U.S. Markets closed

Edited Transcript of HNI earnings conference call or presentation 20-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 HNI Corp Earnings Call

MUSCATINE Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of HNI Corp earnings conference call or presentation Thursday, April 20, 2017 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jack D. Herring

HNI Corporation - Director of Finance & IR and Treasurer

* Marshall H. Bridges

HNI Corporation - CFO and VP

* Stanley A. Askren

HNI Corporation - Executive Chairman, CEO and President

================================================================================

Conference Call Participants

================================================================================

* Beryl Bugatch

Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research

* Gregory Burns

Sidoti & Company, LLC - Analyst

* Kathryn Ingram Thompson

Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research

* Matthew Schon McCall

Seaport Global Securities LLC, Research Division - MD of Building Products and Furnishings and Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. My name is Kayla, 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. (Operator Instructions) As a reminder, today's conference call is being recorded. Thank you. Mr. Jack Herring, you may begin, sir.

--------------------------------------------------------------------------------

Jack D. Herring, HNI Corporation - Director of Finance & IR and Treasurer [2]

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [3]

--------------------------------------------------------------------------------

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 open up to 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 businesses continue to compete well and generated sales at the high end of our anticipated range. As expected, the demand environment started slowly then improved throughout the quarter. We're pleased with the positive customer response to recent investments in new products and selling capabilities. We delivered another quarter of strong operational 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 streamlining 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 businesses, increase capabilities, business process simplification and manufacturing process efficiencies, all contribute to our 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. We're 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 3 to 5 years.

I'll now turn the call over to Marshall for some specifics on the quarter, and then he'll roll through a bunch of numbers for you.

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [4]

--------------------------------------------------------------------------------

Thanks, Stan.

For the first 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-driven business decreased approximately 6% organically, or minus 7% including the impacts of acquisitions and divestitures. Sales in our North American contract business decreased 1% organically, or minus 4% in total. And sales in our international business decreased 20%.

Looking at our hearth segment, sales increased 3.5%. Within the hearth segment, 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 margin increased 60 basis points to 38%. Labor and material productivity gains and the favorable impact of divestitures were partially offset by lower volume. Stan?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [5]

--------------------------------------------------------------------------------

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're expecting organic sales to be up 1% to 4%. Total organic office furniture sales are expected 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 continue. Sales in our retail wood and gas business are projected to be down 2% to 5% due to seasonal timing and mix. Sales of our pellet appliance businesses are forecasted to be up more than 40% or $1 million to $2 million. In total, we expect HNI consolidated organic sales to be up 4% to 7% for the second quarter. Marshall.

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [6]

--------------------------------------------------------------------------------

I'll give some additional information on our second quarter outlook. The growth rates Stan just referred to were all organic. When including the impacts of acquisitions and divestitures, we expect total consolidated sales growth to be flat to plus 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 SG&A, as a 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 consolidated sales are forecasted in the range of minus 1% to plus 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?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [7]

--------------------------------------------------------------------------------

Okay. Let me wrap this up then. Simply, our strategies are working, and we remain focused on creating long-term shareholder value. We're well positioned to deliver profitable growth and enhance our already strong market position.

So with those comments complete from Marshall and myself, we'll now open it up to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Budd Bugatch from Raymond James.

--------------------------------------------------------------------------------

Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [2]

--------------------------------------------------------------------------------

The -- 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?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [3]

--------------------------------------------------------------------------------

Yes. So I'll start, and Marshall can fill in anything I missed or any additional color. But we are coming off a period of strategic pruning here. And you're right. Contract is showing some significant growth forecasted for the second quarter. I think I said 12% to 15%. Now you know, Budd, we don't get too high when there's big numbers, and we don't get too low when there's 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 projects for us, anyways, significant projects that are coming in. And we think the second half is going to continue to be strong for contract. I don't know, Marshall, is there anything else you want to comment?

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [4]

--------------------------------------------------------------------------------

No, I'd say, Budd, that we're seeing pretty good activity on the project side. And particularly, architecture wall is a benefit for the quarter, and we're feeling pretty good about the funnel in the back half from the project side.

--------------------------------------------------------------------------------

Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [5]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [6]

--------------------------------------------------------------------------------

Yes. I don't know if we can characterize it. I would say this, Budd, 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 -- due to where we come from and how we're positioned, we don't do the monster projects. We do large. And I think there are several million dollars is what we would characterize as large, I think.

