Paul Huckfeldt – VP, Finance and Chief Financial Officer Paul Toms – Chairman and Chief Executive Officer Michael Delgatti – President, Hooker Upholstery

Matt McCall - BB&T Capital Markets

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call, reporting its operating results for the third quarter of 2016. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation.

Thank you, Ben. Good afternoon and welcome to our conference call to review our sales and earnings for the fiscal 2016 third quarter and first nine months, both of which ended on November 1, 2015. We certainly appreciate your participation today. Joining me are Paul Toms, our Chairman and CEO; and Michael Delgatti, our President. During our call, we may make forward-looking statements which are subject to risks and uncertainties. A discussion of factors that could cause our actual results to differ materially from management’s expectations is contained in our SEC filing and the press release announcing our 2016 third quarter results. Any forward-looking statement speaks only as of today and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after today’s call. Earlier today, we reported net sales of over $65 million for the fiscal third quarter which is about 3% higher than the same period last year and our highest quarterly net sales in seven years. Net income for the quarter increased nearly 45% or about $1.4 million to $4.6 million from $3.2 million last year due primarily to improved gross margins and higher sales. For the first nine months of fiscal 2016, sales increased about 4% to $186 million and net income increased about $4 million to $12 million representing about 45% increase compared to last year. We reported earnings per share of $0.43 in the fiscal 2016 quarter compared to $0.30 last year, and year to date EPS is $1.11 per share compared to $0.77 last year. Now I will ask Paul Toms to comment on our results.

All right, thanks Paul and good afternoon everyone. Overall we had a very good quarter. We are especially gratified at our ability to leverage modest sales growth into a 45% improvement in net income. Operating income was a highlight across the board for the company during the quarter and the first nine months. Consolidated operating income increased in the quarter and year-to-date periods by 36% and 41% respectively, driven by improved performance in both the casegoods and upholstery segments during each period. In the casegoods segment, profitability was bolstered by higher sales, decreased discounting, continuing favorable freight rates, and lower quality related costs. For the fifth consecutive quarter, the casegoods segment achieved an operating income margin of over 10%. Even though consolidated upholstery sales were down slightly from a year ago, we were pleased with $1.9 million operating income improvement year to date due to increased operating efficiencies at both Sam Moore and Bradington-Young along with a net sales increase at Bradington-Young for the quarter and for the first nine months. Operating income in the upholstery segment improved by approximately 50% in the third quarter and nearly doubled versus the first nine months of last year. We attribute the gains to continued improvements in manufacturing efficiencies and capacity utilization, stable costs, the introduction of new product lines and programs to yield higher gross margins, and a return on some of the investments we’ve made in people, equipment, and systems. Our profitability performance was solid across-the-board. We’re also focused on improving sales growth in order to continue strong earnings. The modest sales increases for the quarter and for the first nine months were driven by higher average selling prices. Consolidated unit volume decreased by 1% for the third quarter and we saw orders weaken in October and November compared to a very strong period -- same period a year ago. Overall, we’ve seen a bit of low compared to this time last year. Demand isn’t terrible, but it certainly has not been as robust since Labor Day. We believe the cause of the softer furniture retail activity is a slight pullback in existing home sales and consumer confidence representing a temporary lapse in the housing recovery. Longer term, we believe the fundamentals are strong and we see plenty of recovery left in the housing market. We have strategies in place to stimulate sales in the fourth quarter which Mike Delgatti will discuss in his comments. In addition to the slight sales increase for casegoods during the quarter, our all other segment consisting of our new business ventures H Contract and Homeware also contributed to our sales increase for the quarter and nine months. The all other segment also showed improvement from a profitability standpoint. Our H Contract brand achieved operating profitability for the fiscal third quarter and for the first nine months and Homeware’s operating losses decreased in the quarter and year to date. In addition to achieving operating profitability, H Contract is growing faster than projected at slightly over 50% increase. Homeware on the other hand has been slower-than-expected to gain traction. As we mentioned in our last conference call, we’ve adjusted Homeware strategy by discontinuing the direct to consumer portion of their business which accounted for less than 20% of Homeware’s total volume. We’re now focused on growing sales for Homeware and its wholesale business distributed through Internet retailers, improving our value equations and exiting some slower selling product categories. We don’t expect to see the full impact of these changes until next spring, but in the meantime we have reduced operating losses significantly. At this time, I’d like to call on Mike Delgatti, our president, to give more details on the factors driving our results this quarter and initiatives underway that will impact the fourth quarter.

