Good morning. My name is Kaila. And I will be your conference operator today. I would like to welcome everyone to the HNI Corporation First Quarter 2017 fiscal results conference call. All lines have been place on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. [Operator Instructions] As a reminder, today's conference call is being recorded. Thank you, Mr. Jack Herring, you may begin, Sir.

Thank you. Good morning. I am Jack Herring, Treasurer and Director of Investor Relations for HNI Corporation. Thank you for joining us to discuss our first quarter fiscal 2017 results. Here with me are Stan Askren, Chairman, President and CEO, and Marshall Bridges, Vice President and Chief Financial Officer. Copies of our financial news release, earnings presentation and non-GAAP reconciliations are posted on our website. Statements made during this call that are not strictly historical facts are forward-looking statements which are subject to known and unknown risks. Actual results could differ materially. The earnings presentation posted on our website includes additional factors that could affect actual results. The Corporation assumes no obligation to update any forward-looking statements made during the call. I am pleased to turn the call over to Mr. Stan Askren.

Good morning, everyone. As usual, Marshall and I will share the assessment of the first quarter 2017 and then provide some thoughts on the outlook for the second quarter and then full-year and then we'll run through questions. Results were slightly better than we expected. Now, we have a bunch of information to share with you. I would say we have lots of numbers, maybe too much numbers but we'll roll this through and then see where the questions are. Our business has continued to compete well and generate sales at the high end of our anticipated range. As expected, the demand environment started slowly and then improved throughout the quarter. We're pleased with the deposit customer response to recent investment with the new products and selling capabilities. We delivered another quarter of strong operation performance providing further margin improvement. This now marks a long string of year-over-year increases in non-GAAP gross profit margin. Our margin improvement is a result of a very deliberate process. We're focusing our businesses on areas that drive the most value. The strategic trend stream lining makes our organization stronger and more capable to aggressively pursue profitable growth and serve our very important customers. In addition, we continue to significantly invest across our business, increase capabilities, business process simplification and manufacturing process efficiencies all contribute to a position as the best cost producer. This allows us to deliver greater value to our customers driving both growth and future profitability. We are a stronger company due to these efforts, a well-positioned with a strong platform to grow the business. We continue to remain focused on the long-term and are confident in our ability to double our earnings every three to five years. I will now turn the call over to Marshall for some specifics on the quarter and he'll roll through a bunch of numbers for you.

Thanks, Stan. For the fourth quarter non-GAAP net income per diluted share was $0.26, compared to $0.31 in the first quarter of 2016. Consolidated net sales decreased 2.9% organically and decreased 4.7% in total when including the impacts of acquisitions and divestitures. In the office furniture segment, sales decreased 4.9% organically and declined 7.1% in total. Within our office furniture segment, sales in our supplies and business decreased approximately 6% organically or -7% including the impacts of acquisitions and divestitures. Sales in our North American contract business decreased 1% organically or -4% in total and sales in our international businesses decreased 20%. Looking at our Hearth segment, sales decreased 3.5% within the Hearth segment and new construction sales increased 3%. Sales of retail wood and gas products increased 2% while sales of pellet appliances increased $2 million or approximately 26%. HNI non-GAAP consolidated gross profit margins increased 60 basis points to 38%, labor and material productivity gains and the favorable impact of divestitures were partially offset by lower volume. Stan?

We're seeing improvement in our markets although conditions remain choppy. In the second quarter, we are forecasting solid organic growth led by our contract business which we expect to increase 12% to 15%. Activity levels, project funnel and in-house orders provide confidence in our sales projections. In our supplies driven business, we are expecting organic sales to be up 1% to 4%. Total organic offers from sales are expect to be up 5% to 8%. Within our Hearth business we expect sales growth of 1% to 4%, new construction sales are expected to be up 3% to 6% as growth in single family starts to continue. Sales in our retail wood and gas business are projected to be down 2% to 5% due to seasonal timing and mix. Sales on our pellet appliance businesses are forecasted to be up more than 40% or $1 million to $2 million. In total, we expect HNI consolidate the organic sales to be up 4% to 7% for the second quarter. Marshall?

