HNI Corporation Aktie

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the HNI Corporation First Quarter 2026 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. McCall. 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 first quarter 2026 results.

With me today are Jeff Lorenger, Chairman, President and CEO; and VP Berger, Executive Vice President and CFO.

Copies of the financial news release 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 risks. Actual results could differ materially. The financial news release 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. Our members delivered solid first quarter results that exceeded our internal expectations in a difficult and dynamic environment. The momentum of our strategies, the benefits of our diversified revenue and profit streams, our ongoing focus on items within our control and the merits of our customer-first business model continued to deliver strong shareholder value.

The takeaway from today's call is we expect a strong year in 2026 with the fifth straight year of double-digit earnings improvement and modest revenue growth in both segments. On today's call, I will break my comments into 3 sections. First, our quarterly results. Again, we delivered solid results despite ongoing geopolitical and macro uncertainty. Second, the remainder of 2026. Despite softer-than-anticipated revenue patterns to start the year, we expect net sales to grow in 2026 with another year of double-digit non-GAAP EPS growth anticipated. And third, our outlook beyond 2026. We project double-digit EPS growth again next year as we maintain multiple years of elevated earnings visibility beyond 2027.

Following those comments, VP will provide more details about the first quarter, our outlook and our cash flow and balance sheet. I will close with some additional color commentary before we open the call to your questions.

I will start with some highlights from the first quarter. Our members continue to focus on controlling the controllables through focused cost management and benefits from price cost and [Audio Gap] this was despite demand softness to begin the year, especially in Workplace Furnishings, amid concerns related to the conflict in the Middle East, the U.S. economy broadly and the impact of tariffs specifically.

In our legacy Workplace Furnishings businesses, first quarter net sales were down about 5% year-over-year on an organic basis with modest growth in our businesses focused on small- and medium-sized customers. We saw weakness early in the quarter with large corporate customers as the impacts of global macro uncertainty were most prevalent during January and February. However, we saw organic segment orders turn positive in March with additional acceleration thus far in the second quarter. This supports our bullishness for the remainder of the year, which I will discuss more in a moment.

As we finished the quarter, it is important to note the integration of Steelcase is going well. Synergy capture and accretion are on track and our cultures are melding nicely. Including Steelcase, Workplace Furnishings segment non-GAAP operating profit in the first quarter totaled almost $49 million, nearly double the prior year level. We continue to expect modest accretion from Steelcase in 2026 and we remain confident in our projected total synergy-driven accretion of $1.20 when fully mature.

In Residential Building Products, revenue increased more than 2% versus prior year period. These are strong results given the ongoing weakness in the new home market. Our growth investments are bearing fruit, and we are outperforming the market. Our new construction revenue was down mid-single digits year-on-year which compares favorably to single-family permits, which declined in the high single digits. Our remodel retrofit revenue was up 13% on a year-over-year basis.

First quarter segment operating profit margin expanded 190 basis points year-over-year, reaching 17.6%. Despite expectations of ongoing uncertainty, we remain encouraged by our opportunities and we continue to invest to grow our operating model and revenue streams.

In summary, HNI's first quarter performance demonstrates the strength of our strategies, our ability to manage daily uncertainty through varying macroeconomic conditions, all while remaining focused on investing for the future. And we continue to expect strong results in the full year, driven by margin expansion and modest revenue growth.

That leads me to my comments on our outlook for the remainder of 2026. I will start with legacy Workplace Furnishings, where we expect segment revenue to increase at a low single-digit pace for the full year, with high single-digit growth in the back half. Additionally, for the Steelcase business, we expect full year revenue to grow slightly. Our outlook is supported by external industry metrics and by our internal pipeline data. Specifically, in addition to strengthening orders over the past 1.5 months, our order funnel, bid quotes, design activity, all improved later in the quarter.

From an earnings perspective, we expect Steelcase to be net neutral in the first half and turn modestly accretive in the second half and for the full year.

In Residential Building Products, our structural changes organizing around the customer and consumer, along with our growth investments, are expected to drive continued market outperformance. For 2026, we expect modest price-driven revenue growth in the second half despite expectations of ongoing housing market softness. From a profitability perspective, we expect both our Workplace Furnishings and our Residential Building Products businesses to expand margins in 2026.

While we are optimistic about the year and expect another year of double-digit non-GAAP EPS growth, we will remain focused, conservative and ready to adjust as required. Our earnings outlook is supported by the anticipated benefits of our ongoing visibility story and our proven ability to manage through changing economic conditions.

Moving on to my third point, a few comments on our outlook beyond 2026. We project double-digit EPS growth again in 2027, driven primarily by expected synergies from Steelcase and legacy network optimization projects. Further, we continue to have multiple years of elevated earnings growth visibility beyond 2027. During the first quarter, we made certain key decisions pertaining to the Steelcase integration that will have positive longer-term implications.

As an example, we terminated Steelcase's multiyear ERP implementation project. This move is part of a broader effort at Steelcase to streamline priorities to focus on profitable growth while also avoiding disruption, eliminating substantial future ERP investment and redeploying resources back into the business toward customer-focused initiatives.

Also during the quarter, we began smartly managing costs across all our businesses in response to a softer start to the year, driven by the current geopolitical backdrop. These new actions are in addition to the previously announced $120 million of synergies associated with the integration of Steelcase, which as I stated earlier, are on track. At the same time, our current synergy projections are focused on the Americas business only and assumed no revenue synergies. And importantly, we remain laser-focused on minimizing any front-end disruption across our Workplace Furnishings businesses.

Finally, as we discussed last quarter, we continue to expect an additional $30 million of savings from network optimization in our legacy Workplace Furnishings businesses over the next 3 years. The combination of our disciplined cost management, Steelcase synergies and our ongoing legacy network optimization projects continue to strengthen our earnings visibility story.

Now I will turn the call over to VP to provide more details about the first quarter, our outlook and our cash flow and balance sheet. I will then provide a longer-term perspective on the opportunities surrounding our businesses before we open the call to your questions. VP?

Thanks, Jeff. I'll start with some additional comments about the first quarter [Audio Gap] of $0.55. On a non-GAAP basis, diluted EPS totaled $0.34 which was slightly ahead of our internal expectations. Our non-GAAP results exclude several items totaling $88 million, the majority of which was tied to the impacts of purchase accounting associated with the Steelcase acquisition.

While volume activity was negatively impacted by the geopolitical conditions, especially in the Workplace Furnishings segment, expense control, price cost and productivity benefits offset volume softness and continued investment in initiatives aimed at driving future growth. Total net sales in the quarter increased 125% overall or down 3% on an organic basis.

From a Q1 orders perspective, in our Workplace Furnishings segment, orders from small- to medium-sized customers were up low single digits. Orders from contract customers, including both legacy Workplace and Steelcase were down mid-single digits versus the first quarter of 2025 levels. As Jeff mentioned, we saw order patterns improve late in the quarter.

Orders in the Residential Building Products segment increased 4% compared to the first quarter of 2025. Remodel retrofit orders outperformed those from the new construction channel. The year-over-year average order growth rate over the final 5 weeks of the quarter was in line with the rate for the quarter overall.

Looking ahead, we expect second quarter 2026 net sales in the legacy Workplace Furnishings to increase at a low single-digit rate year-over-year. Including Steelcase, total Workplace Furnishings net sales are expected to grow approximately 155% to 160% versus the prior year period. In Residential Building Products, second quarter 2026 net sales are expected to decrease at a low single-digit rate compared to the same period in 2025. The impact of the recent order strength includes increased long lead time orders versus the prior year. These orders will ship in the fall and benefit the back half results.

Non-GAAP diluted earnings per share in the second quarter of 2026 are expected to decline modestly from 2025 levels. The addition of Steelcase is expected to be net neutral to moderately accretive to dilutive -- modestly accretive to diluted non-GAAP earnings per share in the quarter. The year-over-year non-GAAP earnings pressure is expected to be driven by lower organic volume and continued investment.

Our outlook for 2026 full year earnings reflects expectations for mid-teens percent non-GAAP EPS growth from 2025 full year of $3.53, with accelerating double-digit earnings growth in the second half of the year. Given the timing of synergy recognition and cost management savings, we now expect non-GAAP diluted earnings per share to be roughly equal in the third and fourth quarters. Productivity, cost management, network optimization initiatives, Steelcase accretion and price/cost benefits are expected to more than offset operating profit headwinds associated with volume pressure and continued investments.

As we look to 2027 and beyond, as Jeff mentioned, we expect double-digit non-GAAP EPS growth again next year and we have multiple years of elevated earnings growth visibility beyond 2027. Steelcase accretion and legacy Workplace network optimization initiatives continue to support elevated levels of visibility. In total, these items are expected to yield savings exceeding $70 million in 2027 and more than $150 million when fully mature. These totals do not include the benefits of our new cost management saving efforts.

Next, a few additional items to assist you in your 2026 modeling. Combined depreciation and amortization are expected to be approximately $150 million to $155 million, excluding purchase accounting impacts of approximately $105 million. Net interest expense is expected to total between $75 million and $80 million. Our tax rate should be approximately 25%.

Finally, from a cash flow and balance sheet perspective. The benefits of the Steelcase acquisition, the strength of our strategies and our financial discipline are expected to drive free cash flow, which will help us quickly deleverage our balance sheet over the next couple of years. As a result, leverage is expected to return to pre-deal levels in the 1 to 1.5x range within 2 years of the deal closing.

Finally, we remain committed to payment of our long-standing dividend and continuing to invest in the business to drive future growth. I will now turn the call back over to Jeff for some longer-term thoughts and closing comments.

Thanks, VP. In the first quarter, our members remain focused on our strategies. We managed our businesses well, and we delivered a solid quarter that modestly exceeded our internal expectations. Looking forward, we remain focused on driving growth and expanding margins and we will continue to invest for the future with confidence. As I mentioned, we saw a slower start to the year than we had anticipated, particularly in the Workplace segment where demand activity was clearly impacted by the conflict in the Middle East and U.S. macro uncertainty.

However, from a demand indicator perspective, the fact pattern we have discussed in the last couple of quarters is unchanged, and we remain bullish about the segment's demand environment. Return to office continues to be a positive driver of activity with levels of remote work expected to fall further in 2026. Office leasing activity grew for the third straight quarter in Q1 with annual leasing activity up more than 7% year-over-year. Net absorption of office space, which has historically been a good leading indicator of future industry demand, was also positive for the third straight quarter with nearly 3.5 million square feet absorbed.

Thus, while supply of new office space will remain a headwind, we see multiple cyclical drivers of growth outside of new construction. These encouraging external industry drivers are consistent with our recent order patterns and internal preorder metrics in both legacy Workplace and Steelcase. Our funnel continues to expand with bid quotes up year-over-year and with the number of large dollar projects increasing versus the prior year period. Design activity also strengthened during the first quarter, and jobs won, but not yet ordered, are up double digits as well. Customers remain engaged, activity is robust with both dealers and end users and our businesses are positioned to win.

Moving on to housing. Headlines continue to point to ongoing softness, especially in new build space. Interest rates remain relatively elevated. Prices remain high and affordability concerns persist and we expect continued new construction weakness in 2026. However, our structural go-to-market initiatives and growth investments will allow us to continue to outperform the market. In remodel retrofit, we are assuming modest market growth in 2026. This is consistent with LIRA projections. In addition, we expect continued market outperformance in our R&R business and we expect ongoing margin and cash flow consistency from this segment.

In conclusion, as we discussed in detail last quarter, we are a transformed and fundamentally stronger organization. Upon recognition of all targeted Steelcase synergies, network optimization savings and cost management benefits, HNI will have substantially higher earnings, stronger margins, greater cash flow and a continued strong balance sheet. This will enable us to continue to deliver exceptional value to our shareholders, customers, dealers, members and communities.

I want to thank all HNI members and specifically the Steelcase employees as they have engaged enthusiastically to begin their HNI journey. Thank you again for joining us. We will now open the call to your questions.

[Operator Instructions] Your first question comes from the line of Reuben Garner with The Benchmark Company.

Maybe to start, the change in the Workplace outlook for the full year, it sounds like things actually got better later in the quarter and to start the second quarter. Can you just walk through, I guess, the progression of orders through Q1 and what you saw in April? And if things are improving of late, what kind of other internal indicators that are making you take that outlook down? Or is it just the slower start that's going to be hard to catch up? Or is it conservatism? So just any thoughts there would be helpful.

Sounds good, Reuben. I'll kind of walk you through. Jeff mentioned the actual order numbers. So if we looked at the first quarter, overall legacy Workplace side was down 3%. The contract side was off a little bit more both for Steelcase as well as the legacy HNI closer to 5%. But the important point, it was a slower start, which, for sure, has taken our full year expectation down a little bit. But in March, it did pick up. And as it continued to progress through the quarter, it actually got stronger. And if I look at the last 5 weeks, that momentum has continued across the different segments.

So the way we're thinking about it, Reuben, that we're going to kind of show this first quarter down 5%. And then in the second quarter, we're going to pivot back to growth. So we're -- we've got low single digits pivoted for the second quarter, which is supported by our recent order trends, as well as how we finished the [ third ] (sic) [ first ] quarter. And I think as we think about the full year, we have enough indicators and Jeff will talk to the internal metrics and some of the other external metrics, that say the back half actually has strong high single-digit growth. So we think we caught an air pocket and the order trends that are coming in now are supporting growth for the second quarter as well as even stronger growth for the back half.

Yes. I think that's a good summary. I think the other thing, Reuben, is some of these order trends with the Steelcase business, some of the larger projects are -- they're spaced out a little bit more. They just -- so we're kind of dialing in timing on when the revenue hits. I had mentioned that our order book is solid. Some of the ship dates are kind of moving around. The other thing we've noticed, though, once we kind of -- it's kind of like we got out of this air pocket and customers have concluded -- they learned their lesson during COVID is like we can't wait. We're going to have to -- we got capital deployed, and we want to get moving. And so that's really what we saw. But it definitely was a slower start to the year than we had anticipated. But we think we're behind that now.

Okay. And then embedded in your second quarter outlook, how much kind of near-term price/cost noise is there from the quickly rising transportation and energy situation? And how quickly can you offset? Or can you talk about what pricing tactics you use to offset those costs?

