Good morning. My name is Emily, and I will be your conference operator today. I would like to welcome everyone to the HNI Corporation First Quarter Fiscal 2018 Conference Call. All lines have been placed on mute to prevent any background noises. 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. Herring, you may begin your conference.

Thank you. Good morning. I’m Jack Herring, Treasurer and Director of Investor Relations for HNI Corporation. Thank you for joining us to discuss our first quarter fiscal 2018 results. Here with me are Stan Askren, Chief Executive Officer and Chairman; Jeff Lorenger, President; and Marshall Bridges, Senior Vice President and Chief Financial Officer. Copies of our financial news release, which was released on Friday, April 20, our 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.

Thank you, Jack. Good morning, everyone. I’ll share a brief assessment of the first quarter, and then turn the call over to Marshall Bridges, who will review some of the specific financial details; and then Jeff Lorenger, who will share our thoughts on the outlook. And then as usual, open it up for questions. Before we get started though, I’d like to take a brief moment to comment on my recent decision announcement to retire from HNI. I spent 26 years as a proud member of HNI, including the last 14 as Chairman and CEO. It’s been a great run. I feel very good about the timing of this transition. We’re in good shape and the businesses are in a solid position. We successfully completed the biggest initiative this corporation has ever taken on, BST. I feel good about our members, the leadership team now in place and the individuals selected by the Board of Directors to succeed me, Jeff Lorenger. Jeff’s been in development for this position for 18 years and has excelled in every role he’s taken on. Jeff is uniquely qualified for this role, with a strong understanding of what it takes to lead and serve our member and our culture and our customers. I’m confident he’ll take the organization and the business to the next level. Jeff and I will be conducting a stepped and orderly leadership handoff over the balance of the year. I thoroughly enjoyed my career at HNI, and I’m deeply grateful to all the wonderful people I worked with over the years. So now, turning to the first quarter. Results exceeded our expectations. We saw a continuation of the strong organic growth we experienced in the second half of last year. All of our businesses are performing well in their markets, delivering…

Thanks, Stan. For the first quarter, consolidated organic sales grew 8.6% versus the prior year. When including the impacts from closing and divesting small office furniture companies, sales increased 5.7%. In the office furniture segment, sales increased 9.7% organically or 5.8% in total. Within the office furniture segment, sales in our supplies-driven business increased 7%. Sales in our contract and international businesses increased 13% organically or 5% in total. In our hearth segment, sales increased 5.5%. New construction sales increased 4%; sales of retail products, including wood gas and pellet products, increased 8%. Non-GAAP net income per diluted share was $0.10 compared to $0.26 in the first quarter of 2017. Earnings decreased as the benefit from strong sales growth was more than offset by impacts from our Business Systems Transformation go live input cost inflation. Okay, I’ll turn it over the Jeff Lorenger, who will now provide color on our outlook.

Thanks. First, I would like to thank Stan for all the guidance he’s provided me and the leadership he has given HNI over the years. He has positioned us well to drive long-term success. I’m excited about the opportunity to lead HNI. I believe we can drive new levels of value creation with our leading market positions, strong operational capability and unique member/owner culture. Now let me share some comments on our outlook. Our expectations for the year are similar to those we previously shared. We will continue driving strong organic growth across our businesses. Our supplies-driven business is expanding due to a combination of our execution, our investments and improving market demand. We expect the supplies-driven business to grow 5% to 8% in the second quarter. We continue to have strong momentum in our contract business. We expect second quarter growth of 3% to 6%, followed by higher growth in the second half. Our hearth business continues to compete well in both the new construction and retail channels. We’re expecting another record year in our hearth business, and we’ll benefit from our strong brands in a solid housing market. We’re expecting hearth to drive 3% to 6% growth in the second quarter. We continue to expect record productivity and cost savings. We are currently on track with these initiatives, which will aggressively ramp up in the second half. We are seeing higher than expected input costs across the board. As Stan mentioned, we are working to offset these pressures with additional cost savings and price increases. These higher costs will have a negative impact on the remainder of the year, particularly in the second quarter. Our full year outlook includes a strong second half. Productivity and structural cost improvements, along with strong organic growth, will drive profit improvement. We are past the operational and business mix challenges we experienced during the second half of 2017. I’m confident we’re on track for a strong year. I’ll now have Marshall provide some details on our outlook.