I'll give some additional information on our second quarter outlook. The growth reach stages refer to real organic. We include in the impacts of acquisitions and divestitures, we expect total consolidated sales growth to be flat to +3% in the second quarter. We also expect total sales for the office furniture segment in the second quarter to be flat to up 3%. Non-GAAP gross profit margin is expected to be similar to the prior year when it was 39.9%. Non-GAAP's SG&A as percentage of net sales is also expected to be similar to the prior year when it was 30.6%. Our estimate of non-GAAP earnings per diluted share for the second quarter is in the range of $0.65 to $0.72. For the full-year 2017, our outlook for net sales remains unchanged. We expect consolidated organic sales to grow 3% to 6%. Office furniture organic sales are forecasted to be up 3% to 6%. Sales in our Hearth business are expected to be up 2% to 5%. Including the impacts of acquisitions and divestitures, total consolidate sales are forecasted in the range of -1% to +2%. Total office furniture sales are expected to be relatively flat to the prior year. Our current best estimate of non-GAAP earnings per diluted share for the full-year 2017, is now in the range of $2.80 to $3.10. Stan?

Okay, let me wrap this up then. Simply our strategies are working and we remain focused on creating long term shareholder value. We are well positioned as lower proper growth and enhance already strong market position. So, with those comments complete for Marshall and myself will now open it up to questions.

[Operator Instructions] Our first question comes from the line of Budd Bugatch from Raymond James.

Good morning Stan, good morning Marshall, good morning Jack. And thank you for taking my question. I guess you said in office you said that business improved during the quarter I believe and then you've given some pretty hefty improvement particularly in the contract side. Can you talk a little bit about the project funnel, can you maybe give us a little characterization of where this is coming from, what do these projects look like, how sticky are they beyond Q2?

Yes. And so, I'll start and Marshall can fill in anything I miss or any additional color. But we are coming off of period of strategic pruning here and in the right contract is shown some significant growth forecasted for the second quarter. I think I said 12% to 15%. Now we don’t get too high when there is big numbers and we don’t get too low when there is not big numbers. This is such a choppy business in contract world, due to timing of large projects, due to all sorts of factors. It does feel to us like things are improving. We are coming off of a more subdued demand environment. We do have several significant project for us anyway. Significant projects that are coming in. and we think the second half is going to continue to be strong for contract. I know, Marshall, anything else you want to comment?

No, I see budget. We are seeing pretty good activity on the project side, and particularly architecture walls is a benefit for the quarter. And we're feeling pretty good about the funnel in the back half on the project side.

And the average project size is what. What can you give us a characterization, we've heard it go from very large projects now down to much smaller project. So, in your case, what are these projects looking like?

Yes. I don’t know if we can characterize. I would say this but our large projects are smaller than the other big contract guys, large projects. So, our large is their mid probably is how just to give you a relative comparison. We don’t do the where we come from in our position. We don’t do the monster projects, we do large and there is several million dollars is what we would characterize as large, I think.

Okay. And in Hearth, again the -- and these numbers are much smaller, but the notable percentage changes is going on in the pellet side, particularly the appliance side. Is energy cost and what do you characterize, what's causing that?

Yes. I mean, the Hearth that the pellet appliance growth number is big, but it's a very small base now. We've been through multiple years of decline and pellet due to energy prices. And I think we're just basically seeing and that we are now at the bottom in what you're seeing is it always over shoots both ways Budd, in this. Because it's a dealer business, which should be in this inventory. So, when it's good, they over order and when it goes down, they tend to get stuck with inventory. And so, I think what we're signaling is its reached bottom and there's simply purchasing product to fill the pipeline and some of that inventory, how much, I don’t know.

Any in that segment, at that pricing has been pretty profitable for you, right, and still the same way you characterize it that way?

Yes. We are, yes exactly, it is profitable business for us. We are the industry leader in this as well. I mean, we have significant share in pellet appliances, we've got good know-how, we have great intellectual property and we have very efficient operations. It fits into our other core part business and so we're able to sort of quoting that up and down as needed and maintain our cost structure and keep it profitable regardless of what the volume is.

Okay. Just a couple of more, these are more housekeeping's or well, first one is not. Cost, what are you seeing in the cost environment right now, raw materials how are they behaving or misbehaving?

Yes. So, but we're seeing about 4% to 5% input cost inflation for the year, led by steel.

And did you have much of that in the first quarter?

No, we didn’t have a lot in the first quarter. Inflation was about $2 million in the first quarter.

And as you call but we index steel, so it is it tends to lag, going up and tends to lag going down and so we are it bounced up, steels bounced up significant. Now, you also know that steel is much less of a input cost, that needs to be so or there used to be, excuse me. But we tend to lag and that's why it was not as much first quarter as you might thing.

