everybody. So, it sounds like some optimism surrounding 2022. And Marshall, you mentioned $60 million of price cost drag that goes away with, I think a little over $1 share if my math is right. Does that include the all encompass -- is that an all-encompassing figure what the supply chain parts of it? Or is that purely sort of material costs? And I guess, is there any other things to think about as we're putting together a bridge for 2022 other than that $60 million headwind going away?

Yeah, Reuben, our input costs include materials, wages, freight, your classic input costs. It doesn't include any kind of disruption to productivity related to supply chain disruptions and things like that. I think as you look to next year the two big levers is what I explained to Greg is the recovery of price cost and then the leverage off volume growth as we expand capacity, and also use the capacity that typically isn't used in the first-half. And we're not going to see a lot of seasonality next year in workplace furnishings, just due to the pent-up demand and backlogs we have.

Great. And that feeds nicely into my next question about the capacity additions. Can you put into perspective the Mexico operation? How much does that add to capacity? I think it's a seating facility. Is that where you need capacity the most? Or, is that just going to allow you to better utilize your facilities in the U.S. for some other product categories? And then secondarily, sorry for the long winded question. But the production rate, Jeff, that you mentioned, I think you said you're 11% short of where you want to be. Where does that number normally sit just kind of in a more normal environment, if there's such a thing?

Yeah, Reuben, what I can tell you is the Mexico operation, yeah, it will relieve pressure overall on the network, so that a positive thing. It's multiple levers, it's additional hiring, it's enhanced productivity, it's shifting production around, its Mexico, it's Marshall’s point about level loading the first-half as opposed to kind of the cyclical nature of the business. We're looking to increase output somewhere in the 15% to 20% range for 2022 over 2021 levels from a capacity output standpoint. So, it's not just isolated in Mexico, but it's kind of all those items.

Okay. That's great. What kind of investment are you having to make to increase the productivity by that much? Is there going to be an incremental pressure on CapEx next year? Or, is this within your certain normal spending parameters?

Reuben, most of it's in our normal spending. The Mexico facility obviously, is going to have a little bit more, but it's not a dramatic change. In most what we're trying to do is utilize the capacity we have and access labor, which is just not as capital intensive as some capacity expansions would be.

Okay. And then on the workplace furnishing side, I think there's some skepticism from investors, or, I guess, unknown about the recent surge in demand, how much of it is catch up from the last year and how much of it is a return to normalization, how much of it is spending to reconfigure the office to be better for or more COVID friendly going forward? I know, this is a tough question. But any sense from you guys on those three buckets, what we're seeing right now, can you tell by the types of products that are being ordered? Is this just kind of things returning to the way they were prior to COVID? Or, are there other factors?

Reuben, that's a great question. I think it's both and to be candid, I think we're seeing people ramp up particularly with some segments, education, SMB businesses are moving forward with their life and their business is doing well. So that's just demand coming online, as those businesses do well. I don't think the reconfiguration for post-COVID has really hit yet those. Office reentry in major metros has been delayed, so that's still I think out there. I think we hear a lot of discussion about the war for talent, and operating in a hybrid environment. In those, I think that demand is still TBD as companies figure that out. So, I would characterize this as, we've seen nice return in certain segments of the business and that's driving our strong order patterns. And there's still another couple chapters to be played out as companies kind of auger through or return to office scenario and hybrid, and then you layer on top of that the war for talent. And there's a lot of discussions underway about how that's going to play out.

I'm going to sneak one more in. We haven't seen a surge in fuel or energy costs like this in a while. Back in ‘14 and ’15, I think it was your Hearth business had a pretty big boost from folks looking for different ways to heat their homes in the winter. I guess, any chance that we see something like that, given the current environment? And then secondarily, do you have the capacity in that kind of area to service an uptick in demand if there was one?

Yes, it’s a great question, Reuben. We always enjoy talking about the pellet business. Yeah, we would expect that to run given how high energy is. I would say, we haven't necessarily seen it yet. So I guess, it remains to be seen. And we are pretty tight in capacity across the Hearth business. So, we're going to have to figure out how to capture all that. But that's a potential upside for us as we go into next year.