Sure. I think, Reuben, consistently our goal is to offset whether it's tariff costs or general inflation over the periods of time. Your specific question, there's about $2 million of headwind in Q2 that we will catch back up in Q3 and Q4 through price surcharge, similar to what we've done in the past. So I know it's dynamic. I mean things are changing. If you think even the IEEPA piece came off, and then they added the new Section 232s, even with all that, we expect to offset it, and we'll probably have a couple of million dollars of headwind in Q2.

Okay. And then last one for me. The comments about the cost management efforts tied to the slower environment. Can you elaborate on some of the moves that you're making there? And then if I heard you correctly, I think you used the word terminate for Steelcase's ERP project, it wasn't delayed. Just a little more detail on what's going on there, why that move and what the benefits of the change will be to the organization?

Yes. I'll hit ERP, Reuben, I mean, a couple of things drove that. One, now that we're a combined entity, we wanted to step back and take a look at it, what the best program was going to be for the HNI network. Two, they had quite a ways to go in that project, and we felt like stepping back from that and kind of resetting, reexamining was the best for the business. And also those take a lot of effort, and we have a lot in front of us that we can make -- we can redeploy assets to grow the business, whether it be in product development or sales, just other network optimization, et cetera, across the network. So we stepped back from that.

We think it's going to be an unlock relative to being able to focus the business on customer-centric growth initiatives. And that's really without a lot of downside to be candid.

Yes. And I think the second part of your question about cost management, similar to what we've done in the past is we want to control the controllables. We got out of the gate slow with some revenue pressure. So yes, where? It was in all areas of the business, actually, Reuben, it's in all the business segments. We all looked at open headcount. We looked at discretionary spend. Obviously, with the termination of -- the business transformation going on with Steelcase. We actually had some headcount adjustments. So it's never in one spot. And the whole idea of that is to still protect our goal and our target of double-digit EPS growth.

So if you try to -- you delever what's happening if you're pulling sales down, mid-single digits was the forecast for Workplace, we're coming down to low single digits. We adjusted our cost structure to ensure that we can still have the double-digit EPS over the prior year, non-GAAP.

Your next question comes from the line of Greg Burns with Sidoti & Company.

Was the impact from the war in the Middle East localized to that region? Or did it create a more global impact for your office business? I just wanted to kind of better understand the commentary about how that impacted demand in the quarter.

Yes. I think it's a little of both, Greg. I mean we're watching the international businesses closely in monitoring that -- those impacts. But I think it was more of a general kind of feeling that customers just kind of hit pause but all our channel checks now are consistent that we're back in the game, just -- the optimism is there. But -- so it's hard to pinpoint exactly where it hit other than it kind of was broad-based across all our businesses. We have -- we play in most markets. We play in all the verticals. We play small, medium, we play large corporate and with the short -- with a little bit of exception being some of the small business stuff continued on, but everything else kind of took a step back in January and February.

So -- but we believe it was a combination of the war, just kind of uncertainty. And then as I stated earlier, in engaging with customers, they're like, yes, the boss said to slow down for a minute and now he or she is like let's keep this moving. And so that's really the bottom line. It was kind of a broad-based kind of macro kind of slowdown that now seems to be behind us.

Your next question comes from the line of David MacGregor with Longbow Research.

Jeff, I guess I wanted to just explore during January and February, it seems like people, as you say, hit pause on releasing purchase orders. Can you just talk about what you were seeing otherwise underneath that in the market? Was quoting activity continuing? Or people still doing mockups? I mean was it kind of business as usual there that would give you a little more confidence in the longer-term view?

Yes, David, that's right on. I mean, it was a little bit of a feeling that we first saw when we -- out of COVID, I think where people were still active. I think the difference in this case is they've been through that now, and they were ready to go. It was more of a slight delay, but -- in placing the PO, but orders were rolling. I mean, quoting was rolling, activity was high at dealers, activity was high in the sales force. Optimism was kind of still there. It never really muted. It's just the order book didn't flow like we had anticipated. So that's why we're pretty bullish here based on all the indicators. And now based on what we're seeing start to flow for the full year.

Great. And did you see any order cancellations? Was there much -- any activity there?

No. No, we really did not. We did not. That's a good question. We monitor that as well. If anything, we saw this general slowdown. And then we got our normal project delays with construction and things like that, but no, no cancellations.

Okay. Great. And then are you conducting any repricing of backlog orders?

We are not. So we confirm the orders, David, we let them flow out. That creates a little bit of the headwind of a couple of million bucks in the short term, but our process has it covered that we catch it back up.

Okay. And then are you far enough along now in terms of your thinking around Steelcase that you can talk about international and just what actions you may be contemplating aimed at achieving higher levels of profitability from that business?

David, we're actually getting more and more up to speed on that business every day. We understand the go-to markets now. We're locked in with how we forecast their business. And I think the key there is what we talked about before. They had already started some pretty significant profit improvement plans, which included some restructuring and transformation. They were in the late innings of that. And we feel good about the overall profit improvement year-over-year that, that business is actually going to drive shareholder value.

Okay. Last question for me is just on the RBP business. Can you just talk about the brand consolidation and how that's being received in the channels? And will there need to be sort of clearance of any inventory? And if so, how should we think about the potential margin headwind both in terms of maybe magnitude and timing?

Are you speaking specifically on the stove side, David?

Yes. Yes, I am.

Yes. We're in a -- it's actually going really well. It's been an introduction 18 months ago to put an overarching brand called Forge & Flame over top of all of our biomass products. So that was more of a digital way to get to the consumer. So we're in the journey now to actually talk about how we're going to badge those different brands and then use their names as technology. So we don't see any downside with this. It certainly makes us -- we already were the industry leader. Now we're clearly the industry leader from a digital standpoint. But it will take us probably another 18 months to get all the way through, and we're not going to strand inventory.

We're taking our time with it. It's actually that business is performing very well. If we look at year-over-year, we continue to take market share. It's where a lot of our initiatives are. So I think you'll just see this kind of play out behind the scenes.

Your next question comes from the line of Kathryn Thompson with Thompson Research Group.

Could you talk a little bit more about what you're seeing in terms of demand trends for non-office verticals in the quarter and really, if you could break it down, not just by end market but by geography, U.S. versus Europe and how it is expected to shape through the year? And is there any ways where you can benefit more specifically as we look at the broad reindustrialization trend in the U.S.?

A couple of points in there, I guess. On the office verticals, we're seeing positive trends, obviously, in health and education. We're getting lots of higher ed businesses that are leaning in to not only our Steelcase but our Allsteel side. We're actually positioned well with the federal government on the Steelcase side. We're seeing positive trends there. As it relates to international, year-over-year, their orders are actually up. So they're hanging in there across both in market, for market as well as the global business accounts.

Yes. The longer-term outlook that, Kathryn, that is -- it's a little early to tell, but we're pretty agile on our thinking about where we ship resources. What we have is we have breadth and depth to cover all these -- all these markets, all the verticals, core customer. We got geographies covered now. We've got really strong distribution. So we're kind of monitoring that. You listen a lot about enterprise, networks and where people are making investments. Manufacturing is actually doing pretty well right now.

We're -- so we're -- we've got strong research and we got strong ability to pivot as those markets develop right now. We're playing all the bases, and we haven't really went overweight on any of them, but we will when the hot hand appears. That's kind of been our history. And with the Steelcase adder to the HNI network, it gives us a lot more geographic coverage for diversity to do that.

Yes. And so when you -- kind of following up on that, when you think about like a different type of construction projects, beyond kind of what I would say traditional. What we are seeing in the market are different type of players. So for instance, it could be a company that had made racking systems for hospitals that are now pivoting to data centers. But working creatively with builders and importantly with developers, the end market, have you changed or have you thought about doing anything differently in terms of winning different types of business kind of this dynamic market that we're in?

One thing I would say is probably the way we get at that a bit is co-development. We have some teams that engage with customers early and businesses early. I mean you're upstream of that when you talk kind of construction, but that sometimes leads to how people are thinking, how they want their workspace to be branded. What I will say is we're seeing a lot more engagement from customers the last couple of years, it's less cookie-cutter and more dynamic around what they need, whether it be to get members and employees back in the office or what they want their brand to be or the new ways of working.

And so what I would say is we have shifted resources to what I would call more dynamic codevelopment and setting up manufacturing flows in order to be more versatile and agile around making product that is maybe, let me say, nonstandard, if you will. So I'd say that's kind of how we're evolving our business model a bit to be more dynamic and play these different elements as they appear because they shift and move and they're shifting and moving fairly quickly.

Yes. That's helpful. Final question, [ you said ], Steelcase following up on their small midsized business growth initiatives is ongoing. Can you compare how they're doing in that segment versus what core HNI is doing and how or if you're making -- adjusting any Steelcase's strategy to that end market?

Yes, very, very similar businesses. We definitely are not adjusting strategy related to the Steelcase SMB and the legacy SMB and they're both -- they're performing very similar. I mean the SMB business has been resilient in both Steelcase as well as the legacy HNI if you look over the last few quarters. So I think when they're going to continue to win on those smaller projects, the difference -- the main difference in the Steelcase SMB is they play in some cases, on seats that are more than our traditional SMB plays on. But other than that, they're very similar in how they go to market and actually how they're performing.

Yes. And long term, I mean, we'll obviously look for opportunities as we go. I think VP did clarify that a bit and to say again, is their SMB metrics, size, type of job, order book, average order size is a little bit higher than our traditional, so they're both called kind of SMB to start, but I would think that -- what it's really done is stretch the coverage model. So we have no gaps in what we -- what someone -- depending on how you define SMB.

So that's the benefit. That's why we're not making any sudden adjustments to that till we kind of see how that all flows and where there's leverage and where there's just a nice new business that we didn't have or obviously, they didn't have.

Your next question comes from the line of David MacGregor with Longbow Research.

I guess I just wanted to think about second half of this year. It seems as though there's going to be some push forward benefit against some fairly stiff compares from last year, and that will help you. But I'm thinking about the government shutdown in 2025, and you should be comping against that, that should be a source of benefit as well. Is there any way to dimension that for us?

Yes, David, I don't know if we specifically thought about it that way. I think if we just think about how the volume is going to play out, you're right. We'll have some comps that if I get into the fourth quarter, we could see mid-single-digit volume year-over-year versus just price in the third and fourth quarter. So whether it's through government, whether it's through SMB or whether it's through large global or corporate accounts, we do believe that sets us up for a strong back half and actually supports what we're saying with a relatively flat first half and mid-single digits in the second half.

Okay. That's helpful. And then secondly, I'm just wondering, and it's still early, obviously, but I'm wondering to what extent you may be seeing, if at all, any kind of cannibalization between Steelcase and Allsteel?

Yes, good question. We really haven't seen that, David. I mean, our premise going in, and it seems to be playing out is they both are in the contract space, but Steelcase plays with a certain type of customer and has strength in markets where we historically have maybe not been as strong. They're stronger with large corporate, big customers, global customers with large networks and still -- Allsteel and some of our contract brands are maybe a little clip down from that. So we haven't really seen -- not saying there isn't some out there on a project here or there. But on an 80/20 macro basis, I mean, it's complementary and that was the pre-deal kind of going in premise, and that's what we've seen so far.

I'll now turn the call back over to Mr. Lorenger for closing remarks.

Thank you for joining us today. We're going to look forward to speaking to you again in July. I appreciate your time. Thanks so much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to HNI Corporation Fourth Quarter and Fiscal Year-End 2025 Conference Call. [Operator Instructions]. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Matt McCall. You may begin.

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 Fourth Quarter and fiscal year 2025 results. With me today are Jeff Lorenger, Chairman, President and CEO; and V.P. Berger, Executive Vice President and CFO.

Copies of our financial news release 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 risks. Actual results could differ materially.

The financial news release 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? .

Good morning, and thank you for joining us. 2025 was a seminal year for HNI Corporation. Our members delivered excellent results as we reported a fourth straight year of double-digit non-GAAP EPS growth despite persistent soft and uncertain macro conditions.

The positive momentum of our strategies, the benefits of our diversified revenue streams, our ongoing focus on items within our control, and the merits of our Customer First business model continued to deliver strong shareholder value. And late in the year, we completed the acquisition of Steelcase. This combination will not only transform our company but also the workplace furnishings industry.

On today's call, we will review our fourth quarter and full year 2021 results and provide some commentary around our expectations for 2026 and beyond including the benefits of the Steelcase acquisition.

Before I discuss our recent performance, I want to reflect on the fundamental improvements we have driven at HNI. Our transformation has taken multiple steps in years. I will begin with Workplace Furnishings where margins have been reset. Three years ago, our legacy Workplace Furnishings business launched a profitability improvement initiative that was instrumental in expanding operating margin nearly 1,000 basis points. In 2023, price/cost recovery following the period of elevated inflation drove the first phase of expansion.

Since then, multiple portfolio management moves, ongoing network optimization efforts KI synergies and the benefits of ramping our Mexico facility have supported consistent profitability improvement. Based on the initiatives already underway, including the recently announced plans to close our Wayland New York manufacturing facility, we have line of sight to continued operating margin expansion in the coming years.

And our margin expansion story is increasingly supported by affirming macroeconomic picture in our workplace furnishing segment. I will provide more macro commentary later in the call. Shifting to our Residential Building Products segment. Our evolution started with the strategic shifts following the great financial crisis.

Since then, we have adjusted our cost structure, fully embraced lean manufacturing and continue to pursue a vertically integrated business model with the leading brands in all product categories. The result was more than 1,000 basis points of operating margin expansion over the decade post 2009.

In addition, since 2019, the efficiency, nimbleness and uniqueness of our Building Products business have supported consistently strong profitability with sustained operating margins in the mid- to high teens. This consistency of both margins and cash flow our foundational elements to HNI's financial strength.

We expect this profitability and cash generation to continue into 2026 and beyond. More recently, our focus in residential building products has shifted to the front end of the business and on driving top line growth. Structural changes have been implemented to organize around the customer and ensure we have laser-focused go-to-market strategies to support our growth initiatives.

These front-end investments are paying off in the absence of cyclical support. In 2025, we reported segment revenue growth of 6% despite continued weakness in the new home market. We expect to outperform again in 2026. This historical context helps set the stage as we enter the next exciting chapter of the H&I story.