Yes, Stan. That's why I was asking. I knew about the lag. And my last question is you've given us the organic and you’ve given us the non-GAAP. What about what restructurings are left and make the book in the second, third, and fourth quarter. How does the charges look, so that we can probably do a GAAP and get the cash flows where we're comfortable with them?

Yes. But we have we saw majority is just to come, in the second quarter we're looking about little over $9 million of non-GAAP adjustments.

Pre-tax or after, Marshall?

That's pre-tax.

Okay, yes.

And then in the third and the fourth quarter, we have a little over $8 million in the third and between $3 million and $4 million in the fourth.

Okay, thank you very much.

And sometimes accelerates depreciation, the typical stuff.

Is there any non-restructuring in there like move cost or any of that in that as well?

Yes. There is quite a bit of transition cost in there.

Okay. All right, thank you.

Thank you, Budd.

Our next question comes from the line of Matt McCall from Seaport Global.

Thank you, good morning guys. So, Stan, a couple of things you hit on, you talked about recent investments and I think you mentioned new products and see on capability. Can you get more specific on some of the things that you're doing, maybe some of the products that are showing promise or showing results or maybe quantify what the matter help you got in Q1 and what you're assuming from some of these initiatives and the Q2 and '17 guidance?

Yes, well. I think, Matt, we're so broadly based diversified basically as investments in you see all of our companies, all of our brands, all of our segments, all of our product categories, it's selling investments, product investments, etcetera. And it's significant sort of benefit in driving our results or sales growth, profitability growth for the year. We have not broken out specifically how much of those improvements come from those investments.

Well, maybe I ask it the opposite way. If you think about the 12% to 15% in contract in Q2, and I think you back in around a 10% number in the back half. What kind of market assumption do you have in those periods? I mean, since there's a level of out performance from those items, are you assuming some mid-single digit type growth for the industry?

Yes, it's the same as you're seeing on a business set. And again, I just sort of rephrase what I said to Budd. We don’t, it's really nice growth and I'm excited about it. But don’t, we're not counting or just that we're outperforming everybody. This anybody that's tracked contract business world for any timeframe should know that claiming share gain is a can or and claiming share loss or claiming about share loss in the short term and mid-term is a waste of time. So, and that's kind of how I think about this. So, we have nice performance. A lot of it has to do with where you're positioned and what's going on etcetera. So, it's not a whole lot more than I think just timing in mix and where we're positioned etcetera. Some of that's coming from new product but it's a lot of just day-to-day grind-it-out company-by-company stuff.

Okay. And one thing, just to clarify, sometimes you've given contract and sometimes you've given contract in other I think which includes international. What is the 12% to 15%, is that just contract in North America?

Yes. Yes, no. it's when we talk about contract in the outlook, its contract in the big sense of international and North America.

Okay. Just want to make sure we're speaking the same language. One of the thing, Stan, you talked about strategic pruning, you're exiting a period of strategic pruning. Can you talk about that a little bit more and have you quantified the impact in recent quarter from some of those pruning efforts?

We have not quantified that Matt. Because again it's typical of our sort of overall continuous improvement sort of mentality.

All right.

So, it goes all the way from very finite pruning product lines, even options on product lines to pruning categories to consolidating, to some case is pruning customers and then the big one that we talk about last time as we prune in also businesses out of the whole system as well. So, it's very broad based, it's consistent without sort of daily improvement, rapid continuous improvement sort of culture in way of thinking.

Okay. All right, last one. I think you might have partly answered this to say here Marshall. But when I look at the full-year, I'll take the high end of the guidance range takes a little bit lower. What was the real driver, I think you mentioned inflation to Budd's question, but was there anything else?

Yes, no Matt. The reason we lowered the top end of range and nickel, had to do with inflation coming at the top end of our expected range in relative to seeing that. And a greater opportunity to invest in the business and as a result, we're seeing less upside for 2017.

Okay. And is that inflationary environment supporting pricing in a bigger way, Stan?

It's a good question, Matt. It's harder to get pricing these days, I think right now. So, the answer is not really supporting this specifically. If it is, it'd be more like 2018 before we would see that. The inflation isn’t crazy, it's just I think its modest inflation, and so because it had it's harder to get price I think to cover that.

Okay. Thank you, guys.

Thanks, Matt.

Our next question comes from Kathryn Thompson from Thompson Research Group.

