Good morning, ladies and gentlemen. My name is Michelle and I'll be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International Second Quarter Fiscal Year 2017 Financial Results Conference Call. All lines have been placed on listen-only mode to prevent any background noise. After the Kimball's speakers opening remarks, there will be a question-and-answer period where Kimball will respond to questions from analysts and investors. [Operator Instructions] As with prior conference calls, today's call February 2, 2017, will be recorded and may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from the forward-looking statements. Risk factors that may influence the outcome of forward-looking statements can be seen in the Kimball International Form 10-K and today's release. The panel for today's call is Bob Schneider, Chairman and CEO of Kimball International; and Michelle Schroeder, Vice President and Chief Financial Officer of Kimball International. I would now like to turn the call over to Bob Schneider. Mr. Schneider, you may begin.

Thank you Michelle, and welcome everyone to our second quarter earnings conference call. The financial results for our second quarter ended December 31, 2016, were released yesterday afternoon. As in prior calls, an investor presentation slide deck has also been posted to the Investor Relations section of our website to accompany this conference call. The slide deck includes trending of - what we believe are very key metrics. To help all of you with better clarity, as we did during the last call, we've gone back through our notes from prior investor discussions and have incorporated thoughts around the key questions from those calls into our prepared remarks for today. I will start with a few brief comments before I turn the call over to Michelle who will provide us with the key financial highlights for the quarter. We will then open the call up to questions from analysts and investors. In summary thinking about the quarter, we continue our trend of year-over-year improvement in the second quarter with sales increasing 4% and net income increasing 34%. Excluding the restructuring charges in the prior-year, our second quarter net income increased a healthy 13%. Now I’ll touch on a few of the key highlights for the quarter ending December 31. Regarding sales, the 4% increase in sales in the second quarter was led by strength in our hospitality and healthcare vertical markets. Our hospitality vertical sales were up 9%, growth in this market has slowed a bit from a year ago but the market continues to be strong with a lot of refurbishment and new hotel construction activity. And I have mentioned that healthcare also drove our sales this quarter, it was up a strong 15%. Moving to office furniture, when comparing to office furniture industry data from Beth MA, we…

Thanks Bob. Our second quarter sales ended at $169.9 million which was a 4% increase over last year and this was the 14th consecutive quarter we recorded year-over-year sales growth and that's something that we're really proud of. Our healthcare vertical market sales increased 15% in the second quarter. I've mentioned in prior calls how we've increased our marketing efforts, enhanced our product portfolio, and really put a heavy focus on this vertical market and it is paying off. Sales to the hospitality vertical market increased 9% in the second quarter with that growth coming from our program business. RevPAR which is revenue per available room is a leading indicator for the hospitality industry and that is forecasted to grow 2.3% in calendar year 2017. Forecasted growth in RevPAR is slowing and that's in part due to the forecasted acceleration of supply growth outpacing demand. So growth in supply is good for hospitality business so while growth is slowing the market still remain strong. Sales to the education vertical market also increased in the second quarter by 4%. Our government and commercial market sales were flat while the finance vertical markets declined. Sales from new office furniture products introduced in the last three years increased 21% compared to the second quarter of last year and that was about 27% of our total second quarter office furniture sales. So our new products continue to drive our sales growth. Moving to the orders for the quarter. Overall our orders declined 1% in the second quarter and as Bob mentioned we did see a slowdown in our day-to-day orders. We are watching this activity closely. By vertical markets orders in the commercial and government vertical markets increased while order in healthcare, hospitality, education and finance declined. The decline in the healthcare and education…

[Operator Instructions] Our first question comes from Catherine Thompson of Thompson Research. Your line is open.

Good morning guys. This is Steven Ramsey on for Catherine. Got a couple of questions here thinking about older products versus newer products. I was trying to back into sales for products that would not be considered new and thinking about office furniture and if I'm calculating it correct, it looks like the older product sales were down in the low to mid single digits am I looking at that right and...

That is correct Steven, and when thinking about that - recognize the significant change in our industry last roughly three, four, five years in the types of products that are being purchased and so it frankly makes sense and it is not surprising that these older products would be down and the new products would be really taking off because the industry is not static last five years, it's been a monumental change in the types of products that customers want to buy.

Very interesting. And then I guess thinking further about that. Do you guys have a medium or long term goal of new products as a percentage of sales for office furniture and do you think that acquisitions are a key part in getting to higher levels of new product sales?

Yes. Our new product sales as a percent, the mix was 27% Michelle, 20% of our sales from new products, our goal is generally net low to mid 20s and I think most of our competitors, I think we're actually a little bit higher than they are in terms of our actual percentage of new product sales in terms of that mix but anyways we are already actually higher than we think long-term that we would be in this metric.

And our margins for these newer products, are they comparable or superior to older products?

Lot of them are better Steven, I would say probably the majority of them are better.

Excellent. And then thinking about just cost on a growth - cost to sales line and SG&A line, how much of those would you say, how much is variable and then thinking about SG&A do you expect SG&A to stay in that low $40 million level going forward.

The aspect of variable, if you're trying to get the contribution margin, generally speaking our leverage on sales is 25% to 35% which is pretty strong. As you think about SG&A it moves with our sales because of commissions and other types of marketing costs as our sales are going up. So when you look at the dollar amount of the SG&A we expect the dollar amount to go up. You saw this quarter as a percent of sales we were actually down slightly which I'd like to see as we go forward and grow but the dollars were drop and that will happen because of commissions and things like that.

And incentives as well and profit goes up, those costs go up.