The acquisition of Steelcase unites 2 industry leaders to meet the dynamic marketplace and evolving needs of the workplace and accelerating in office work trends. We have brought together 2 highly respected companies with shared values talented teams, strong financial profiles and highly complementary capabilities, innovation, thought leadership and operational excellence, chief among them.

This strong foundation combined with expected synergies will accelerate our ability to invest in long-term operational enhancements, digital transformation, customer-centered buying experiences and products to meet evolving customer needs.

Our integration efforts are underway, and we are leveraging a disciplined and proven approach informed by recent experience, while continuing to build on the iconic brands for which both companies are widely respected. HNI will now have total revenue of more than $5.8 billion, including all synergies, total adjusted EBITDA will be nearly $750 million and annual free cash flow will approximately be $350 million.

We are now the market leader in both of our industries, Workplace Furnishings and products. I can report that the integration of the Steelcase acquisition is off to a strong start. Six months following the announcement, we're even more confident in our move to add steel case to the HNI family.

The complementary go-to-market nature of the 2 businesses from a capability, product, brand, customer and cultural perspective, has been reinforced as we have begun to work together. We also remain confident in our ability to deliver the targeted synergies of $120 million and drive margin expansion at Steelcase.

Our current synergy projections are focused on the Americas business and do not include any revenue synergies. And importantly, we are laser-focused on minimizing any front-end disruption across our Workplace Furnishings businesses. As we have consistently stated, there are no plans to change dealer partnerships, sales forces or brand distribution.

And as I've been traveling and engaging with our teams, it is clear that this continuity is being received positively by customers industry influencers and our dealers. Now I will turn the call over to VP to provide some additional detail about 2025, discuss our outlook for the first quarter of 2026 and give some thoughts on how we see the full year playing out. I will then provide a longer-term perspective on the opportunities surrounding our businesses before we open the call to your questions. VP?

Thanks, Jeff. I will start with some additional comments about 2025. Fiscal 2025 non-GAAP diluted earnings per share for our legacy business was $3.74, which increased 22% from 2024 levels. Again, this was our fourth consecutive year of double-digit earnings growth with the average annual growth rate exceeding 15%.

Total net sales for the year increased 12% overall and 6% on an organic basis. Excluding all impacts from Steelcase, full year adjusted operating margin for H&I expanded 80 basis points, reaching 9.4%. The improvement was driven by volume growth, productivity gains, Kimball International synergy capture and price cost benefits.

From a segment perspective, in our legacy Workplace Furnishings business, Full year organic net sales increased 6% year-over-year, fueled primarily by the strength of our contract brands and the benefit of an extra week in fiscal 2025.

Full year profitability, excluding the Steelcase stub period benefit from volume growth, our profit transformational efforts, KII synergy capture while we continue to invest in future growth initiatives. Full year non-GAAP operating profit margin expanded 100 basis points year-over-year to 10.5% as we delivered on our previously stated goal of achieving double-digit operating margin.

Non-GAAP operating margin has expanded nearly 900 basis points over the past 3 years. Looking ahead, we expect revenue growth and margin expansion in our legacy workplace furnishing business for the full year 2026 even as we continue to invest to drive growth.

In Residential Building Products, fourth quarter revenue grew more than 10% versus the same period of 2024. Driven by the strength in the remodel retrofit market and the benefits of the extra week. For the full year, revenue increased nearly 6% versus 2024. New construction revenue was flat with the remodel retrofit up a double-digit pace with solid volume improvement. Segment non-GAAP operating profit margin in 2025 expanded 60 basis points year-over-year to a strong 18.1%. We remain encouraged about the long-term opportunities tied to the broader housing market, and we continue to invest and grow our operating model and revenue streams.

As we look to 2026, we expect modest segment revenue and profit growth despite ongoing challenges in the new construction market. Overall, as Jeff mentioned, 2025 was an outstanding year for HNI.

Before I move to our outlook, a couple of comments about Steelcase's impact on the quarter. We completed the acquisition of Steelcase on December 10. Thus, we consolidated Steelcase's performance for the final 3 weeks of December into our reported results. The second half of December is a lower shipment and production period for our industries.

Consequently, that stub period included seasonally lower levels of daily shipment activity while were more than offset by the recognition of full cost and expenses for the period. We excluded this impact from our adjusted results as it does not provide any fundamental insight into our performance.

And as Jeff mentioned, the expected timing and magnitude of our projected $120 million of synergies and $1.20 of accretion are unchanged and unimpacted by the stub period. For the fourth calendar quarter, Steelcase generated strong results. Revenue grew approximately 5% year-over-year, and earnings grew about 9% from the fourth quarter 2024 levels absent purchase accounting, restructuring and acquisition-related costs.

Now I'll transition to our outlook. For 2026, as Jeff mentioned, we expect a fifth year of double-digit non-GAAP EPS growth. Revenue growth is expected to continue while we drive bottom line improvement. In addition, our network optimization efforts continue to support our ongoing earnings visibility story we've been discussing with you.

Our favorable fourth quarter '25 results included accelerating the benefits of these efforts. Looking forward, these initiatives, which include KII synergies, the ramp-up of our Mexico facility, the closure of Hire and the planned closure of Wayland are expected to yield an incremental $0.25 to $0.30 over the next 3 years.

Approximately $0.10 of this will be recognized in 2026. Finally, we now are expecting modest EPS accretion from Steelcase in 2026, excluding the impact of purchase accounting.

Finally, a few additional comments to assist you with your 2026 modeling. Combined, depreciation and amortization is expected to be approximately $175 million to $180 million. Interest expense is expected to be between $75 million and $80 million, and our tax rate should be approximately 25%. For the first quarter of 2026, we expect total net sales to increase by more than 130% year-over-year. Non-GAAP EPS is expected to decrease slightly from 2025 levels.

Temporarily, first quarter earnings pressure is expected to be driven by revenue and expense recognition timing and the increased investment. Modest year-over-year revenue pressure in workplace is expected to be limited to the first quarter and we expect mid-single digits for the full year.

Building Products revenue is expected to be up low single digits for the first quarter and the full year, and we expect year-over-year adjusted earnings per share to return in the second quarter and accelerate as the year progresses.

Finally, a comment on cash flow and the balance sheet. Post the closing of the Steelcase acquisition, our balance sheet ended the year with a net debt-to-EBITDA ratio of 2x. We expect our cash flow strength to continue and accelerate with the addition of Steelcase.

As a result, leverage is expected to return to pre-deal levels in the 1 to 1.5x range in the next 18 to 24 months. Finally, we remain committed to payment of our long-standing dividend and continue to invest in the business to drive future growth. I will now turn the call back over to Jeff for some long-term thoughts and closing comments.

Thanks VP. Our fourth quarter and 2025 results demonstrate the strength of our strategies and our ability to manage through uncertain macroeconomic conditions, while we remain focused on investing for the future. We expect strong results to continue in 2026 driven by our margin expansion efforts, synergy recognition and continued revenue growth.

As we look forward, the timing was right for the acquisition of steel case from a strategic, financial and cyclical perspective. We are increasingly bullish about the workplace furnishing demand dynamics as the macroeconomic picture continues to firm. Return to office continues to be a positive driver of activity with levels of remote work expected to continue to fall in 2026.

Office leasing activity established a new post-pandemic high in the fourth quarter with annual leasing activity up more than 5% for the full year 2025 and net absorption of office space, which has historically been a leading indicator of future industry demand was meaningfully positive in the second half of 2025.

In fact, JLL believes a new expansionary cycle in the office space has begun. While new supply of office space will remain a headwind, we see multiple cyclical drivers of growth outside of new construction.

Moving to housing. Headlines continue to print -- to point to ongoing softness, especially in the new build space. Interest rates remain relatively elevated, prices remain high and affordability remains low. As a result, we expect continued new construction weakness in 2026. However, our structural changes and growth investments should allow us to continue to outperform the market. In remodel retrofit, we are assuming modest growth in 2026.

This is consistent with the lira projections. In addition, we expect continued market outperformance in our R&R business. And importantly, we expect ongoing margin and cash flow consistency in this segment.

Finally, our optimism continues to build around the addition of Steelcase to the HNI family. As I stated earlier, we are confident in our projected synergies of $120 million and accretion of $1.20. And as VP mentioned, we now expect modest accretion in 2026.

We entered 2026 a transformed and fundamentally stronger organization. Upon recognition of all targeted synergies, the profile of HNI will include substantially higher earnings stronger margins, greater cash flow and a continued strong balance sheet. This will enable us to deliver exceptional value to our shareholders, customers, dealers, members and communities. Thank you again for joining us. We will now open the call to your questions.

[Operator Instructions] Your first question comes from the line of Reuben Garner with the Benchmark Company.

Maybe to start just the clarification about the outlook for the year, given the stub period and your efforts to kind of show what the underlying business in the fourth quarter. Are the revenue and double-digit earnings growth comments for next year? Are they off of the base without Steelcase or the base with Steelcase? .

Perfect, Reuben. I kind of walk through the pieces. If you look at the -- on the face of the 346, that's including the Steelcase stub as well as all the purchase accounting, which is close to $4.6 million headwind -- if you take out the purchase accounting, it's $3.53, that's what you're going to want to compare to for the future years because that's what ran through the P&L. And if that specific number could actually be up 16% if you talk about the growth -- and then if you look at the $374 million, that's excluding purchase accounting and the Steelcase stub period. .

And the double-digit growth for '26 would be off of which 1 of those 3 numbers.

353.

Perfect. okay. And then your comments about Workplace Furnishings in the first quarter. I don't think I heard you mention weather just seeing what's happening in some of the major cities in the Northeast and knowing that New York in particular is playing a role. Is that in the recovery? Is that driving the kind of flattish, I think you said first quarter?

And what gives you confidence about the acceleration that you're expecting as the year progresses in the mid-single-digit full year guide, is there any kind of backlog or order numbers from Steelcase and H&I legacy that kind of gives you confidence in a pretty meaningful acceleration as the year moves on.

Yes, Reuben, that's a good question. I mean, weather is always can impact. We don't really hang our hat on that. I mean I think it probably has some impact. It's been a little choppy. Even in the fireplace business, the heart business because they are outside and getting the homes to install. So there's a little pent-up there probably at a little headwind.

But the bottom line is both when you look at legacy and Steelcase we've got really strong, healthy activity, bid counts, both number and dollars, particularly in the contract side or in the high teens. The funnel, our funnel metrics are up in count and in dollars and particularly in large projects, over $5 million.

And I'd say these are consistent across what I would call both legacy and the Steelcase business if you look at it. And that's what's kind of driving our confidence in addition to the macro topics that I talked about firming up on office and net absorption and things like that. So you got that going on macro and micro internally, we see these big numbers and presale activity numbers all trending nicely positive.

And then, Jeff, you've had a little over 60 days, I think, if the math is right since the deal is closed as you've been able to kind of get in and meet with people see how they do things. What are you learned what kind of surprised you to the upside or downside what opportunities do you think you've kind of developed or seen over the last couple of months? .

Yes, it's a good question, Reuben. I spent a lot of time with the teams in Grand Rapids and a lot of time -- a lot of time in the market. And I would say first of all, confidence continues to grow on why we did the transaction. If you look at the customer reach and the complementary nature of the brands and the geographies go to markets, the talented teams are working well together.

We're out of the gates quick. And then I would tell you that the positive response we've seen from customers, dealers, sales force, influencers, basically, people in the value chain as I've gone out in the market and talk to them are very positive on this combination.

And so that's -- that's been a real -- I mean, we predicted that to be the case, but actually going to talk to customers in their locations. And here in the questions they ask and the enthusiasm they've shown for this. It's been really strong. .

All right. And I'm going to sneak one more in. I'm not going to count that first 1 is a full question. So the building products space. Your outlook for low single-digit growth is super encouraging, very impressive given how you performed in '25. It looked like you changed some things up about how you're selling or displaying the product down at the builder show a couple of weeks ago.

I guess, talk about what's driving your outperformance of the industry. There's not a lot of categories in building products, talking about kind of even flattish volume environments for this year. So for you guys to do it on top of what you did in '25, something has to be working for you. Can you just kind of dig into what you're doing there? .

Yes, we can -- VP can comment on us as well. I mean I think we've started to talk about this a while ago, Reuben, which is really getting closer to the builders and the customer engaging in the market being laser-focused on what we can bring to the table for our customers. And it's been -- it's early days, but it's being really well received. I mean, we've got a great product lineup. We hit all price points, all fuel types. And as we get in and engage more specifically from a manufacturer side alongside our industry best-in-class distribution partners, the 2 things are really starting to have an impact.

And combine that with the service model that we have in our large installing distributors, independent and our FHH. What I would tell you is it's is moving the needle. And so we got a good product pipe we're talking about in the electric category.

And all these things are really starting to catch hold. And I think that's really what's going on. I mean it's it's nothing more than really customer intimate focus where customers want to be met, whether it be in the R&R segment or in the new home segment. I don't know VP if you've got any.

Yes, Jeff, I'd add and the way we measure this, Reuben, is you can -- everybody sees the news of permits down 7% year-to-date, and they see contracting markets. We actually measure it market by market and the initiatives that Jeff is talking about the intimacy, we can see that we're seeing better results on that. So those are share gains and in some cases, get more fireplace spec.

So it's the controlling the controllables. And on the remodel side, we've done a nice job on the spoke side of our business. We've gone to a single brand to consolidate it. We've been able to get a lot more reach a lot more reach into the retail in the big box. So that was an area for growth that's inside the numbers as well. So the long-term investments are paying off. We still have a lot more to do to get to more markets and more builders, but we certainly are not pulling victim to a down 7% permit number.

Great. Thanks for the detailed guys. Congrats on the strong close to the year and the strong outlook at the stock markets being a bit rational today, but I assume all this will work itself out and good luck in '26. .

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

Good morning, everyone. I wanted to start on the synergy number, $120 million being Americas focused. A couple of things on that. First, I would -- given your past execution, I think there could be upside to that. I'm curious kind of what points or targets you would need to reach to potentially raise that down the road?