--------------------------------------------------------------------------------

Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [7]

--------------------------------------------------------------------------------

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's -- well, I'll let you characterize. What's causing that?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [8]

--------------------------------------------------------------------------------

Yes. I mean, the hearth, that pellet appliance growth number is big, but it's a very small base now. As you know, we've been through multiple years of decline in pellet due to energy prices. And I think we're just basically signaling that we are now at the bottom, and what you're seeing is -- it always overshoots both ways, Budd, in this. Because it's a dealer business, which typically there's 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 it's reached bottom, and then there's simply purchasing product to fill the pipeline and some of that’s inventory. How much, I don't know.

--------------------------------------------------------------------------------

Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [9]

--------------------------------------------------------------------------------

And even that segment at that pricing has been pretty profitable for you, right? And still the same way you would characterize it?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [10]

--------------------------------------------------------------------------------

Yes, we are -- yes, exactly. It is profitable business for us. We're 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 accordion that up and down as needed and maintain our cost structure and keep it profitable regardless of what the volume is.

--------------------------------------------------------------------------------

Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [11]

--------------------------------------------------------------------------------

Okay. Just a couple more. These are more housekeepings, or well, first one is not. Costs, what are you seeing in the cost environment right now, raw materials? How are they behaving, misbehaving?

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [12]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [13]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [14]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [15]

--------------------------------------------------------------------------------

And as you would recall, Budd, we index steel so that it tends to lag going up and tends to lag going down, and so we are -- it's bounced up. Steel has bounced up significantly. Now you also know that steel is much less of a input cost as it needs to be, so -- or as it used to be, excuse me. But we tend to lag, and that's why it was not as much first quarter as it -- you might think.

--------------------------------------------------------------------------------

Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [16]

--------------------------------------------------------------------------------

Yes, 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 in the book in the second, third and fourth quarter? How does the -- how do the charges look? So that we can properly do a GAAP and get the cash flows where we are comfortable with them.

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [17]

--------------------------------------------------------------------------------

Yes, Budd. We have a -- we still have some charges yet to come in the second quarter. We're looking at about a little over $9 million of non-GAAP adjustments.

--------------------------------------------------------------------------------

Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [18]

--------------------------------------------------------------------------------

Pretax or after, Marshall?

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [19]

--------------------------------------------------------------------------------

That's pretax. 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. They look at that as accelerated depreciation and the typical stuff.

--------------------------------------------------------------------------------

Beryl Bugatch, Raymond James & Associates, Inc., Research Division - MD and Director of Furnishings Research [20]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [21]

--------------------------------------------------------------------------------

Yes, there's quite a bit of transition cost in there.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD of Building Products and Furnishings and Senior Analyst [23]

--------------------------------------------------------------------------------

So Stan, a couple of things you hit on. You talked about recent investments, and I think you mentioned new products, new selling capability. Can you give any -- can you give more specific on some of the things that you're doing, maybe some of the products that are showing promise or showing results and maybe quantify what amount of help you got in Q1 and what you're assuming from some of these initiatives in the Q2 and '17 guidance?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [24]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD of Building Products and Furnishings and Senior Analyst [25]

--------------------------------------------------------------------------------

Well, maybe I'll ask it the opposite way. If you think about the 12% to 15% in contract in Q2, and I think you back in the -- or rather 10% number in the back half, what kind of market assumptions do you have in those periods? I mean, I assume there was a little of outperformance from those items. Are you assuming some mid-single-digit-type growth for the industry?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [26]

--------------------------------------------------------------------------------

Yes, it's the same as you're seeing and not a bit much, et cetera. And again, I'll 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 calling in our chits that we're like outperforming everybody. This -- anybody that's tracked contract business world for any time frame should know that claiming share gain is a canard and claiming share loss or praying about share loss in the short term and midterm is a waste of time. So -- and you know 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, et cetera. So it's not a whole lot more than I think, just timing and mix and where we're positioned, et cetera. Some of that's coming from new product, but it's a lot of just day-to-day, grinded out company-by-company stuff.

--------------------------------------------------------------------------------

Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD of Building Products and Furnishings and Senior Analyst [27]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [28]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [29]

--------------------------------------------------------------------------------

Yes, no, it's -- when we're talking about contract and outlook, it's contract in a big sense of international and North America.

--------------------------------------------------------------------------------

Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD of Building Products and Furnishings and Senior Analyst [30]

--------------------------------------------------------------------------------

Okay. Okay. Just wanted to make sure we're speaking the same language. One other 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 quarters from some of those pruning efforts?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [31]

--------------------------------------------------------------------------------

We have not quantified that, Matt. Because again, it's typical of our sort of overall continuous improvement sort of mentality. So it goes all the way from very finite pruning product line, even options on product lines to pruning categories, to consolidating, to some cases, pruning customers. And then the big one that we talked about last time was we pruned some businesses out of the whole system as well, so it's very broad based. It's consistent with our sort of daily improvement, rapid, continuous improvement sort of culture and way of thinking.