Okay. Let’s talk about the second quarter, first. We expect consolidated second quarter organic sales to be up 4% to 7%, or up 1% to 4% when including the effects of closures and divestitures. Second quarter office furniture sales are expected to be up 4% to 7% organically, or flat to up 4% in total. Our estimate of non-GAAP earnings per diluted share for the second quarter is in the range of $0.28 to $0.38. Breaking down projected drivers, we expect to benefit from solid organic growth, combined with $5 million to $7 million of productivity gains and structural cost reduction. These benefits will be more than offset by previously made investments and BST-related costs. I would like to note that we will generally see these incremental costs anniversary during the third quarter. Non-GAAP gross profit margin for the second quarter is expected to be similar to the second quarter of 2017 result of 37.3%. Non-GAAP SG&A, which includes freight distribution expense, is expected to be slightly higher than our first quarter result of $172 million. We expect our tax rate for the second quarter and the full year will be approximately 23.5%. So let’s shift to the full year. For the full year, we continue to expect consolidated organic sales will grow 5% to 8%, or be up 1% to 4% in total. We’re expecting our office furniture business to deliver organic growth of 4% to 8%, with our hearth business up 3% to 6%. We estimate non-GAAP earnings per diluted share will be in the range of $2.40 to $2.70. Stan?

Okay. Thank you, Marshall and Jeff. So we continue to feel good about the markets, prospects for growth and ability to deliver increased profits. We have strong businesses and extremely capable members to lead those businesses. HNI is in a great position to drive long-term value for our shareholders for many years to come. So with those general comments complete, we’ll now open it up for questions.

Our first question comes from the line of Budd Bugatch from Raymond James. Your line is open.

Good morning. Good morning, Stan. Congratulations to you, Jeff. Congratulations to you as well, and best of luck on your new assignments. Talk a little bit about what you’re seeing in office. You’re giving us an outlook that says strong contract growth, and yet, the business remains choppy overall, at least as we see it on the industry metrics. Can you talk a little bit about competitive positioning and what you’re seeing in the overall contract side of the office furniture market?

Yes. Budd, I mean, you summarized it even with your comments. We do see the economy is stronger. We think we’re competing well. It is choppy, as you say. It’s up and down. And we – our outlook here that we’ve expressed and for the foreseeable future is that we expect to see nice growth in the contract segment. The other good news is we’re seeing nice growth in the supply segment as well, which is a continuation really started second half of last year on forward. And we’ve had a lot of noise around this wholesaler shift, but we’re seeing strong performance with the dealer channel, we’re seeing strong performance out of national supply dealers, and we think it’s going to continue for a while here.

Yes. And that disruption, Stan, is it over in the supply side? It’s been [indiscernible]

Yes, I won’t say it’s over, Budd, but it’s certainly becoming less and less. It’s trailing down. And we expect that by midyear, there’s still going to be some destocking as they rationalize their stock levels. But we expect to decline, but it’s not – the decline’s not accelerating. It’s not going to be a dramatic turnaround, but I think it’s stabilizing. And it’s the growth we’re seeing in independent dealers and national supply dealers is more than offsetting those declines.

Okay. And as we frame the – your guidance for the year and our refresh model after you did report, it’s certainly back end-weighted, most of the earnings for the year. And so as you indicated on input costs are continuing to rise, or have continued to rise. Maybe you can give us a little bit of color on that and why you’re so comfortable in keeping most of your estimate for the outlook for the year intact, but having to take it and make it more second half-loaded?

Yes, Budd. The story for the year and the second half are pretty similar. We need to do two things really to make that happen. And the first is we need to keep the strong organic growth going. And we’re feeling pretty good about that. The other key to the second half and the year is structural cost reduction and achieving productivity. So those two things are really the keys to the year, and we have some headwinds, but we expect those two items to more than offset those headwinds.