And then secondly, it being America's focused seems to imply that Steelcase International is still projected to be a negative offset -- could that be a source of upside in the future?

Steven, I'll take it kind of in 2 pieces. The first $120 million that we originally announced is through our disciplined approach that we've learned through the KI process. You heard Jeff say we're still comfortable with that number. It takes every bit of 3 to 6 months to get the team working on the specific projects of how we're going to go execute it, which is why I talked about accretion of $0.60 in the second year once these projects are up and running.

And so to your question about timing, 6 months in, if we've learned more, we'll share more. But right now, we're focused on making sure we understand the buckets between procurement logistics, SG&A and network optimization, and that we'll share with you as we learn more as we go.

But I think the key thing from the last time we talked is we expected it to be neutral in year 1. And now that we're in there, this is actually going to be modestly accretive in year 1.

And that's really good considering the capital structure and the additional shares that were issued that it doesn't change our total target, but it shows that we'll start seeing the benefits of a little quicker. That's kind of question one.

Question 2 on international, that is not offsetting anything. This $1.20 stands on its own. The international business has very good assets, as Jeff said, with the business and the team is working together, we're getting up to speed on that business, whether it's APAC or EMEA. We're getting a lot of insight of how the business is going to go to market and their advantages. And I'd tell you, the teams are are energized right now to drive profit improvement plans. They're in place in all of those areas, and that will not be a drag on the $1.20.

Okay. That's great color. Wanted to think about the resi growth investments, and you talked about that being a consistent margin. Is the implication that 2026 resi margin is flattish with sales up? And is there a cadence for the year on the resi margin profile? .

Yes. I think that's the right way to think about it, Steven. That business is extremely flexible in profitability as you've seen it from whether it's $500 million or $850 million, it tracks between the 17% 18%. We are going to continue to make the investments Jeff was talking about with builder and getting closer to the builder. So we would expect those margins with the revenue growth to stay right around the same area. .

Okay. And then maybe you could share a bit more on the resi growth investments and if those have shifted in the last year or so as you've started making those, it's clearly working and your it sounds like you're saying it's geared towards builders yet R&R is the growth drivers. Maybe you can kind of connect the dots there on the investments being more to builders, but the growth being from R&R.

Yes. I think there's a couple of things on this one, Steve. One, when we talk about investments, this has been a 3-year journey. The operational excellence of this business is what's allowed us to deliver the results -- in the last 3 years, we've moved to a front-end structure. We brought in leaders running each of these business units that bring those front-end points of view. And they're the ones leading the charge in each of the intimacy models in both new home and existing.

We've also made a significant amount of investments in product and innovation. Part of this success and our offset against the market is we are entering new categories and new areas. Specifically, an example would be Woodstone and DIY-- that's a large market. We didn't have a place in. So we're making investments with go-to-market there. It's allowing us to do it as well as what Jeff said on the electric side. So I think you're seeing investments on the new home and the remodel side as well. and they just pace to how they come in through the revenue streams are not always at the same time. .

Yes, I think it's a great point. I also would -- we're getting really good. I think someone else mentioned at the IBS show is a different look from what we've had in the past. We're connecting more to designers, interior designers. I mean there's a lot of focus there relative to design as well, Steven. So it's kind of across the board -- and I lump it all back to getting much closer and intimate with our geographic areas, design trends, customer intimacy in all the while working that with the changes VP talked about. It's been a couple, 3-year run, and it's starting to pay dividends, and we're going to keep investing.

Your next question comes from the line of Greg Burns with Sidoti & Company. .

I was just hoping to get a little bit more color on the profit headwinds in the first quarter. What exactly are they? And why are they going to be rolling off as we move through the balance of the year? .

Yes, Greg, it first starts with just some timing of the revenue. It's a little choppy on kind of how some of the contract side of the business, everything that Jeff talked about on the backdrop is all good and favorable for us. And if I look at even how orders came in, in the fourth quarter, the workplace was actually up 5% and Steelcase's actually showing up good order trends as well.

It's just the timing of when that stuff is going to ship. So -- the revenue is the first piece, and we have a couple of comps just from last year that we're up against. That's why we do believe it's a short-term issue and the full year is more important.

I think on the expense side, there's really 2 things happening bringing in the Steelcase family, there's a comp timing that's hitting in the first quarter that would have hit in the second quarter under their P&L. So that's a little bit of expense pressure. And we're still balancing our investments. We're still making sure that we're thinking about the long game and the macroeconomics tells us still to keep investing.

So I think the revenue growth, the timing of the expense and that's continuing investment puts the short-term pressure -- but more importantly, as we go through the year, you're going to see the double-digit EPS growth accelerate in Q2, Q3 and Q4 based on not only volume but the visibility story we're talking about. .

Okay. Great. I think last quarter, you called out some hospitality orders or the timing on hospitality orders. Could you just maybe update us on the hospitality market and if there's any any change there? .

Yes. No, there is not. The hospitality market is solid. We were up against the comp. But look, say similar to the contract market, pipeline is strong. Our business is making investments performing well. They have a market leader position in in-room furniture. And so we like that business a lot, and we expect that it will perform at or above prior year.

Your last question comes from the line of David MacGregor with Longbow Research.

I guess from our dealer conversations this quarter, it's pretty clear that demand for design support has accelerated pretty dramatically. And so just wondering if you can talk about the amount of work that you believe is developing in the pipeline, but maybe not yet in the order backlog -- and how you're thinking about the timing of that were converting to orders and then to sales dollars?

Yes, that's the question, isn't it, David. I think you're hearing the same stuff that we're seeing, which is there's a lot of activity. It's -- I believe it's real. And we're actually -- just to get upstream on that a little bit, a lot of our businesses are deploying additional resources to help dealers and customers get things through the pipe because that does become a backlog area relative to the ability to get things designed. We're also working on some AI tools and some other digital tools to be able to help that as well for the long game. .

But look, we -- historically, this business has had a pretty stable conversion kind of spec to order cycle. And post- COVID, it's been a little bit all over the map, and it hasn't really settled down. But I would tell you that once these things start and you see the commitment, particularly on the larger projects, they come in.

It's just sometimes they don't fall perfectly in the areas. And the other thing that we're seeing with the Steelcase acquisition is their exposure to the large stuff that once it gets let, it goes it's robust. Now we're still working with them on how they view their timing and predict the order to revenue cycles and the spec to order cycles.

So I can't really give you a great answer on -- it's 90 days or 60 days or it's 30 days. But it's real and it's volatile relative to when it gets put in. But we're bullish.

Yes, it's out there. There's no doubt about it. Second question, really just around the discussion around synergies and you talked about the $120 million -- it seems like you're bumping the '26 expectation a little bit. And I'm mindful that you haven't any change to the 120. But I guess the question is, is the better outlook on '26 a function of maybe incremental synergies that you've identified? Or is it really timing? And then I guess, related to that is the whole discussion on commercial synergies, which I fully understand why you don't want to get into too much detail around that at this point.

But I'm wondering if you can just discuss it at a very high level kind of the actions you're taking to facilitate the eventual capture of those commercial synergies.

Yes, I'll take the first part of that, David. The timing and the dollar of year 1 actually hasn't changed as it relates to the -- we had predicted a little bit more transition costs and some offsets in our original accretion analysis as you put the businesses together. So it's just -- as a result, we'll just get a little bit more of that that 2-year look of $0.60 a little bit earlier. So I would tell you that our philosophy hasn't changed, and our approach hasn't changed as we've set that number.

Yes, David. And then on the synergies, yes, you're right, it's early days. And we -- what I would tell you, though, as I've traveled, we're seeing some nice, what I would call, organic connections between our networks to support revenue synergies, particularly with some of our open line brands. And so that when that formalizes more and gets more structured to it. We're going to kind of let it play out a little bit and see kind of how the natural system works, and then we can look more at that. But look, I mean it's going to -- we see some organic pull for some of that revenue. And it's early days, but we'll probably be talking about that down the road. But right now, it's -- I'm encouraged by what I see. .

Can I squeeze maybe 1 more in. And just maybe for the model, if you will, working capital in 2026 and how we should be modeling working capital. .

We're going to -- we benefited with the pooling on the Steelcase balance sheet. We're actually sequentially improved a little bit. And just with the timing of expenses, we're going to need to make a little bit of an investment, David, but not significant when you think about the net working capital as we go into 2026 and beyond. .

So -- but I think 1 more comment there, though. The operational discipline inside of the HNI piece as we bring into that balance sheet, I would tell you there's opportunity as we get into the out years. .

That concludes our Q&A session. I will now turn the call back over to Mr. Lorenger for closing remarks. .

Thank you for joining us today and your interest in HNI. We look forward to speaking with you again in April. Have a great day. .

Ladies and gentlemen, that does conclude our conference call for today. Thank you all for joining, and you may now disconnect. Everyone, have a great day.

Hello, everyone, and welcome to HNI Corporation Third Quarter Results Conference Call. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the floor over to Mr. Matt McCall. Please go ahead, sir.

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 2025 results. With me today are Jeff Lorenger, Chairman, President and CEO; and VP Berger, Executive Vice President and CFO. Copies of our financial news release 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 risks. Actual results could differ materially. The financial news release 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. I'm going to divide my commentary today into 3 sections. First, I will provide some comments about our third quarter results. Non-GAAP earnings per share increased 7% year-over-year, driven by a record third quarter non-GAAP operating margin. Next, I will discuss our expectations for the fourth quarter of 2025. Our full year earnings outlook is unchanged from what we provided on last quarter's call. We continue to anticipate a fourth consecutive year of double-digit non-GAAP earnings improvement.

And finally, I will provide additional detail about recent demand activity and how we see our markets playing out in the fourth quarter and as we move into 2026. Following those highlights, VP will provide additional color around our fourth quarter outlook. He will also comment on the strength of our balance sheet, both currently and what we anticipate after the completion of the pending acquisition of Steelcase. I will conclude with some closing comments, including some additional thoughts on our Steelcase transaction before we open the call to your questions.

I'll begin with the third quarter. Our members delivered another strong quarter despite ongoing tariff-driven volatility and continuing macro uncertainty. The positive momentum of our strategies, the benefits of our diversified revenue streams, our focus on items within our control and the merits of our customer-first business model continue to deliver strong shareholder value.

For the quarter, we delivered non-GAAP diluted earnings per share of $1.10. EPS grew 7% versus last year, which was modestly ahead of our internal expectations. Total net sales in the third quarter increased 3% organically over the same period a year ago and profit margins in the third quarter were strong. Our non-GAAP operating margin expanded 10 basis points year-over-year to 10.8%. This non-GAAP EBIT margin was the highest on record for the third quarter. In the Workplace Furnishings segment, organic net sales increased 3% year-over-year, fueled by growth across all major brands. We delivered similar organic growth rates in our brands focused on small- and medium-sized businesses and on contract customers.

From a profitability perspective, Workplace Furnishings' non-GAAP segment operating profit margin expanded 40 basis points year-over-year and exceeded 12%. Third quarter profitability benefited from our profit transformation efforts, recognition of KII synergies and modest volume growth.

In Residential Building Products, third quarter revenue was roughly unchanged versus the prior year period. New construction revenue was down slightly, while remodel retrofit sales grew modestly, both on a year-over-year basis. We delivered this top line performance despite continued challenging housing market dynamics as we continue to compete well and our internal growth investments are bearing fruit.

Consistent with expectations discussed on last quarter's call, third quarter segment operating profit margin contracted year-over-year driven by continued investment. However, segment operating margin still came in at a strong 18%. Despite expectations of ongoing uncertainty, we remain encouraged about the opportunities tied to the broader housing market, and we continue to invest to grow our operating model and revenue streams, and the consistently strong profit margins in this segment are evidence of the business' unmatched price point breadth and channel reach, along with the benefits of its vertically integrated business model and overall operational agility.

To summarize, our third quarter performance demonstrates the strength of our strategies and our ability to manage through varying macroeconomic conditions while remaining focused on investing for the future. We expect strong results to continue, driven by our margin expansion efforts and continued volume growth. That leads to my comments about our outlook for the fourth quarter. Overall, we expect our margin expansion efforts and continued revenue growth will support ongoing year-over-year EPS improvement, all while we continue to invest to drive future growth.

In Workplace Furnishings, segment orders increased 2% after excluding the estimated impact of prior quarter pull-forward activity and hospitality orders. We are again excluding hospitality from our adjusted order growth and backlog metrics as the business has experienced meaningful tariff-related volatility over the past 2 quarters, which has temporarily skewed results. Adjusted orders from contract customers performed better than those from small- to medium-sized businesses. Our adjusted segment backlog at the end of third quarter was up 7% from the third quarter of 2024.

I will discuss our outlook for our workplace markets, including hospitality more in a moment. Moving to Residential Building Products, orders in the third quarter increased 2% year-over-year. Remodel retrofit orders outperformed and were up mid-single digits from third quarter 2024 levels, while new construction orders were down low single digits.

Overall, year-over-year segment order growth accelerated towards the end of the quarter. Builder sentiment has weakened in recent months and continues to reflect the impacts of elevated interest rates, ongoing affordability issues and weaker consumer confidence. And housing trends have broadly followed builder sentiment with permits moving lower. Despite expectations of ongoing uncertainty and headwinds, we remain encouraged about the opportunities tied to the broader housing market, and we continue to invest to grow our operating model and revenue streams.

I will finish by making a few comments about our markets and provide additional detail around our elevated EPS growth visibility. On our last few calls, we highlighted an increased focus on investing to drive growth in both segments. Our 2025 to-date revenue strength and encouraging leading indicators have provided added support for our growth initiatives and investments. As we look at our Workplace Furnishings segment, we are encouraged about the developing fundamentals of this business.

The macro and industry backdrops have shown consistent improvement in recent months. Return to office data appears to be indicating an inflection. The castle card swipe data following Labor Day reached post-COVID highs with Class A buildings in the top 10 markets approaching 98% peak day occupancy. Further, in a recent KPMG survey, nearly 80% of CEOs surveyed now expect employees to be full time in office over the next 3 years. This is up from fewer than 40% in the April 2025 survey.