Great. Thanks, guys.

Thanks, Reuben.

Our next question comes from the line of Steven Ramsey with Thompson Research.

Hey, good morning. I'm thinking about the Q4 guidance to start with sales. It looks like Q4 sales being better than Q3. Can you maybe go through how much of that is pricing flowing through? And how much of that is better production and shipments? And then secondly, if Q4 sales are higher sequentially but profits at or below, what is driving that dynamic? Is that price cost? Are there other items?

Yes, it’s a good question, Steven. Let me try to answer the second part of your question first. So, as you look at the fourth quarter, as it relates to the third quarter, we said conditions will be generally same, but there's a lot of moving parts that basically net together offset each other. So I’ll maybe walk through them and I think the answer is both of your sub questions. So, on the positive side, we are going to see better price cost. Our pricing is ramping up and even though inflation continues to increase, we're going to narrow that gap. So that's an improvement sequentially. Also, the volume in residential building products will improve sequentially. That's really related more to shipping inventory we produced earlier in the year. We're pretty tight on production as said earlier. So those two positives get offset by basically three negatives. The first one is there is some seasonal uptick in the corporate allocated overhead. We were about $11 million in the third quarter there, that should increase $7 million, but the year-over-year increase in each of those quarters is still pretty small. It's just how those costs flow. We're also going to see fewer production days, so this is a -- the fourth quarter has got more holidays. And so the workplace furnishings business will have lower unit volume, price excluded. And then lastly, we're going to see a little bit lower productivity, particularly in workplace furnishings related to two factors, one starting up the New Mexico facility, and then secondly, the supply chains are still not back to being healthy. So your net all together, we're looking at pretty similar profitability and the volume picture, including price depends on which segment.

Okay, very helpful. And then thinking about the constraint improvement, is one improving sooner than another, thinking about supply or labor getting better? How much of that is factored into your bridge to 2022? And, kind of on the other side as these things get better, which one is a greater tailwind to profit, supply or labor? And maybe some of this is chicken and egg, so maybe it's not right to break it out that way.

Yeah, such a good question. We watch this every day, Steven, and I think it is a bit of a chicken and an egg. The labor pressure has kind of rippled through the supply chains as well just like us. So we're making some progress on both is what I would tell you, and we continue to have to try to balance those two things kind of in tandem. So, candidly, if one runs way ahead of the other, it's not going to really net out, as well as it could or should anyway. So we're really working hard at both of those levers. And we do expect improvement -- stability first and improvement as we get into 2022 on both fronts. But like I said, it's kind of 6:1, they both need to improve kind of at the same rate. And as people and we've seen some stabilization in the supply chain, but we watch it daily.

Okay, great. And then last one for me, HNI is known for being extremely efficient. And we talked to many people in the supply chain and in procurement that think just in time inventory will change permanently from this situation the world is in, and therefore more companies will hold more inventory. So I guess if you contemplate it, how you will change managing inventory and working capital as on the other side of the current issues?

Yeah, that's a great question. And we have absolutely kinds of play to that. And I do think we're no different, we will be carrying more buffers. Candidly, if you even think about our business model, some of the small, medium sized business that we have, we got some high runners that we can build ahead. And so, we will definitely use the balance sheet appropriately to change that dynamic over time. Now, it won't happen overnight. But I do think we're entering a period here, maybe a permanent period, in which the business is going to have to kind of reset its expectations on just in time versus inventory. I think that's – and we're going to be playing that point some of those leverage as we get into next year.

Helpful. Thank you.

Thank you.

This concludes the question-and-answer portion of today's call. I will now turn the call back over to Mr. Lorenger for closing remarks.

Awesome. Thank you. Again, thanks everybody, for joining us today. Have a great day and we'll talk to you soon. Thanks.

This concludes today's conference call. Thank you for participating. You may now disconnect.