TRG | The Bottom Line – 8/11

TRG has described office furniture and hearth manufacturer HNI as a catapult story, as challenged near-term volumes in both end-markets were hiding the margin enhancement initiatives that have been in-flight.  HNI reported earnings this past week, providing an opportunity to gain a clearer view of the company’s progress. Q2’23 results revealed tremendous margin improvement in the Workplace segment, and the earnings call brought meaningful nuggets that should help investors more fully appreciate the Kimball acquisition and add to earnings power. While many mergers often bring operating headaches and reduce shareholder value, this appears to be the opposite. HNI closed the Kimball deal in early June, and HNI has already announced a deal to divest Kimball’s Poppin’ unit (acquired in 2020), which has been a drag on margins. HNI also posits there could be upside to the synergy amount of $25MM from the Kimball deal. Core Kimball is generating operating margins in the high-single-digit range, while core HNI Workplace margin is closing in on that level in Q2. The Resi segment margins were abnormally low in Q2 (11.2%), but management expects a steep stair-step upwards in Q3 and Q4 to reach high-teens levels on a FY basis. Workplace is showing modestly better YOY demand, and HNI’s robust margin expansion in the quarter is a testament to this viewpoint. We have greater conviction that the Kimball merger adds pop to the catapult, and 2H’23 margins are projected to be in-flight even before volumes really start to inflect.