And according to CBRE, nonviable space is being converted at record levels. This positively impacts our business in 2 ways. First, it results in more forced moves as landlords encourage current tenants of this nonviable space to relocate. And second, it will accelerate the expected Class A square footage shortage, which will either drive the addition of new space or increased investment in upgrading existing Class B space. Each of these dynamics result in more furniture events.

Finally, calendar year 2025 is expected to see the highest net absorption of office space since 2019. Historically, absorption has been an important indicator of office furniture demand. JLL estimates more than 6 million square feet was absorbed on a net basis in the third quarter of 2025 alone. This compares to total negative net absorption of more than 100 million -- 150 million square feet over the past 5 years. Office vacancy rates are falling for the first time in 7 years as we enter what JLL has deemed a new office growth cycle.

In New York City alone, businesses leased 23 million square feet of additional office space during the first 9 months of 2025. This is the largest amount of new workspace rented for that period in 2 decades. And in total, 18 of the largest U.S. markets are exceeding pre-pandemic leasing activity over the past year. The macro and industry backdrops are clearly improving, and we expect our contract business to disproportionately benefit from these trends as much of the industry growth cycle to date has been in secondary and tertiary markets.

Finally, I will comment on our hospitality business. As I mentioned earlier, compared to our other businesses, this vertical has seen more tariff-related demand volatility over the past 2 quarters. Despite this pressure, we expect revenue in this business to be relatively flat in 2025 overall. We have seen recent improvement in preorder activity, and our pipeline continues to build, pointing to a solid growth year in 2026. Looking ahead, we believe we are particularly well positioned to benefit as the workplace furnishings market continues to improve. We have strong market positions and offer compelling value to our targeted customers with a diversified portfolio of brands.

Moving to Residential Building Products. We believe in the positive long-term market fundamentals. We continue to perform well despite an ongoing soft new construction environment, and we acknowledge a market-driven revenue recovery will take some time. We are, however, optimistic about our opportunities to increase revenue through our growth initiatives. Specifically, we continue to invest in developing market-leading new products that offer customers more options and features.

We are driving new programs to increase homeowner and homebuyer awareness of their fireplace options, ensuring our products are considered in all remodel and new construction projects. And we are strengthening our already strong relationships with builders across the country, helping them deliver the best overall value to the homeowner. Encouragingly, we are outperforming the market in this segment despite still being in the early days of each of these initiatives. And while we invest in growth, we will continue to deliver high-margin results and strong profits in this business.

Longer term, single-family housing remains undersupplied and demographics will support additional demand growth. The results of our ongoing investments, which will enhance our connection to customers and build on our leading brands will fortify our position of strength in the industry. Finally, and importantly, we continue to have elevated earnings visibility this year and next. Our outlook for 2025 revenue continues to include full year growth in both segments.

Our outlook for 2025 earnings reflects expectations for mid-teens percent EPS growth. In addition to increased profits and volume growth, KII synergies and the ramp of our Mexico facility are expected to continue to drive significant savings. These 2 initiatives are expected to contribute a total of $0.75 to $0.80 of EPS in 2025-2026 period. I will now turn the call over to VP to discuss our outlook for the remainder of 2025 and our balance sheet. VP?

Thanks, Jeff. I'll start by discussing our outlook for revenue and profit. Beginning with the top line. Fourth quarter revenue in Workplace Furnishings is expected to increase at a high single-digit rate year-over-year organically. The impact of divestitures is expected to reduce the year-over-year organic revenue growth rate in Workplace Furnishings by a little less than 100 basis points.

The benefits of our order and backlog growth, along with an extra week in our fiscal year are expected to drive solid revenue growth in the fourth quarter. For Residential Building Products, fourth quarter net sales are also projected to increase at a high single-digit rate compared to the same period in 2024. Pricing actions are expected to be the primary driver of growth.

However, we also [Audio Gap] borrowing capacity will continue to provide us with significant financial flexibility. Moreover, while we expect our initial post-closing net leverage to approximate 2.1x, we continue to project our debt levels will return to our targeted range of 1 to 1.5x within 18 to 24 months of closing.

In the meantime, we remain committed of payment of our long-standing dividend and continuing to invest in our business to drive future growth. I'll now turn the call back over to Jeff.

Thanks, VP. During the third quarter, we remained financially disciplined, managing the middle of the income statement to drive profit improvement while pursuing revenue growth. As we look forward, several positive secular trends and our HNI-specific initiatives will help offset macro-related risks and continued tariff-driven volatility.

We will remain focused, conservative and ready to adjust as required. And as a result, our earnings outlook for the full year is essentially unchanged, and we continue to expect the fourth consecutive year of double-digit non-GAAP EPS growth. This outlook demonstrates the benefits of a stronger-than-expected third quarter, our ongoing visibility story and our proven ability to manage through changing economic conditions.

Before we take your questions, I wanted to provide some thoughts on the pending Steelcase acquisition. As we approach the closing, we are excited about the future of bringing together our combined capabilities to create new career growth opportunities for our team members, deliver more value for our customers and dealer networks and further support and invest in the communities in which we operate. The deal is right from a strategic, financial and cyclical perspective, and our 2 companies are highly complementary on many fronts.

We currently expect synergies to reach $120 million and ultimate accretion to total $1.20 per share when fully mature, excluding purchase accounting. And as VP highlighted, our anticipated strong free cash flow will help us quickly deleverage our balance sheet. The addition of Steelcase will further strengthen the tenets of the HNI investment thesis, and we are positioned for continued success.

We have elevated earnings growth visibility for several years, broad and diverse product and market coverage in Workplace Furnishings, market-leading positions in Residential Building Products, and we continue to invest to drive growth. All this is supported by our strong balance sheet and the ability to generate continued free cash flow. I want to thank each HNI member for their continued dedication and congratulate them on another excellent quarter. We will now open the call to your questions.

[Operator Instructions] Your first question comes from the line of Greg Burns of Sidoti & Co.

That $1.20 of accretion from Steelcase that you just mentioned, is that considering just the synergies that you've already outlined? Or is that...

Yes, Greg, that's the $120 million that we talked about on the investor call back in August. So that number has not changed. And just the way the share count works, that now converts to about $1.20 in accretion.

Okay. So that's just your initial outlook, maybe there's potential upside to that if you get your hands around the business and drive additional savings.

Greg, I think for that -- I think just one comment there. That's a number that we're really confident in. And we're going to use our disciplined integration process. And once we get in there and if there's more, we'll look for more. But that's what we're on record for right now.

Okay. Great. And then where are you in terms of the $0.75 to $0.80 from KII and Mexico? How much have you gotten so far and what remains?

Yes. We had said that $45 million to $50 million would be recognized between '25 and '26. We had mentioned kind of splitting it half and half. We're seeing a little bit more come forward of '26 in the last quarter here of '25. So I would tell you, maybe a little bit more in '25 and '26. But I think more importantly, to Jeff's point on visibility, we do see the $45 million to $50 million coming through.

Okay. And you gave us a lot of data points around kind of some of the positive industry level fundamentals in the office space. We've seen kind of this slow and steady demand improvement happening over the last couple of years, kind of low single-digit growth. But when we think about the -- where the industry is at relative to maybe pre-pandemic levels, I know you've passed along a lot of pricing.

Where are we in terms of volume, like relative to maybe where we were pre-pandemic? Like where are we in terms of industry-wide volumes? I'm just trying to get a sense of where we're at in the cycle and maybe what the potential uplift from here could be if we do get a more positive demand environment going forward?

Yes, Greg. I think we're probably -- with all the pricing, it's a little tough to say. But I think confidently, we probably are 30% to 35% on the volume side, still down just given pricing actions and tariffs. But -- so that's kind of -- I think as you think about that, that's how we think about the post-COVID kind of cycle and some of these other macro backdrop items starting to turn around. So that's how I think about, that's how we think about, and that's why we're bullish about the space.

Yes. Even if it returns half that, Greg, you're looking at mid-single-digit volume growth for a significant number of years. So the backdrop is set up, even if it doesn't get back to the 30% more, there's still a lot of volume growth opportunity.

Your next question comes from the line of Reuben Garner of Benchmark.

Can we -- can you kind of give us a compare and contrast about your full year guidance? I guess, what's embedded in the fourth quarter now versus maybe how it looked a few months ago? It looks like maybe the top line is a little higher, but there's some more cost in there as well. Can you just kind of give us the breakout of that?

Yes, I can walk you through that, Reuben. Starting with revenue, I think it's probably -- if I look at Workplace and Residential revenue, it's mostly actually in line with prior expectations. Both are expected to be in the fourth quarter, up high single digits with the extra week. So I think where we're seeing a little bit of the pressure is the product mix. When we look at what's come through in backlog and the pipeline, there's more project-driven business and systems.

So that's really a timing issue. It draws a little bit lower margin, but on the backside of that comes other business that goes with that with ancillary products that will come probably in Q1. So a little timing there. I think the second part of our Q3 beat is going to be timing of investments. Some of it slid in the fourth quarter or into the fourth quarter, and it's part of that actually saved in the third quarter. So those are going to come back.

I think the key there is our second half is still unchanged. So I think you got a little bit going between the 2 quarters. And I think a couple of other things to mention. Jeff mentioned, I mentioned insurance-related pressure year-over-year. That's hitting us on the SG&A side. And I think we probably need to update our tax rates. Our second half tax rate is now at 24.4%. That's about 80 bps higher than we talked about prior in the year that gets us to a full year tax rate of 23%. So when you boil that all together, the back half is really not changing. It's got a little bit of timing and dealing with some onetime expenses.

Okay. That's really helpful. And then on the residential building products side, you guys have definitely outperformed kind of what the end markets have been like so far this year. And I know you've got some investments ongoing there to drive growth. How much runway do you have on that front? I guess maybe to ask it differently, if we're looking at kind of a flattish environment next year, like can you -- do you think you can still grow above and beyond the market on the volume side?

Yes, Reuben, it's a good question. I think we can. It's all relative to the macro environment, right? I mean -- but we -- I think given the investments we're making, like right now, the new construction business -- I'll give you an example, we're outperforming, for instance, in October, our orders were flat and permits 90 days prior to that were down high single digits, and that's kind of the lag time we've been seeing.

So that tells you we believe we can outperform this market. The question is where is the market ultimately going? And your guess is as maybe good as ours, but we definitely we can outperform. We got retail performing well. Our gas inserts are up year-over-year. We've got stoves now going into the big box channel, and that's early innings. Our wholesale business is actually up year-over-year because the operating model is strong in that part of the world to support smaller independent dealers.

And just overall investments in our superior service model, our vertical integration and builder intimacy efforts are starting to take shape. So these are in the early innings, but they are bearing some fruit. So we do believe we'll be able to stay ahead of the demand curve, if you will. The question is, where is that macro demand curve and what gap can we put on top of that.

Okay. And I'm going to sneak one more in on the contract business. It seems like some good momentum on that side and the timing of you guys adding Steelcase seems nice. Can you talk about any risks out of the gate as you're integrating the company? And if we did see an acceleration in demand, just kind of what gives you confidence that you'd be able to kind of, I guess, participate in that upswing as you're putting the 2 companies together?

Yes. That's a great point, Reuben. Let me start with, first of all, we're going to -- there's really no change on the front. Our dealer partnerships are going to remain intact as they are. The brand distribution is going to remain intact. Sales force is intact, both for HNI and Steelcase companies. So I think our approach there will avail us the ability to take advantage of some of those trends because everybody's heads down in that regard. And the cultures are good.

We're out of the blocks. And so we're bullish about being able to work on what we need to work on, as we've talked about, cost synergies in some of those areas while keeping the front end of these businesses separate and focused on their unique brand position so that we continue to work to build on those. So we would anticipate being able to participate in any of this as these trends continue to evolve, particularly in some of these larger markets.

Question comes from the line of Steven Ramsey of Thompson Research Group.

This is Brian Biros on for Steven.

Sure.

On the resi side, I guess, sales were flat. Orders grew 2% and really accelerated at the end of the quarter, it sounds like. So I guess can you just parse out maybe like why orders grew and if there's anything to call out really that drove the acceleration into the quarter end?

Yes. And are you talking about the resi side or Workplace, Brian, just to make sure I'm...

Sorry, the resi side.

Yes. Yes. You kind of nailed it. So the -- if you look at orders for the quarter, we're up 2% for the segment. The actual remodel retrofit was up 7%, and it actually was accelerating as we went through the quarter. We actually grew backlog to 13%. So that's given us confidence in the high single digits for the quarter. The backdrop of everything that Jeff just talked about is supporting that, which is allowing us to outpace the market.

We're starting to see good signs for a retail season in most of the country outside the West Coast. All those support our high single digits with the extra week. So when we look at that business for the full year, I think it's more important, we're going to grow mid-single digits in a very tough market that didn't grow. And although most of it will be price, we actually are going to show unit volume growth in the fourth quarter and a bit for the full year.

Got it. Helpful. And secondly, I guess, just on the Workplace segment, the opportunity set there, maybe by sector, is there a way to think of how much that reflects return to office compared to non-office verticals?

So yes, I think that's -- it's pretty hard to parse that. I think it's some of both. The verticals have been holding up well. You look at education, you look at health care. Obviously, federal government is in kind of in a weird spot right now. But I think the return to office stuff, if I had to say, is probably in the earlier innings definitely than some of the other vertical plays. But we do see some of those verticals as we look out into the future that's still staying strong. But I'd say verticals have been a little stronger than return to office and return to office is just really getting going.

I'd now like to hand the call back to Mr. Lorenger for final remarks.

Great. Appreciate it. Thanks -- thank you for taking an interest in HNI, and have a great day. Appreciate the time.

Thank you so much for attending today's call. You may now disconnect. Goodbye.

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the HNI Corporation Investor Call to discuss HNI's agreement to acquire Steelcase. [Operator Instructions] .

I would now like to turn the call over to Mr. McCall. Please go ahead.

Good morning. My name is Matt McCall. I'm Vice President, Investor Relations and Corporate Development at HNI Corporation. Thank you for joining us to discuss HNI's agreement to acquire Steelcase, which we announced earlier this morning. With me today on the call are Jeff Lorenger, Chairman, President and CEO of HNI Corporation; Sara Armbruster, President and CEO of Steelcase; and VP Berger, Executive Vice President and Chief Financial Officer of HNI Corporation. We have posted a slide presentation with additional information about the proposed transaction on the Investors section of our website under Events and Presentations. We encourage you to read the slide presentation in its entirety.

