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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. 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 V.P. 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 risk. 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 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, V.P. will provide some financial highlights of the combined companies. Finally, we will open the call for your questions. This acquisition brings together two 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 remain our collective priority. With this foundational backdrop, we see many strategic benefits from this combination. First, with Steelcase joining the HNI family, 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. 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. That is 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. 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. 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 make 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.
I look forward to the exciting wave in which this transformative combination will shape the industry and deliver significant benefits to our customers, dealers, and employees. 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 on this call know 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 two 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 V.P. V.P.?
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.
The transaction, which is expected to close by the end of the calendar year of 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 healthcare, 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 the expected accretion of $0.50 to $0.60 before 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 sheets, 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, V.P. 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 five 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. 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 six 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.
At this time, I would like to remind everyone, in order to ask a question, please press star, followed by the number one on your telephone keypad. Your first question comes from the line of Steven Ramsey with Thompson Research Group . Please go ahead.
Good morning. Happy Monday. 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. Maybe the second-level question is, how can you do that when you have separate maintained dealer networks at the local level?
Yeah, Steven, first, let me tell you that the benefits of what we just covered for our combined companies also, I think, strongly apply to our distribution partners on both sides. We have complementary starts. We have complementary capabilities at the manufacturer level that I think trickle down to and apply to our dealer partners. 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. Therefore, the position we start with is we have no plans to change the dealer partnerships because they're both critical in doing well in 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. The more great products we have over time, they can get co-mingled in. I think it's something that happens in our business, and it happens naturally. It doesn't really happen as a forced march. 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 has learned that. 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. 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?
You know, 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. That's how you're going to unlock some of this going forward. There's going to be opportunities in the network over time. I'm certain of that. We don't really have anything quantified today in that regard, nor are we prepared to talk about it.
Okay. That's fair. 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 have some great people, some great footprint, great dealers by all accounts from where we sit. We just have to get more fidelity to that business and understand what they're doing. I know the team's been working hard in that business, and it's got upside. Like a lot of this, it's very early days, Steven, but we'll get close to that and hopefully have some perspective. I can tell you, they are extremely focused on that, and they have been. I think there's some great assets in the network there.
Sounds great. Congratulations to everyone.
Thank you.
Your next question comes from the line of David MacGregor with Longbow Research . Please go ahead.
Yes. Good morning, and congratulations on the transaction. I wanted to—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?
You know, David, look, I mean, like I was mentioning to Steven, I think there's always opportunities when you put two great companies together like this that will exist. 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. 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 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. Those revenue streams will, I'm sure, be worked with a lot of diligence, careful thoughtfulness over time. We don't really have that mapped out right now.
The deal wasn't, you know, we didn't put that into the deal dynamics and the transaction numbers either at this point. That would be upside.
Right. Just a second question for me, it would just be a very high level. You know, as you think about a little further down the road, once you've got these two 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?
Yeah, I think we've talked about, you know, 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. I can tell you, making it easier to do business for our dealer partners all the way through the value chain, there'll be some, I think we have investments going there. They have investments going there, you know, bringing our operational capabilities together to find the best process available. That's the beauty of something like this. You have two great businesses that are heads down working on some great stuff. We will bring those together. We'll remix the priorities in a way that the investments make sense. We can get a, you know, a two-for-one in many respects.
I think the investments to start with will be, candidly, they'll be people investments, they'll be distribution investments, they'll be ease of doing business with data and AI investments. All those things are, it's an exciting time to really pick each other's brain on how we remix those investments.
Got it. Thanks, Jeff. Congratulations.
Thank you.
Your next question comes from the line of Greg Burns with Sidoti & Company . Please go ahead.
Morning. It sounds like you're kind of leaving the dealer networks alone for now. Are there any potential disynergies to combining the two companies? I know you have some open line distribution brands. Are there any areas where you feel like there might be disynergy?
We don't really see that, Greg, at this point. Net-net, we don't see, we see more upside than disynergies. We have two complementary organizations. Our open line brands kind of compete all over now. 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. There's always risk of loss. We're not naive to that. We're pretty bullish on minimizing any of that and starting from a position of strength and going forward.