Yes.

Excellent. And then last question, how much cash do you guys feel that you need to keep around to retain optionality for the buyback down the road in potential acquisitions.

Our targeted cash is around 20 million or so Michelle if I remember correctly. We're obviously way, way higher than that and we also have to factor into that our credit facility which gives us a lot of liquidity for fluctuations and cash needs. So, if you look at our capital structure today Steven, we have absolutely no challenge sort to speak to be able to fund the buyback that we have remaining. And with the excess capital we have, plus borrowing ability we have a lot of capital to fund, the fund growth through acquisition.

Excellent. Thank you.

[Operator Instructions] Our next question comes from Paul Sonkin of Gabelli. Your line is open.

Good morning. I guess, I didn't notice this before but when you calculate return on invested capital you should remove excess cash. Of course you're not showing the true economics of the business and I don't believe that your peers are similarly capitalized.

All as we did that, we would significantly go pass all of our peers on return on capital. And we frankly included that cash in the calculation to avoid the [indiscernible] you have this capital and you need to get a return on it. So it puts a little bit more pressure on us to deploy that capital and get a much better return than what we own it presently but I totally understand your point but we give it to be extremely conservative and even doing so we still are tops in the industry.

Yes, I guess two comments well then, on is I don't think it's conservative I think it's not a relevant figure. And then the other thing is, since when is pressure bad thing and then the other thing is that you need to come up with good answers as to why you're not deploying that capital which again I'm happy to help you with. So it seems as though your return on invested capital would be close to 31%...

It would be in the 30s.

Yes, if you assume that you needed a little bit of cash to run the business, now the question that I have is that in terms of acquisitions, can you - are there any acquisitions that are generating that kind of return and if they are generating that kind of return, people are going to want a pretty high valuation so, can you just talk a little bit about your acquisition criteria in regards to that.

We would look very, very closely Paul at the return on an acquisition relative to the cost of capital. Clearly our return on capital is extremely strong and I think exception with your comment earlier in terms of it not being conservative to approach it the way we did in terms of the disclosure because I would not want to imply to some investors who may look at 31%, 32% return on capital and maybe be mislead to think that's our total capital deployed.

Well that's a footnotes for…

And so that's why we listed that way and make it clear that that's what we - how we computed it. But clearly when we look at acquisitions to find companies that have that type of return on capital it would be very, very difficult to find companies like that and if you did the premium being paid for them would be absolutely huge and it would be tough to sustain that return on capital. So totally aware of that and a part of our thinking.

Okay. So if you say that you're looking for acquisitions which [evil] [ph] do you look at? Do you buy something with a subpar return on invested capital with the intent of getting it up to your return on invested capital over time or do you overpay?

Certainly don't want to over pay but whatever the specifics are on that target company, we look very, very closely on where can we get some synergies that the marriage of that company and ours can drive value that exceeds our cost to capital.

Well, if you - even if your cost of capital is like 10% or 12%, it will probably be fairly easy to find something that is above that hurdle rate but it would be dilutive in terms of overall bid business.

I'm not sure it would be easier to find that in this environment Paul because of valuations on companies today. I wish it was that easy but it...

Yes, so then the question becomes as like how hard are you looking for acquisitions then?

We are looking very hard as we are also on organically growing our company.

Okay. Because actually the answer I probably to [indiscernible] that you're not looking hard at acquisitions given…

We like to turn over all stones Paul and see what's under and hopefully we will find - that's a great marriage.

Yes. The other thing is, on the last conference call you mentioned that you felt that the market was discounting a recession and I just wanted to get kind of a little bit of how you feel about that now?

I think we had some major domestic and world events since our last conference call that dramatically changed the optimism in the U.S., CEO confidence being as high as this, I mentioned earlier, lot of the metrics looking very positive. And as I look at the coming year, the coming couple of years, I think there is a lot of things pointing in the direction of growth and this country that is going to expand GDP much beyond I hope and believe - I think it was 1.9% in the fourth quarter and I'm not sure if we've gone over 2% for the last -I don’t know how many years, so I'm much more bullish Paul now than I was at the last call.

Okay. And then in terms of the health of the hospitality market like can you just give us a little bit more definitive into that?

RevPAR for 2016 was up 3.2%. The estimates of the industry going into 2017 is still growth but slower. The latest estimate for 2017 is 2.3% of growth, I'm hopeful that this market still has significant steam left in it and I think with what's happening in terms of CEO confidence et cetera in this country that there is still many innings left of the expansion in the hospitality cycle. So time will tell but we are very, very active with customers with projects and it is very, very busy right now. So I just think what is transpired with the election has ended so many things in terms of trends and thinking in this country that it's hard to get a sense of just when that growth is going to start and how expensive it might be. And we are watching it very, very closely but the indications we are getting from customers is very, very positive.

Got you. Well for us hope is a four letter word but have the RevPAR estimates proven to be accurate and is the 2.3% estimate was that made after the election?

It’s the latest PWC report and it was after the election. Q - Paul Sonkin Okay. And has that proven to be accurate in the past.

Generally so.

Okay, okay. All right, well thank you very much. I appreciate it.

[Operator Instructions] I'm showing no further questions. I'd like to turn the call back over to Bob Schneider for any closing remarks.

Thank you Michelle, and thanks everyone. In closing, we are very pleased with our solid performance in the second quarter given the market challenges and are looking forward to continued improvement in growth. Thanks everyone for your interest in Kimball International and have a great day.

At this time listeners may simply hang up to disconnect from the call. Thank you and have a nice day.