Statements made during this call that are not strictly historical facts are forward-looking statements, which are subject to known and unknown risks. Actual results could differ materially. The news release and slide presentation posted on our website and on the SEC website include additional factors and risks that could affect actual results. The corporation assumes no obligation to update any forward-looking statements made during the call or contained in the news release.

I'm now pleased to turn the call over to Jeff Lorenger. Jeff?

Good morning. Thank you for joining us. It is an exciting day for both the HNI Corporation and Steelcase, and I'm looking forward to walking you through this transformational acquisition. I will begin with an overview of the compelling strategic rationale before passing the call over to Sara to share her perspectives on the transaction. I will then provide an overview of Steelcase and explain why we are so excited about the opportunity. Next, VP will provide some financial highlights of the combined companies. Finally, we will open the call for your questions.

This acquisition brings together 2 companies with highly complementary dealer networks, brand portfolios and customer segments. Before I discuss the strategic merits of the combination, it is important to note that there are no plans to change the dealer partnerships, brand distribution or sales forces of HNI or Steelcase. Our partnerships and strong commitment to our dealers and their ongoing success remains our collective priority. With this foundational backdrop, we see many strategic benefits from this combination.

First, with Steelcase joining the HNI family, we'll be -- we will more effectively reach and serve a broader range of customers from small and medium-sized businesses to the largest global organizations. Second, we will bring together several of the industry's most respected and widely recognized brands. Together, HNI and Steelcase will be even better positioned to meet the evolving needs of the workplace. Third, HNI and Steelcase have capabilities that fit very well together. We will unite a strong innovation engine with operational excellence to accelerate delivery of more advanced and diverse solutions to customers.

Fourth, this acquisition will be highly accretive and is fully aligned with HNI's strategic framework, which is focused on driving long-term profitable growth. Finally, as in-office work trends accelerate, we will be better positioned to capture industry tailwinds and unlock new opportunities by reaching more customers in more places with more solutions. This is truly a great day for both HNI and Steelcase.

Now let me introduce Sara so she can share her thoughts on the transaction.

Thanks, Jeff, and good morning, everyone. This is an incredibly exciting day for all of us at Steelcase, and I'm pleased to share how joining HNI Corporation will create greater value for our shareholders, customers, dealers and employees. For more than 100 years, Steelcase has been driven by our purpose of helping the world work better. We've established ourselves as an innovator and thought leader, always keeping our customers' needs at the forefront of everything we do. And over the past several years, we've reshaped our business by adding new capabilities and teams, launching next-generation products and embracing new technologies.

As part of HNI, we will continue pursuing our strategy of enhancing the work experience and helping people do their best work wherever work happens. And that's why I'm so confident that this is a win for all of our stakeholders. This transaction offers immediate and significant value at an attractive premium. And as a more diversified and resilient industry leader, we'll bring together complementary brands and reach more customers, providing even more upside from this combination.

Following the close of the transaction, we will continue to operate at Steelcase with our current brand strategy. And through our combined capabilities with HNI, we'll be even better positioned to deliver for all of our stakeholders. This transaction is a testament to the incredible efforts of more than 11,000 people whose talent, dedication and passion are what makes Steelcase the industry leader that we are today.

I've enjoyed getting to know Jeff and the HNI management team, and it's clear that they share our deep commitment to investing in employees and operating with excellence. So I look forward to the exciting ways in which this transformative combination will shape the industry and deliver significant benefits to our customers, dealers and employees.

And now I will turn it back to Jeff.

Thank you, Sara. The feeling is certainly mutual. This process has been highly collaborative and has provided valuable insights into the capabilities of the talented Steelcase team. I'm excited about our future together.

Many of the -- many on this call knows Steelcase well, but I want to take a moment to provide an overview of the company and why we think this combination is a very strong fit. Steelcase's global footprint includes almost 800 dealer locations in more than 80 countries. By maintaining and growing Steelcase's distribution networks and strong corporate relationships, HNI will have a broader coverage across multiple customer segments within the workplace furnishings industry.

Steelcase is known industry-wide as a thought leader with a portfolio of design forward brands. We have long admired Steelcase for its research-led approach, which helps deliver insights and innovative product design for customers around the world. As we bring these 2 organizations together, our recent M&A experience and our disciplined integration approach give us confidence in our ability to successfully combine our capabilities and deliver cost synergies. The successful integration of Kimball International has proven we have a playbook, utilizing cross-functional teams focused on the right priorities, driving processes that deliver results.

Combined, we'll have an enhanced financial profile that will increase our ability to invest in operational and transformative strategies for the benefit of our customers, dealers and members. To provide more detail about the financial highlights of the transaction, I will now pass the call over to VP. VP?

Thanks, Jeff. I'll walk through the financial terms of the deal, and then we'll highlight why this is a compelling opportunity for our shareholders. The total cash and stock consideration of Steelcase common shareholders is approximately $2.2 billion. This implies a price per share of $18.30 to Steelcase shareholders and reflects an enterprise value multiple of approximately 5.8x pro forma adjusted EBITDA, including $120 million of annual run rate cost synergies and the projected net debt at the time of closing.

Following completion of the transaction, HNI shareholders will own approximately 64% of the combined company and Steelcase shareholders owning the remaining 36%. From a financing standpoint, the net leverage is expected to be approximately 2.1x at closing as defined by our credit agreement. The modest level of leverage and our track record of strong cash flow generation will provide continued balance sheet flexibility to support future growth initiatives.

This -- the transaction, which is expected to close by the end of the calendar year 2025 is subject to approval by the HNI and Steelcase shareholders, the receipt of required regulatory clearances and the satisfaction of other customary closing conditions.

Together, our companies have a very compelling operational footprint, which will help the combined organization get products to more customers in more places. This complementary combination will also enhance our ability to serve diverse customer segments from small and medium-sized businesses to the largest corporations. We'll also expand our offerings across a wide range of vertical segments, including health care, education and hospitality customers.

As we combine our capabilities, we expect to maximize the combined organization's effectiveness and unlock significant cost synergies. We expect to realize $120 million in annual run rate cost synergies. These cost savings opportunities will contribute significantly to our overall profit margins. We expect the transaction to be highly accretive to non-GAAP earnings per share beginning in 2027, with expected accretion of $0.50 to $0.60 for the impact of purchase accounting. Additionally, we expect our complementary brand and product portfolios to provide longer-term revenue growth opportunities from an enhanced dealer network. At this time, we are assuming no revenue synergies in the current accretion projections.

A few additional comments on our balance sheet and cash flow. As part of our integration process, we will also focus on generating strong cash flow in order to quickly deleverage and maintain flexible balance sheet with net leverage expected to return to pre-acquisition levels within 18 to 24 months.

We expect our pro forma cash flow to significantly benefit from cost synergies and working capital efficiencies as well as from organic volume growth. The combination of our consistent cash flow generation and strong balance sheet will continue to provide a high degree of financial flexibility and capacity for investment. We also remain committed to continuing our quarterly dividend policy and opportunistically returning capital to shareholders through share repurchases.

In summary, upon closing, we expect the total annual net sales of the combined company to be approximately $5.8 billion with a pro forma EBITDA of $745 million, inclusive of synergies. This is equal to a strong adjusted EBITDA margin of nearly 13%.

With that, I will pass it back to Jeff for some concluding comments.

Thanks, VP. It is important to note that HNI and Steelcase share a deep commitment to respecting people, protecting our planet, operating with excellence and acting with integrity. These shared values will be the cornerstone of our integration efforts.

Before we open the call to your questions, I wanted to update the investment thesis we have been sharing with you in recent quarters. We believe the workplace industry is returning to growth after 5 years of softness. We expect our residential building products business to outperform the housing and R&R markets while maintaining its strong EBIT margins in the high teens, and we continue to have elevated EPS visibility from our Mexico operation and KII synergies, which will expand workplace EBIT margins. These items will lead to a fourth and fifth straight year of double-digit non-GAAP EPS growth in 2025 and 2026. Now with the addition of Steelcase, we will extend our consecutive years of double-digit non-GAAP earnings growth performance to at least 6 years.

In closing, we could not be more excited about the future as we bring together our combined capabilities to create new career growth opportunities for team members and dealer partners, deliver more value for customers and further support and invest in the communities where we operate.

We will now open the call to your questions.

[Operator Instructions] Your first question comes from the line of Steven Ramsey with Thompson Research Group.

I wanted to think about the topic that was highlighted on the call, just a few days ago from you guys on the co-mingling of sales between contract and SMB products that you have within HNI and how combining with Steelcase can potentially widen that opportunity? And then maybe the second level question is, how can you do that when you have separate maintained dealer networks at the local level?

Yes, Steven. First, let me tell you that -- let me start with the benefits of what we just covered for the -- for our combined companies also, I think, strongly applied to our distribution partners on both sides. We have complementary -- it starts -- we have complementary capabilities at the manufacturer level that I think trickled down to also that applied to our dealer partners.

So I do want to state again, we bring different strengths to each other in the distribution space. We have strengths in geographic markets and coverage, product focus, and therefore, the position we start with is we have no plans to change the dealer partnerships because they're both critical and doing well and the brand distribution or the sales forces.

Now having said that, obviously, over time, as we get to know each other further, there will be -- we see it right now in our business that there is co-mingling and customers today want flexibility, the floor plate and the more great products we have over time, they can get co-mingled in. But I think it's something that happens in our business, and it happens naturally, it doesn't really happen as a forced march. So again, I think we start from a position of strength. The dealers know their markets best. They know their customers best. We've learned that. Steelcase's learned that, and the partnership will unlock co-mingling opportunities, I'm sure, as customers look at their needs in the commercial interior space.

Okay. That's helpful. And then what about the seating production facility in Mexico that is in its early days, but definitely a positive for margins for HNI. Is there an opportunity to bring Steelcase seating brands into this facility and raise the benefits of that facility to the combined company?

Steven, I think there's all kinds of potential downstream effects that I think are positive, but we haven't really gotten to that level of detail. We've really focused on the people, the customer profiles, the dealer partners and the team. And that's how you're going to unlock some of this going forward. But look, there's going to be opportunities in the network over time, I'm certain of that. But -- we don't really have anything quantified today in that regard or nor do we -- are we prepared to talk about it.

Okay. That's fair. And last quick one for me. The Europe -- or the International segment for Steelcase had some challenges, profitability-wise over time. Do you have any early perspectives and insights on how you guys will manage it as part of the combined company?

Look, we'll work closely with Steelcase. I'm looking forward to getting closer to that business. They had some great people, some great footprint, great dealers by all accounts from where we sit. And we just have to get more fidelity to that business and understand what they're doing.

I know the team has been working hard in that business, and it's got upside. So we need to -- like a lot of this. It's very early days, Steven, but we'll get close to that and hopefully have some perspective. And -- and -- but I can tell you, they are extremely focused on that and they have been. And I think there's some great assets in the network there.

Sounds great. Congratulations to everyone.

Your next question comes from the line of David MacGregor with Longbow Research.

Congratulations on the transaction. I guess I wondered -- you mentioned that there are no revenue synergies in the forecast synergy numbers that you're sharing this morning. Are you able to talk at least conceptually about revenue synergy opportunities and how you're thinking about that longer term? And just some of the more immediate examples that may come to mind?

David, look, I mean, like I was mentioning to Steven, I think there's always opportunities when you put 2 great companies together like this that will exist, and some of -- the co-mingling of price mixing and fit and function and form and style, we've already started to see some of that. And as we get to know their dealer partners and customers better and they get to know our dealer partners and customers better, I'm sure there'll be opportunities. We've seen it already.

But we just haven't really -- we haven't really done that work yet because what we really want to do is maintain the strong revenue streams we have today and get to know, the sales forces get to know the dealers with more fidelity. And then those revenue streams will, I'm sure, be worked with a lot of diligence, careful thoughtfulness over time, but we don't really have that mapped out right now. And the deal wasn't -- we didn't put that into the deal dynamics and the transaction numbers either at this point. So that would be upside.

Right. And then just a second question for me would just be on a very high level. As you think about a little further down the road once you've got these 2 businesses fully integrated, how do you think about the investment opportunity? Where does the combined business invest? What are the priorities longer term in an industry that's clearly consolidating?

Yes. I think we've talked about -- we both have strategic initiatives under flight, and we'll probably take a time to reset with their team and our team and refocus our priorities. But I can tell you, making it easier to do business for our dealer partners all the way through the value chain. There will be some -- I think we have investments going there. They have investments going there, bringing our operational capabilities together to find the best process available. That's the beauty of something like this.

You have 2 great businesses that are heads down, working on some great stuff. And we will bring those together. We'll remix the priorities in a way that we -- the investments make sense, and we can get a 2 for 1 in many respects. And so I think the investments to start with will be candidly, there'll be people investments, there'll be distribution investments. There'll be ease of doing business with data and AI investments. And all those things are -- it's an exciting time to really pick each other's brain on how we remix those investments.

Got it. Congratulations.

Your next question comes from the line of Greg Burns with Sidoti & Company.

So it sounds like you're kind of leaving the dealer networks alone for now. But are there any potential dissynergies to combining the 2 companies? I know you have some open line distribution brands? Or is there any areas where you feel like there might be dissynergy?

We don't really see that, Greg, at this point. Net-net, we don't see -- we see more upside than dissynergies. I mean we have 2 complementary organizations. Our open line brands kind of compete kind of all over now. And so I think that only -- when you think about this question, that provides probably upside, we don't really see a lot of downside there. You talk about vertical markets and the combination of some of the strengths we have and some of the verticals putting those together, we think that is net-net positive as well.

So don't -- look, there's always risk of loss. We're not naive to that. But we're pretty bullish on minimizing any of that and starting from a position of strength and going forward.

Okay. And then in terms of the accretion that you mentioned, I think, $0.50 to $0.60, was that the total number? Or is that just what you expect in '27?