Okay. 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 2027?
Yeah, that's just 2027. When we think about accretion, it's accretion positive, you know, before purchase accounting, even in year one a bit. We just have to get through that. We have to figure out what the intangibles are going to be and the amortization. As you get into 2027, 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 key, and I think the key there too, is that's just going to continue to grow from an incremental benefit, you know, as we layer in our purpose-driven initiatives to drive towards the $120 million.
Okay. You mentioned the Kimball playbook. I just wanted to talk about 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. Can you just talk about that $120 million number and your expectations for potential upside to that?
Yeah, I mean, the Kimball learnings certainly informed us. Jeff talked about discipline-integrated approach. We've taken those learnings, and we've looked at the business, and we feel comfortable with the $120 million. We've looked at it from an SG&A standpoint and a COGS standpoint. Like Jeff mentioned, even on the front end of the business, these are early days. 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. That's why we feel comfortable with the $120 million.
Okay. I know Steelcase had their own initiatives. I think they had a $50 million kind of COGS program that they were working through. Is the $120 million inclusive of that or exclusive? Are they still doing those types of internal initiatives? I know they had an ERP transition going on. Is that still going to be continuing?
I'll kind of hit each of those. This is exclusive of that, not inclusive. The initiatives that Steelcase has been working on in their global footprint are still going. The $120 million that I'm talking about or that we're talking about is incremental. We've accounted for the ERP transition. I know they've shared on the calls their plans, and their plans are still to take that live, and we've accounted for that in our ongoing plan.
Yeah. I don't know, Sara, if you want to make any comments on that to make sure we hit that.
Yeah, no, I think.
Actually.
Thanks. Yeah, no, I think you said it exactly right. As you said, we continue to work hard on those initiatives and continue to drive the improvements that we've had baked in our plan and that we've talked about with all of you and with investors. 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.
Okay, great. Thank you.
Your next question comes from the line of Reuben Garner with The Benchmark Company . Please go ahead.
Thank you. Good morning, guys, and 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 two-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? 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? Therefore, you know, 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. Thanks.
Yeah, 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 are a lot of things that go into that, Reuben, when you look at size of business, the complexity, the procurement spend. I would say the philosophy is very similar, whether it's 2/3, 1/3 , or 70/30. 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. As it relates to conservative, I think you kind of know our approach. We're going in with a number we believe we can hit. As we thoughtfully go through it, we'll reassess as we go.
We're confident in the $120 million.
Got it. The last couple of years, Steelcase has made a concerted push in some kind of non-traditional office areas, if you will, whether it's healthcare, education, smaller businesses. Would that be a similar approach to the dealer network where there's no reason to change that kind of go-to-market strategy, or are there ways that you can do it together? I know that particularly with the Kimball addition, you guys are in some of those spaces already as well.
Yeah, I think what I would say to that, Reuben, is there's some attractive market coverage in those verticals, whether it be healthcare or education. We like our collective positions in there, and certain dealers do that well. As I said earlier, as we get more fidelity and get to know the networks, we'll see where those connection points run. 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 the same. W e have products that hit the education space at a certain level, a certain way. 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.
Thanks.
Your next question comes from the line of David MacGregor with Longbow Research . Please go ahead.
Yeah, thanks for taking the follow-up. Jeff, do you anticipate any concentration issues, or are there going to be any places where you anticipate sort of regulatory requirements of divestiture?
Yeah, 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. 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. I think as we started talking with Jeff Lorenger 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. In many ways, I think this is sort of a natural evolution of the journey that we've been on. I'm excited about the opportunities for this combination to help us continue to advance this industry as part of HNI .
Great. Thanks, and congrats again.
Thanks.
I'll now turn the call back over to Mr. Lorenger for closing remarks. Please go ahead.
Thank you. I appreciate everyone's time today. I just want to also mention again, 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, very much forward to what we have in front of us. The future looks really bright from my seat. Thanks, everybody. Appreciate it.
Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.