And BST is fully implemented now? Any early read on that?

It is fully implemented. The reason is we brought it up top live successfully, and now, we’re in the process of tuning, refining. There’s always little bubbles in the business, and so we’re working hard, make the experience better for dealers, make the experience better for our internal numbers, et cetera. But we feel really, really good. I think the team did one heck of a job of taking on a super complex, super significant investment that provides just a tremendous capability of framework for the future. And so we’re good. Now we’re just in the tuning phase to sort of smooth all of it out and really optimize it going forward.

Okay. Thank you all. I'll let others have their own questions. Thank you very much for taking mine.

Thanks, Budd. Appreciate it.

Our next question comes from the line of Matt McCall from Seaport Global Securities. Your line is open.

Thank you. Good morning, everybody and Stan, congratulations. I know we’ll speak many times. Really enjoyed working with you. And congratulations, Jeff. well-deserved. So, let’s see. I think I have a couple of follow-ups here. So the supply side, there was, I guess, there were two components that I kind of followed. One was the investments that you needed to make to kind of put the infrastructure in place to provide the service levels that you needed. And then there was the revenue that was expected to kind of follow. Is the – you said before that the other parts of the business are offsetting. So the revenue, I assume, is still declining. What’s in the plan or what’s in the guidance for the rest of this year in terms of both spending and revenue in that wholesale side of the business?

Well, I mean I think the bigger question is where we expect the supplies-driven business is as a whole. And we’re expecting a growth, and we grew approximately 7% in the first quarter. And we’re expecting a similar growth rate in the second quarter. And then as we look into the back half, we’re still expecting growth. Now embedded in there is growth in other channels besides wholesale and continued declines in the wholesale, but it’s included in that outlook. So we’re excited about our prospects there. On the spend side, I think you’re referring to the direct fulfillment investment, which we are continuing to invest in, in the first half here. That was about $2 million in the first quarter and a similar amount in the second quarter.

Okay. I think that leads nicely into the second question I have. I think about the components that we’re talking about here, you’ve got the structural cost you’re taking out of productivity, you’ve got some, it sounds like, some BST spending that’s ongoing, infrastructure spending, cost inflation, price is going to offset some of that. How do we kind of layer all this in? It sounds like the majority of the benefit’s going to show up in the back half. But I guess what I’m getting at is what type of visibility do you have into these – into the expected improvement? How much of it is low risk, if you will?

Well, Matt, we have to execute, right? So as I mentioned to Budd earlier, the keys to the year really are the volume growth, and from what we can see with our visibility to preorder activity and the sales funnel and things like that, we feel reasonably good about that, although the supplies-driven business is short cycle. On the productivity and structural cost reduction, there’s a combination of things which are in place, and some things we have to go execute. And we need to generate $30 million or $40 million of benefit from those two things this year, and we’re on track and feel good about where we are. But it does hit the back half disproportionately.

Okay, okay. Let’s see. So the international business sounds like our buddy Kurt’s doing a good job there. I think it’s up 9% on a year-over-year basis. What’s the outlook there? I mean, how big is it now? How big do you expect it to be? Stan, you’ve given us some insight to that in previous calls. But just any update on international overall?

Well, first off, Kurt Tjaden is doing a heck of a job. He’s listening on the call, I think, and we appreciate what he’s doing. The growth is really in China and India, as you recall. And so it’s not a huge part of our business. I mean, it’s still a single-digit size of our business. And I think it’s going to be that for a while. We do expect that over the next 10 to 20 years to outgrow domestic, and so it will become a bigger percentage. But it’s not moving the needle in a huge way. I’m excited about the prospects. Those still are two of the largest, fastest, growing economies in the world, and I think they’re going to continue. There will be ups and downs, and I think we’re really we’re well positioned with really some outstanding teams in China and India.

Okay, okay. And I do want to sneak one more in, just to make sure I understand. The price-cost front, Marshall, can you talk about it maybe on a segment-by-segment basis? If another pricing dynamic’s going to be different across the three businesses. What price has been put in place? The layering in. I know you said the back half’s going to be obviously be better. But where does the risk lie, if you will, on a price-cost front from a segment perspective?