Yes, that's just '27. So when we think about accretion, it's accretion positive before purchase account even in year 1 a bit. So we just got to get through that. We've got to figure out what the intangibles are going to be and the amortization. But as you get into '27 as the synergies we talked about kick in, the $0.50 to $0.60 is what we expect for the year of 2027, obviously, before the intangible amortization. The -- and I think the key there, too, is that's just going to continue to grow from an incremental benefit as we layer in our purpose-driven initiatives to drive towards the $120 million.

Okay. And then you mentioned your -- the Kimball playbook. So I just wanted to talk about kind of your expectations for the synergies? Because I think when you initially acquired Kimball, you came out with like a $25 million number, and that went way up over the course of time. So can you just talk about maybe that $120 million number and your expectations for maybe potential upside to that?

Yes. I mean the Kimball learning certainly informed us. Jeff talked about disciplined integrated approach. So we've taken those learnings and we've looked at the business, and we feel comfortable with the $120 million. We looked at it from an SG&A standpoint and a COGS standpoint. But like Jeff mentioned, even on the front end of the business, these are early days. So we'll get in there and start working with the business, and make sure that we take a thoughtful approach. This isn't about how fast, this is about doing it with the right cadence. So that's why we feel comfortable with the $120 million.

Okay. And I know Steelcase had their own initiatives, I think they had a $50 million kind of COGS cost program that they were working through. Is the $120 million inclusive of that or exclusive? Are they still doing those types of internal initiatives? And I know they have an ERP kind of transition going on. Is that still going to be continuing?

Yes. I'll kind of hit each of those. So this is exclusive of that, not inclusive. So the initiatives that Steelcase has been working on in their global footprint, those are still going. So the $120 million that I'm talking about or that we're talking about is incremental. And we've accounted for the ERP. So we still -- I know they've shared on the calls their plans and their plan is still to take that live, and we've accounted for that in our ongoing plan.

Yes. I don't know, Sara, if you want to make any comments on that and make sure we hit that?

No. Yes. No, I think you said it exactly right. So as you said, we continue to work hard on those initiatives and continue to drive the improvements that we've had based in our plan and that we've talked about with all of you and with investors. And as this goes forward, lots of details to be worked out about how those play out over the long run, but we're not slowing down.

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

Congrats on the deal. Just a follow-up on the synergy side, the mix or the breakdown of the cost synergies between COGS and SG&A is a little different than the Kimball side. I guess 2-part question. One, can you talk about why there is more of a tilt towards COGS than the Kimball deal? What kind of examples of procurement savings are there from this one that maybe weren't there with Kimball?

And then secondarily, the percentage of revenue seems similar for both deals. I know this question was asked already, but was the process the same in determining the amount of the synergies and therefore, we can potentially see quite a bit of upside? Or is the law of larger numbers at play here? Just any color you could give on how you came up with this number?

Yes. I mean there is a slight difference between the mix. The Kimball mix was 2/3, 1/3 COGS, 2/3 op expenses, 1/3. This is a little bit more in COGS. There's a lot of things that go into that, Reuben, when you look at size of business, the complexity, the procurement spend. So I would say the philosophy is very similar, whether it's 2/3, 1/3 or 70-30. So I don't think there's much difference when I think about it that way.

When I think about the difference of the businesses, the public company costs and things associated with a business this size versus the business of Kimball that drives a little bit of the difference. But as it relates to conservative, I think that you kind of know our approach. We're going in with a number we believe we can hit. And as we thoughtfully go through it, we'll reassess as we go. But we're confident in the $120 million.

Got it. And then the last, I don't know, a couple of years, Steelcase's made a concerted push in some kind of nontraditional office areas, if you will, whether it's health care, education, smaller businesses. Would that be a similar approach to kind of the dealer network where there's no reason to change that kind of go-to-market strategy? Or are there kind of ways that you can do it together because I know that particularly with the Kimball addition you guys are in some of those spaces already as well?

Yes. I think what I would say to that, Reuben, is there's some attractive market coverage in those verticals, whether it be health care, education, we like our collective positions in there, and certain dealers do that well. And so we'll get -- as I said earlier, as we get more fidelity and get to know kind of the networks, we'll see where those connection points run.

But the benefit is we've got product. They've got some products that hit the education space at a certain level in a certain way, we have products and hit the education space at a certain level, a certain way. So we'll look at those markets and address -- bring our assets to bear in a way that makes sense.

Great. Thanks for the detail, guys and congrats again.

Your next question comes from the line of David MacGregor with Longbow Research.

Jeff, do you anticipate any concentration issues? Or are there going to be any places where you anticipate sort of regulatory requirements of divestiture?

Yes. No, David, we plan to have clearance. We're going to run the normal process, but we don't expect any issues or delays based on what we've been advised at this point.

Okay. And Sara, a question for you. Why now? I mean Steelcase has been, I guess, approached in the past, but what makes this the right time?

I think things come together when the pieces fall into place. And I think we -- as we started talking with Jeff and exploring this more, we really saw a pretty compelling logic for how this transaction could be a win for our shareholders, our customers, our dealer partners and our employees. And in many ways, I think this is sort of a natural evolution of the journey that we've been on. And I'm excited about the opportunities for this combination to help us continue to advance this industry as part of HNI.

I'll now turn the call back over to Mr. Lorenger for closing remarks. Please go ahead.

Well, thank you. I appreciate everyone's time today. And I just want to also mention again, I really appreciate all the Steelcase members we've met and employees to this point, and congratulate the HNI members to get to this point. It's an exciting time for both companies and look -- a lot of work ahead, but look very much forward to what we have in front of us. The future looks really bright from my seat. So thanks, everybody. Appreciate it.

Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.

Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the HNI Corporation Second Quarter Fiscal 2025 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Matt McCall. You may begin.

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 second quarter 2025 results. With me today are Jeff Lorenger, Chairman, President and CEO; and VP Berger, Executive Vice President and CFO. Copies of our financial news release 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 risks. Actual results could differ materially. The financial news release 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?

Good morning, and thank you for joining us. I'm going to divide my commentary today into three sections. First, I will provide some comments about our second quarter results. Non-GAAP earnings per share increased more than 40% year-over-year with solid revenue growth in both segments. Next, I will discuss our expectations for the remainder of 2025. Our earnings outlook has modestly increased from what we provided on our last quarter call. We continue to anticipate a fourth consecutive year of double-digit non-GAAP earnings improvement. And finally, I will provide additional detail about recent demand activity and how we see our markets playing out over the rest of the year.

I will also discuss the confidence we have in our strategies and an update on our elevated EPS growth visibility. Following those highlights, VP will provide additional color around our third quarter and updated full year outlook. He will also comment on our strong balance sheet. I will conclude with some closing comments before we open the call to your questions.

Let's begin with the second quarter. Our strategies are working, and our members delivered another excellent quarter. The benefits of our diversified revenue streams and the merits of our customer-first business model continue to deliver strong shareholder value. For the quarter, we delivered non-GAAP earnings per share of $1.11. The 41% year-over-year EPS growth was ahead of our internal expectations. Much of the earnings upside was driven by better-than-expected volume growth. Both segments generated year-over-year top line growth in excess of 5%, with both modestly exceeding the expected ranges we discussed on last quarter's conference call.

Profitability in the second quarter was also strong. Consolidated non-GAAP gross margin expanded 90 basis points on a year-on-year basis to 42.9%. Our non-GAAP operating margin expanded 200 basis points year-over-year to 11%. This EBIT margin was the highest on record for the second quarter, driven by the impact of volume growth, along with our profit transformation efforts and KII synergies. In the Workplace Furnishings segment, organic net sales increased more than 8% year-over-year, fueled by broad-based growth across the portfolio. We experienced noteworthy strength in our contract brands with revenue up nearly 15% year-over-year.

We also saw a return to growth in our brands focused on small- and medium-sized businesses, where revenue was slightly up year-over-year. From a profitability perspective, Workplace Furnishings non-GAAP EBIT margin expanded 120 basis points year-over-year to a strong 13.1%. Our profit transformation efforts and realization of KII synergies continue to deliver benefits, driving segment EBIT margin to record second quarter levels. Broadly, while there was some revenue and profit pull-forward activity driven by pricing actions, the impact during the quarter was modest. Finally, in Residential Building Products, second quarter revenue increased more than 5% year-over-year.

Revenue from new construction channel -- the new construction channel was up more than 4% and remodel-retrofit sales grew over 7%, both on a year-over-year basis. We delivered this top line growth despite continued challenging housing market dynamics as we are competing well and our internal growth investments are beginning to bear fruit. Residential Building Products profitability was also strong in the quarter.

Segment operating profit grew 20% year-over-year, and segment operating margin expanded 190 basis points from the same period of 2024 to a solid 15.7%. The consistently strong profit margins in this segment are evidence of the business' unmatched price point breadth and channel reach, along with the benefits of its vertically integrated business model and overall operational agility. To summarize our collective results, our revenue growth and profit improvement demonstrate the strength of our strategies and our customer-first business model, the resilience of our members and our proven ability had manage through varying macroeconomic conditions.

That leads me to my comments about our outlook for the remainder of 2025. Our margin expansion efforts and expectations for continued revenue growth will support ongoing year-over-year EPS improvement as we move through the second half of the year, all while we continue to invest to drive future growth. In Workplace Furnishings, orders grew in the quarter across all major office brands. We saw a return to order growth in the SMB space with orders up 3%. Our contract brands outperformed with orders growing 5% year-over-year when excluding hospitality. We are excluding hospitality for the metric as the business experienced a meaningful tariff-related pause in activity during the quarter, which has temporarily skewed results. I will discuss our positive outlook for the hospitality market more in a moment.

As was the case with revenue and profits, we did see some order pull forward in the quarter. However, adjusted segment orders, which exclude hospitality and the impact of pull-forward activity, were still up for the quarter on a year-over-year basis. In addition, total segment backlog is up 5% year-over-year. So we continue to see encouraging signs that support our view of volume improvement, while at the same time, we are increasingly focusing our investments on driving revenue growth in this segment. Moving to Residential Building Products. Orders in the second quarter decreased approximately 2% year-over-year. Going back to the first quarter, we saw some order pull ahead in March, which negatively impacted order growth in the month of April. However, as the impact of pull-forward activity abated, year-over-year order improvement returned in both May and June.

Builder sentiment continues to reflect the impacts of elevated interest rates, ongoing affordability issues and weaker consumer confidence, and housing trends have broadly followed builder sentiment. Despite the current environment, however, we believe in the long-term opportunities tied to the housing market and in the strength of our market-leading positions and profitable operating model. This supports our ongoing level of investment.

I will finish by making a few comments about our markets and provide additional detail around our elevated 2025 EPS growth visibility. On our last 2 earnings calls, we highlighted an increased focus on investing to drive growth in both segments. Our first half 2025 revenue strength and encouraging leading indicators provide added support for our growth initiatives. As we look at our Workplace Furnishings segment, we experienced solid revenue and order growth across all major office brands. SMB orders rebounded and grew in the quarter after a brief pause in late 2024 and early 2025. We remain bullish about the fundamentals of this business. We believe our strength in the SMB space and our broad price point breadth continue to be competitive differentiators. This is especially true as more cost-conscious customers embrace price mixing across projects, increasingly co-mingling SMB products in the contract settings.

In our contract business, we expect growth to continue in the back half of 2025. We see encouraging signs associated with larger projects across all our key verticals and saw customers return to a business-as-usual mentality. We believe we are seeing the release of pent-up demand as they focus on in-office work continues to highlight the need to refresh and reset spaces to adapt to the new ways work is done and the more people in office. As a result, presale activity, orders and backlog were all up.

Finally, I'll comment on our hospitality business. As I mentioned, we saw a tariff-related demand pause during the quarter. This business relies heavily on imported product, primarily from Vietnam and China. As a result, many customers tapped the brakes on new projects as tariff uncertainty spiked. We have seen an improvement in activity and our pipeline has rebounded significantly. So while this business can be lumpy, we remain enthusiastic about hospitality demand prospects as macro volatility subsides. Looking ahead, we believe we are particularly well positioned to benefit as the workplace furnishings market continues to improve.

We have a portfolio of brands with unmatched product and pricing breadth and depth, allowing us to meet any furniture need a customer has. We have products that work for customers ranging from small businesses to the largest multinationals. Our brands are distributed widely across geographies from tertiary markets to the top MSAs, and we can broadly meet the needs of workplaces, schools, health care facilities and hotels.

Moving to Residential Building Products. We continue to believe in the position in the positive long-term market fundamentals. We are performing well despite an ongoing soft new construction and R&R environment, and we acknowledge a market-driven revenue recovery will take time. We are, however, optimistic about our opportunities to increase revenue through our growth initiatives. Specifically, we continue to invest in developing market-leading new products that offer customers more options and features. We are driving new programs to increase homeowner and homebuyer awareness of their fireplace options, ensuring our products are considered in all remodel and new construction projects.

And we are strengthening our already strong relationships with builders across the country, helping them deliver the best overall value to the homeowner. Encouragingly, we are driving growth in this segment while still being in the early days of each of these initiatives. And while we invest in growth, we will continue to deliver high-margin results and strong profits in this business. Longer term, single-family housing remains undersupplied and demographics will support additional demand growth. The results of our ongoing investments, which will enhance our connection to customers and build on our leading brands will fortify our position of strength in the industry.

Finally, and importantly, we continue to have elevated earnings visibility this year and next. Our outlook for 2025 continues to include full year revenue growth in both segments. In addition, our earnings per share outlook moves modestly higher. We continue to have high visibility to significant profit growth driven by operational efficiencies. As a reminder, we have 2 initiatives underway in this area, Mexico and KII synergies. In recent quarters, we highlighted an expected benefit of $0.70 to $0.80 of additional EPS through 2026. To date, we have recognized approximately $0.24 of EPS benefit, leaving $0.50 to $0.60 to be recognized over the next 18 months. This is a modest increase from our previously communicated range and continues to provide visibility into a fifth consecutive year of double-digit EPS growth. I will now turn the call over to VP to discuss our outlook for the remainder of 2025. VP?