--------------------------------------------------------------------------------

Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD of Building Products and Furnishings and Senior Analyst [32]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [33]

--------------------------------------------------------------------------------

Yes, no, Matt, the reason we lowered the top end of the range $0.05 had to do with inflation coming in at the top end of our expected range, and we're also seeing a greater opportunity to invest in the business. And as a result, we're seeing less upside for 2017.

--------------------------------------------------------------------------------

Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD of Building Products and Furnishings and Senior Analyst [34]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [35]

--------------------------------------------------------------------------------

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 it 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 it's modest inflation. And so because of that -- it's harder to get price, I think, to cover that.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research [37]

--------------------------------------------------------------------------------

You had said last quarter that you had expected sales to improve throughout the year. We certainly saw that in Q1. Was that improvement choppy? Or 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 being better?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [38]

--------------------------------------------------------------------------------

Yes, 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 "animal spirits." I just think it's an overall improvement and not 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.

--------------------------------------------------------------------------------

Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research [39]

--------------------------------------------------------------------------------

Okay. Helpful. And one of the things that we are starting to hear from our -- this is more on the 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, 4 to 6 months. What visibility do you have with your business to either support or debunk that observation from large national contractors?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [40]

--------------------------------------------------------------------------------

Okay. We're talking about building products, Kathryn?

--------------------------------------------------------------------------------

Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research [41]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [42]

--------------------------------------------------------------------------------

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 tuned in maybe to the mega bid sort of stuff. That said, our -- right now, we're in a period of seeing some good large- and medium-sized project business, but I wouldn't say that we would support or deny that premise that you stated there.

--------------------------------------------------------------------------------

Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO, and Director of Research [43]

--------------------------------------------------------------------------------

Okay. Of the asset that you announced divesting last quarter, you're able to distinguish on the top line the impact. But what was the profitability or maybe margin impact of taking that asset out of the picture?

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [44]

--------------------------------------------------------------------------------

So Kathryn, there's more than just the one asset that we have divested, but the one being the big one. So for the year, our divestitures will lower top line by approximately $100 million and will increase EBIT by approximately $3 million, so it's definitely accretive.

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [45]

--------------------------------------------------------------------------------

So the other divestitures, Kathryn, that Marshall is referring to would be, periodically, we will free up or 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. And so that's part of what Marshall is referring to in addition to this other big business we divested.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Gregory Burns, Sidoti & Company, LLC - Analyst [47]

--------------------------------------------------------------------------------

What would you say is driving the underperformance internationally? And what do you think needs to be done, particularly in China, to drive growth in those markets?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [48]

--------------------------------------------------------------------------------

Well, yes, your definition of underperformance is always in a shackle bag, and so, Greg, these businesses are choppy, volatile. International for us is 5% of the total HNI sales. Based on where you're positioned, et cetera, you're going to see different orders. So a significant portion of our business in Mexico and the 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.

--------------------------------------------------------------------------------

Gregory Burns, Sidoti & Company, LLC - Analyst [49]

--------------------------------------------------------------------------------

Okay. Maybe more specifically about -- 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?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [50]

--------------------------------------------------------------------------------

Well, we are one of the leaders in China. China is very much a regional business, and it's about investing in selling capabilities and product. 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 a important business for us, and it's just day-to-day management, keep the ball rolling, so to speak.

--------------------------------------------------------------------------------

Marshall H. Bridges, HNI Corporation - CFO and VP [51]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Gregory Burns, Sidoti & Company, LLC - Analyst [52]

--------------------------------------------------------------------------------

Okay. And in terms of the supplies market, it seems like the sentiment indicators for small businesses have been improving since the election or have improved since the election. Looks like the second quarter guidance is implying a little bit of a pickup but not as much as contract. But can you just talk about what you're seeing in the supplies market and what the small business sentiment out there?

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [53]

--------------------------------------------------------------------------------

Yes. I think your comments are right on. Small business sentiment is improving. It's not improving as 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 they inventory and stock. I think there's a lot more to play out there. We are well positioned. We're broadly diversified. And I think we've got a -- it's a significant profit generator for us and will be in the future. So again, it's more of invest wisely in product and the selling capabilities and serve those customers as efficiently, as effective as we can. And as that market improves, we will improve likewise.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Stanley A. Askren, HNI Corporation - Executive Chairman, CEO and President [55]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

This is the end of today's call. You may now disconnect. Have a great day.