Well, I mean I think it’s probably better to talk about it collectively for the whole corporation. So we put price increases in January for the inflation that we knew about at that time for the majority of the business. And we’re also putting a secondary price in for the back half to compensate for this recent round of inflationary pressures we’ve seen. So based on what we know now, we feel like we can offset that with additional cost savings initiatives as well as the price increases. So we did, as you saw, lower our range a bit from $2.40 to $2.80, to what we’re seeing now is $2.40 to $2.70, and the primary reason for that is the inflationary pressures we’re seeing.

Yes, we don’t see, Matt, a big risk on the price side. The inflation is the big bet, and we think we have a good perspective on inflation going forward. But I think anybody who’s following the economy is trying to figure out exactly where will inflation settle out. But we feel good about these numbers that we’ve given you, and we feel good about our ability to drive productivity and drive additional price to help offset these cost increases.

Okay, great. Thank you all.

Our next question comes from the line of Kathryn Thompson from Thompson Research Group. Your line is open.

Good morning guys. This is Steven Ramsey on for Kathryn. For gross margin, should we be thinking about the second half being positive then as these things roll in? Or can you describe the cadence and if that benefit of price and cost reduction benefits 2019?

Yes. Steven, the gross profit margin in the back half will be higher than it is in the first half. For the year, we’re expecting it to be in the range of 30.5%, which is above what we did in the first quarter and what we’re projecting for Q2.

Got you. On the supplies business, did the combined impact of shifting to direct fulfillment and freight inflation, should we expect that direct fulfillment strategy to make freight inflation less of an issue going forward? Or if you could just talk about those two moving pieces happening at the same time.

No, I don’t think the shift to more direct fulfillment really changes the inflationary profile that we’re exposed to. If anything, we have a little bit more transportation cost there.

Got you. Are the tariffs impacting the international segment more uniquely than the domestic contract business?

No.

Okay. And then lastly, just in the office segment, peers have been active in acquisitions recently, looking to add products that looks like on the ancillary side of the market. Do you feel the need to be acquisitive to improve your competitive position there on the ancillary side? Or can you fulfill that through the existing brands?

We don’t talk about our acquisition plans. I will say this, we feel good about our ability to develop internally these set – these solution sets to meet the market needs.

That’s it for me. Thanks.

Thank you.

Our last question comes from the line of Greg Burns from Sidoti. Your line is open.

Good morning. In terms of the hearth business with oil kind of rebounding here, how long does it simply take for consumer behavior to change? When would you maybe start to see a benefit on the hearth side of the business from higher oil?

Yes. Greg, I mean, the question is really has to do with Brent crude. It has to do with fuel oil and then liquid propane prices. And so generally, when oil is up around above 60, around 70 or 80, that we start to see that kick in. There is – it typically is historically, these are general rules of thumb. It takes like two seasons for the consumer to get kind of kicked in the head, and then they’ll start looking for alternative fuel sources. If it’s just one season, it doesn’t really move the needle. It takes two seasons to really move the needle at that above $70 sort of level.

Okay. And the margins on the hearth business continue to improve year-on-year. How do you feel about the – how well that business is optimized? Is there room for further margin improvement? Or is it mainly a volume story here?

Yes. Another good question. They are a lean machine. They are recognized as one of the leaders in industrial America for their manufacturing prowess and their lean ability, both design, development of product for manufacturing, and then their ability to sort of leverage their manufacturing capabilities and know-how to drive additional cost improvements. So it’s more than volume. They will continue to have opportunities to drive cost improvement all else equal in this business going forward. They are great lean practitioners, and that journey is never done.

Okay. And Marshall, what’s CapEx going to look like for this year?

Yes. We continue to expect CapEx to be in the $75 million to $85 million range for the year.

Okay. All right, thank you.

There are no further questions at this time. I will turn the call back over to Stan Askren for closing remarks.

Well, we appreciate everybody tuning in. Thank you, so much for your interest in HNI, and we look forward to talking to you soon. Have a great day.