Thanks, Jeff. I'll start by discussing our outlook for revenue and profit. Beginning with the top line. Third quarter revenue in Workplace Furnishings is expected to increase at a mid-single-digit rate year-over-year organically. Including the impact of divestitures, Workplace Furnishings revenue is expected to increase at a low single-digit pace. The benefits of improving orders and backlog are expected to drive the revenue growth in the third quarter. For Residential Building Products, third quarter net sales are projected to increase at a low single-digit rate compared to the same period in 2024. Pricing actions are expected to be the primary driver of growth. However, for the second half overall, we continue to expect volume growth for this segment.

We're projecting revenue improvement in 2025 without market growth. Shifting to our third quarter profit outlook. Non-GAAP earnings per share in the third quarter are expected to increase slightly from 2024 levels. This improvement is expected to be driven by productivity benefits and volume growth, which should be partially offset by increased investment levels. In the third quarter, we expect operating margin in Workplace Furnishings to expand modestly year-over-year, driven by volume improvement and continued profit transformational benefits, partially offset by increased investment.

Residential Building Products operating margin is expected to compress modestly year-over-year in the third quarter as a result of slightly lower volume and increased investments. Again, we still are expecting overall non-GAAP earnings per share in the third quarter to increase slightly from 2024 levels. Moving to the full year. In Workplace Furnishings, we expect year-over-year mid-single-digit net sales growth, excluding the benefit of an extra week in the fourth quarter. Our full year volume expectations move higher. However, the overall segment sales outlook is essentially unchanged as now we see lower projected price realization, primarily related or driven by reduced impacts from tariffs.

In Residential Building Products, our outlook improved slightly, with net sales now expected to grow at a mid-single-digit pace, again, after excluding the benefit of the extra week in the fourth quarter. From an earnings perspective, our outlook for 2025 increases modestly with double-digit percent EPS growth expected for the fourth straight year. I'll wrap up with a few comments on our balance sheet and cash flow.

Quarter ending gross debt leverage was at 1.4x as calculated in accordance with our debt agreements. During the quarter, we continued to deploy cash through our long-standing quarterly dividend and through stock repurchases of nearly $40 million, demonstrating our continued confidence in our future earnings and cash flow generation. The combination of our strong balance sheet and consistent cash flow generation will continue to provide a high degree of financial flexibility and capacity for investment. Our capital priorities remain reinvesting in the business, paying dividends, pursuing share buybacks and exploring M&A opportunities. I'll now turn the call back over to Jeff.

Thanks, VP. We remain focused on investing to drive revenue growth and on expanding margins. We have multiple avenues to drive growth, and we'll continue to invest. And we expect to extend our track record of consecutive years of double-digit percent EPS growth. And beyond 2025, we are positioned for continued success. We have elevated earnings growth visibility through 2026, broad and diverse product and market coverage in workplace furnishings, market-leading positions in residential building products, and we continue to invest to drive growth. All this is supported by our strong balance sheet and the ability to generate continued free cash flow. I want to thank each HNI member for the continued dedication and congratulate them on another excellent quarter. We will now open the call to your questions.

[Operator Instructions] Your first question comes from Reuben Garner with Benchmark.

Jeff you started -- you referenced, I think, modestly increasing your earnings outlook a couple of times, if I heard that right. And then you referenced the $0.50 to $0.60 over the next 18 months of visibility being, I think you said higher than you expected. Can you elaborate on what's driving that increased visibility or that increased earnings outlook?

Yes. I mean I think we continue to get more confidence in how our network optimization and our synergy work has developed here, Reuben. So we're -- based on our first half and what we have in the hopper, we're able to say with confidence that we think that's going to drive a modestly increase in the full year on EPS, from where we were at.

Got it. Got it. And then the SMB business showing some signs of life, I guess, as one way to put it. Does -- in the past, I think that's been a pretty good barometer of just general sentiment improvement. Does that -- does it feel different this time? Was it maybe some things were not -- the trigger wasn't pulled earlier in the year with the tariff dynamics going on, and this is kind of some catch-up? Or do you think this is a sign of maybe some acceleration to come in both sides of your office business?

That's a great question, Reuben. And you've been around a bit as, have I. And I think it's a little -- I think there's some of that. I also think it was more of a -- that business has been performing pretty well in the last couple of years. And I think it was more of a lull in the tariff impact, like we said, at the end of last year, beginning of this year.

So I don't know that it's a traditional pattern in that respect because I say our contract business is performing well right now. And so I think it's really SMB returning from that temporary kind of shock to the system and getting back online more so than it is kind of traditional goes in first, comes out first, mentality.

Yes, Reuben, we talked last time 3 straight quarters of that contracting at -- about an average of 5%. We started to see that rebound early in the second quarter. So I think it's a sign of -- usually that goes in first and comes out -- goes in first and then out. So it supports the thoughts there.

Got it. And then last one for me on the Residential side. Even with the pull-forward dynamic, orders down 2% is pretty good in this environment with what we're seeing in new construction, in particular. Can you talk about where you think you're getting the out performance? Is it more on the new side? Is it some progress in the R&R space, Anything? Is it driven by the new products? Is it a combination of everything? Can you just kind of dive into that a little bit?

Yes, Reuben, I think we can probably both comment on this. I would say from my vantage point, we're really competing well. I mean our teams are focused. Our growth initiatives, again, it's early days there, but we've got investments rolling on top of that. So we just -- the team is really focused on market connectivity in both the R&R and the new home. Areas we've -- we've got gas inserts rolling. We've got some new product impacts with the electric category. We've looked at some new channels in the home improvement retail space. So again, all these are early, early days, but I'd say baseline, we're competing really well. We're really focused, and our investments are just starting to take root. So that's, I think, why we're able to kind of front run the market dynamics, although they are still there, there's no doubt about it.

Yes, I'd add to add to that Reuben, you asked about which side of the market. It is in both sides, both new home and remodel. And if you look at permit activity through the first 4, 5 months of the year, it's actually down, yet we're showing revenue up. So I think it's a sign of our -- a bit of our unique model on the new construction side with own distribution as well as the initiatives that we're getting in place with dealers on the remodel side.

Your next question comes from Greg Burns with Sidoti & Company.

You gave us some color around where the growth -- what the growth investments are on the building products side of the business. On the Workplace Furnishing side, where are you investing there? And maybe you could give us a little bit of color on the growth investments you're making there?

Yes, Greg. So really, that -- we've got a couple of things rolling. One, just people capacity, both on the external and internal. Secondly, we're really trying to streamline the dealer experience, simplify and streamline our connectivity with dealers, automating things to make it easier to do business with, which really we see as a bit of an unlock.

And then new products. We've been -- we've got a lot of teams focused on increasing product cycle times and getting products to market sooner and being really focused on that. So those are some examples of kind of what we're doing kind of in-house, so to speak, to start to drive growth. And I remind you that we said we were going to pivot to growth, and that's -- we're going to continue to do that, and we're going to continue to make investments in these spaces.

All right. Great. And then in terms of the margin profile on the workplace business, impressive margin this quarter. Is there a target margin range you think that business should operate in? Is there room -- obviously, it seems like with some of the profit initiatives you have, there's room for margin expansion. But how should we think about maybe the longer-term margin range that you think that business can operate within?

Yes. I think the jump off here was about a 9.5% business. We think there's between a 200 to 250 basis point, Greg, just based on the current initiatives that we've already talked about between the KII synergies and the Mexico ramp. And then obviously, we'll continue to have our normal productivity that we drive in there annually to offset any inflation. So we still think there's a lot of runway there to push that thing towards a 12% return business.

Okay. Great. And then just lastly, could you just remind me what percent of the workplace business is SMB? Just...

Yes Greg, 40% to 45%. So certainly still an important part here.

Your next question comes from Steve Ramsey with Thompson Research Group.

I wanted to speak about the workplace comments on the co-mingling of SMB products in the contract settings. Can you maybe parse that out, add some nuance to why that is happening? And then put some context around that activity as it's happening in 2025 versus the prior couple of years?

Yes, Steven, that's a good question. I mean I think what we've seen, if you back way up just kind of the post-COVID environment, a lot of the dynamics have gotten jumbled up. And as people have come back online, there's been a lot of study. There's been a lot of hybrid. There's been a lot of remote versus in office. And all these things have been developing over the last bit of time. And I think it kind of shocked people in -- out of their traditional mindset and into maybe new ways of thinking about how to configure, how to do things. And as they've done that, I think they've become kind of a blank slate and a clean sheet of paper in solving for their in-office productivity, work demands, et cetera.

And it's afforded an opportunity to say where they really -- where they want to go long and spend more, where they want to maybe mix in different price points. And it's really just a shift in how that's being done. And -- and so that's where we see it's coming in. And we just see -- we see dealers, we see customers being open to looking at different versions of what maybe they hadn't considered before. And that's where we're seeing it. On a percent basis, I can't really tell you it's gone from X to Y. We just see it. We see it in presale metrics. We see it flowing through based on what customers and what dealers sell what products. And so that's why -- that's kind of contextually how we see this developing and happening. That's the background for that color commentary on that comment.

Okay. That's interesting. I mean I would think you guys have an advantage to play a part of that trend given you play strongly in both categories. So interesting to hear that.

I think that's right.

Yes. Okay. And then flipping to the resi segment. This was touched on earlier that the sales were strong, orders in May and June were good despite the environment. Do you attribute that to share gains or maybe some comps help on the R&R side, but how you would describe the out performance?

Yes. I think part of it, you got to break it apart here, Steven, on the new construction side, we think we're starting to see our initiatives come through. When permits are down and our unit volumes are better than that. That's a signal that we're expanding the market or taking share. So I feel that's happening.

And I think we've been talking about on the remodel side, there's been a lot of initiatives around dealer activity, dealer activation, more improvement in the DIY space or home improvement retail, and we're getting more placement there. So it's kind of why we're saying we expect growth regardless of what's happening with -- with the markets themselves.

And I'll also comment on the investment side. This is also where we're making longer-term incremental investments in similar areas that Jeff talked about on the workplace side with more people capacity and adding to the selling model. So we think we're uniquely positioned to outperform the market.

Okay. Great. And maybe to add on to that, on your vertically integrated part of the resi segment where you have distribution, can you talk about how that is performing versus your external sales?

If you look at it from a unit standpoint, Steven, we can see that where we own distribution is performing well. It's the absolute delta compared to non-owning distribution is hard because each market is different. And where we own distribution, we're primarily the main distributor, but we certainly think it's performing as good or if not better than independent.

Okay. That's great. And then one last one for me. Strong EPS growth is good to see. Thinking about the inputs of operating cash flow generation and CapEx, do you expect free cash flow growth year-over-year to be similar to the earnings per share change? Or how do you think about the cash flow dynamics in 2025?

Yes. Well, I'll answer that 2 ways. One, we expect to maintain neutral on working capital with growth. Two, we're going to take our cash flow generation up probably $30 million to $35 million that we talked about last quarter, $10 million of that is because of true volume growth. So now we're in the $200 million to $210 million range and another $25 million to $30 million is going to be because of the new tax bill, so -- and the timing of when we're going to pay some. So it's going to improve.

Your next question comes from David MacGregor with Longbow Research.

Congratulations on the strong results. I apologize if these questions have been addressed. I had a little technology challenge getting on here. But I guess I wanted to start off by just asking about Workplace Furnishings and specifically the volume leverage. And I think the expectation had been that Kimball in Mexico would drive volume leverage above the historical mid-30s level, but you're also seeing the negative price, cost working against that. So can you just talk about how much improvement you're seeing in the absolute volume leverage in Workplace Furnishings if we were to separate out the price cost pressures?

Yes. I think it's -- David, the obviously incremental improvement on our 2 projects is what you're referring to on the first piece, which is going to accelerate volume. But we should still think now that we're in the 35% to 40% in incrementals with volume, and we should expect to see that. But that's before we do our investments. And I think we've talked a lot about making sure we stay on our growth investments and stay up in front of the selling models and capabilities. But 35% to 40% would be the incremental before investments.

Okay. Good. And I guess -- so you're still seeing progress there that gives you confidence in those numbers. That's great. And I guess you also in the release discussed the savings from Kimball in Mexico of $0.24 for the first half. I guess with all the progress to date and the volume growth, how would you handicap the likelihood of upside to those numbers?

I think Jeff signaled that there is a little bit of upside just based on us taking our outlook up. So we gave a range of $0.70 to $0.80 as we started to kick off those projects. I think it's fair to say we're leaning closer to the $0.80 based on where we are and what's in flight. So I would push on the right side of that range and if not a little bit more.

Okay. And then just on the share repurchase activity, $40 million in the quarter, kind of matched the first quarter pace. Should we be modeling kind of $150 million, $160 million for the full year? Or was there something that you thought of as being maybe opportunistic in the first half? How should we be modeling that?

Yes. I think the modeling is how we're going to use our free cash flow, but we reevaluate that, David, every quarter, and that's going to be a quarter-by-quarter decision.

And your final question comes from Brian Gordon with Water Tower Research.

I also had some technical issues connecting earlier. So also, I'll apologize if these questions have been asked before. I guess my first question would be, when you're talking with the large contract customers, how are they feeling about business conditions? And maybe more explicitly, how are they feeling about their CapEx decisions going forward? And how would that differ maybe from what you're seeing in the SMB side of the business?

Well, I can't speak customer by customer on CapEx. What I can tell you, though, is that I kind of said there -- the mentality is they're investing and use the term business as usual, which contextually means what we're seeing is they're moving out in our space. They probably moved out in other investment categories depending on what business it has been. But on the in-office and the workflow and productivity, they are viewing that as business as usual, and they're making the investments.

I think they -- I think you used the term that some people are coming off the sidelines, if you will. And we don't see -- we don't see a lot of hesitation there. Most of these customers are in the game and wanting to move forward. And so we use the term kind of studying over the last couple of years, some customers were evaluating, reevaluating. And I think we're past that point now when people are deploying capital to do projects to support their in-office model, whatever it may be.

Great. Second question that I have today is on the RBP side. How much of this is volume versus how much is pricing?

Yes, it's primarily price, Brian. I think if you looked at the first half of the year, it's probably 1/3 volume, 2/3 price. But -- and if you look at the full year, you'll see the volume kick in with more volume happening in the back half.

That concludes the Q&A session. I will now turn the conference back over to Mr. Lorenger for closing remarks.

Appreciate everybody taking the time to join us today. Have a great day. Thanks so much.

This concludes today's conference call. You may now...