Hi, thanks for taking my questions today. You had said last quarter that you had expected sales to improve throughout the year. We certainly saw that in Q1. Was that improvement choppier, was it consistent throughout the quarter, and did you see this trend in both office and Hearth? And then finally, with this improvement, to what degree is this really more company specific efforts that you're yielding profits from or is it more post-election animal spirits doing that.

Yes, I -- those are great questions, Kathryn, as usual. I think the improvement we're seeing is relatively consistent. And it's driven in part I think significantly by the overall market and just the overall sentiment post-election. And then I think also that we are performing well within that improving market. So, I don’t see any core animal spirit, I just think it's an overall improvement and that sort of tracking, maybe slightly because of where we're positioned ahead of that improvement. It's about what we thought both in office furniture and in Hearth.

Okay, helpful. And one of the things that we are starting to hear from our, this is more on that contractor base, is that you're seeing more bids that are bigger and their backlogs. And this is something that's really started to change over the past say four to six months. And what visibility do you have with your business to either support of debunk that observation from large national contractors?

And we're talking about building products, Kathryn?

No, we're talking about guys that are building football stadiums to office buildings to hospitals and schools.

Yes. I would say we are because of where we compete, we tend to be really more in the small type of bids and the medium type of bids and not as two I mean maybe to the mega bid sort of stuff. That said, are right now we're in a period of seeing some good large to medium sized project business. But I wouldn’t say that we would support or deny that premise that you stated there.

Okay. Now the asset that you announced divesting last quarter. You are able to distinguish on the topline the impacts. But what was the profitability or maybe margin impact taking that asset out of the picture?

So, Kathryn there's more than just the one asset bid that we have divested, the one we're favoring. So, for the year, our divestitures were lower topline by approximately a $100 million and we'll increase EBIT by approximately $3 million. So, it's definitely accretive.

Okay. So, that --.

The other divestiture, Kathryn, that Marshall's referring to would be periodically we will free offer we will divest contract dealers that we brought in house to help and then we typically will help straighten those up and then typically we'll sell those back to the local entrepreneurial talent. So, that's part of what Marshall's referring to in addition to this other big business we divested.

Okay, perfect. Thank very much, for your time.

Thanks, Kathryn.

Thank you.

Our final question comes from the line of Greg Burns from Sidoti & Company.

Good morning. What would you say is driving the underperformance internationally and what do you think needs to be done if we take away China to drive growth in those markets?

Well, yes your definition of underperformance is always in a struggle back and say Greg, these businesses are choppy volatile. International for us is 5% of the total HNI sales. Based on where your position, etcetera, you're going to see different order. So, a significant portion of our business is Mexico and Mid-East which has been rather volatile. And then China and India moves around depending on what projects we win and what's going on there. So, what makes it better? Well, it's just day-to-day grinding it out and hitting the right mix and timing of the business.

Okay. Maybe more specifically around China and how you're positioned in that market. I mean, are you more regional there and do you need to expand your footprints. What kind of investments do you see needing to be made in China to establish your position there?

Well, we are we are one of the leaders in China. China is very much a regional business and it's about investing in, selling capabilities, and products. There's no big silver bullet here, it's just driving the business forward. We like what's going on in China. We like how we're positioned in China. China is an important business for us and it's just day-to-day management, keep the ball rolling so to speak.

And Greg, just to know, we are expecting some acceleration there in the second half, since kind of 15% to 20% growth rates international for this back half of this year.

Okay, thanks. And in terms of the supplies market, it seems like the sentiment indicators that the small businesses has been improving since the election or have improved since the election. Looks like the second quarter guide is implying a little bit of a pick-up and not as much as contract. But you just talk about what you're seeing in the supplies market and with the small business sentiment out there.

Yes, I think your comments are right on. Small business sentiments improving, it's not improving much as contract. It's a very as you know we are the market leader in that segment. It's a very volatile segment due to sort of the changing supplies nature. We have several large customers, that sometimes the results get moved around based on how the inventory and stock. I think there is a lot more to play out there. We are well positioned, we're proudly diversified and I think we got a it's a significant profit generator for us and will be in the future. So, again it's more of invest widely in product and the selling capabilities and serve those customers as efficiently as effect as we can and as that market improves, we will improve likewise.

Okay, thank you.

There are currently no more questions in queue. I hand the call back over to the presenters.

Well, thank you very much for tuning in, in the HNI first quarter earnings call. We look forward to talk beyond the future and have a great day.