Thank you, Paul. Good afternoon and happy holidays everyone. As Paul mentioned, the continued strong operating profitability performance of casegoods along with the ongoing improvements for our upholstery segment have been highlights of the year. Bradington-Young’s solid performance in both sales and income along with the turnaround of profitability at Sam Moore have been the stories of the year so far in the upholstery segment. At Sam Moore, we believe that the positive profitability performance is sustainable. Month by month, as more time goes by with improvements, that sustainability is being affirmed. Sam Moore has successfully navigated several challenging transitions. Our greatest accomplishment has been improving service to retail customers through faster production and delivery times. Today, we are shipping over 90% of orders to retailers in five weeks or less which is a significant improvement from just six months ago. At the same time, we have made strides in our service capabilities. We completed the conversion to a new ERP system platform late in the first half of the year. During the third quarter, Sam Moore’s system related functions such as order processing began to stabilize. Not only have our systems stabilized, we already are beginning to experience a return on our investment in this more robust system platform. For example, our smart forecasting system has helped our service levels improve by having the right materials in-house at the right time and we have more accurate and timely information regarding order status to communicate to our retailers along with better tracking systems and visibility of work in progress. While sales have been negatively impacted in the short term, we believe we are positioned well for the near and long-term at Sam Moore. One driver of growth will be Sam Moore’s Studio, a retail dedicated space program introduced earlier this year. Our initial target for that program was 50 retailers, but we are now up to 80 of those programs which should help our order rate in the coming months. In addition, all the upholstery for the new Cynthia Rowley for Hooker Furniture brand launched at the October market is produced by Sam Moore. Orders for these products should also increase shipments as that collection is set to launch at retail in spring 2016. Moving on to Bradington-Young, our domestically produced upscale leather brand, has been the star performer on both the top and bottom lines for our upholstery segment. Sales increases year to date are on budget and profitability performance remains solid. We believe Bradington-Young continues to capture market share which we attribute to the success of our comfort at home retail dedicated space program as well as luxury motion, the premium leather upholstery program introduced at the October High Point Market a year ago. The luxury motion program is performing very well at retail and already drives 15% of Bradington-Young’s overall sales. In addition, we continue to have some relief from rising leather cost which is beneficial to both Bradington-Young and Hooker Upholstery as leather pricing has stabilized after a long period of price increases and volatility. At Hooker Upholstery, our imported leather line, we were disappointed with the sales decrease this quarter. We believe this is short term as we intentionally moved away from some unprofitable programs we had in place and believe the short-term sales impact will be more than offset by an improvement in profitability performance. Reclining chairs and home-office leather seating continue to be our standout categories for Hooker Upholstery. While we have been challenged in motion upholstery due to some price pressures from direct importers, we are bullish about the introduction of a very well received new Hooker Upholstery barstool program which is expected to hit retail stores in January and should have a favorable impact on fourth quarter results. At the October High Point Market, retail attendance in the Hooker Furniture, Bradington-Young, Sam Moore and Cynthia Rowley showrooms was up 10% compared to a year ago. The reaction to our new products was very positive. Our standouts included the Cynthia Rowley brand launch and a comprehensive new European traditional collection called Archivist. Because we received such a strong reaction to Archivist when we previewed it to our top retailers at our May 2015 design meeting we made the decision to order that product early so that we would be able to ship it to retailers during our fiscal fourth quarter. We expect that collection to hit retail floors in December and January which also will have a positive impact on the quarter. In order to stimulate higher demand and sales we are promoting more aggressively at all divisions as we enter the historically strong fourth quarter. At this time, I’d like to turn the call over to Paul Huckfeldt who will give more details on our performance for the fourth quarter and year to date.

Thanks, Mike. Looking at our quarterly results, I’d like to point out a few highlights. Net sales increased due to higher average selling prices in casegoods and upholstery and higher unit volume in our all other segment. That was partially offset by lower unit volume in both casegoods and the upholstery segment. Part of the increase in ASP is attributable to lower discounting in our casegoods segment which is a result of stronger products and improved inventory management, something that’s been a key initiative for a couple of years has begun to yield significant benefits. This improved inventory management means that we also have lower levels of distressed inventory which contributes to our lower unit volumes but also to the higher ASP. Gross profit increased due to both higher sales volume and improved gross margin. Improved gross margin added over $1.5 million to gross profit while increased sales contributed another half-million or so. For the quarter gross margin increased to 27.8% of net sales compared to 25.4% a year ago and that was primarily due to decreased casegoods segment discounting, lower product costs resulting from lower freight rates and to a lesser extent lower product quality related costs. Also driving gross margin were improved upholstery segment margins due to net sales increase at BY and increased gross profit at Sam Moore despite a net sales decline. That was a result of improved operating efficiencies such as decreased contract manufacturing and also lower medical claims in the overhead there. Improved all other segment gross profit was due primarily to increased net sales at our H Contract division. Consolidated selling and administrative expenses were about $375,000 higher than the prior year due to higher net sales as well as increased professional and consulting fees which is partially offset by decreases in bad debt expense thanks to better collection experience and decreased banking expense due to changes in our sales policy. As a percentage of sales, SG&A expenses were flat to the prior year period. Our balance sheet remained strong and stable. At quarter end, we had cash of nearly $50 million, up almost $11 million from year end. The higher cash balance is due primarily to improving profitability and lower accounts receivable and inventory levels since the end of the year which more than offset our capital spending and dividend payments this year. During the remainder of the year, we expect to spend between $500,000 and $750,000 on capital expenditures primarily our ERP project and to other projects to improve manufacturing efficiency and capacity. We continue to be debt-free and have over $13 million available under our revolving credit facility which remains in place until July 2018. Earlier this month our board declared a quarterly dividend of $0.10 per share which represents an annualized dividend yield of about 1.5% based on yesterday’s closing price. Now I’d like to turn the discussion back to Paul Toms for his outlook.

Thanks, Paul. Compared to a very robust fourth quarter last year, demand is down slightly. We believe it’s due to economic -- temporary economic factors such as the low on the housing recovery we mentioned earlier. Despite this temporary slowdown the fundamentals of the US economy are strong. Millennials are entering the life stages and which are beginning families and buying homes. Housing remains affordable. Household formations have rebounded from the lows of the 2008 to ’11 period. Unemployment is low, consumer confidence is relatively high, interest rates are at historically low levels and wages are growing. We’re pleased that our ability to leverage a 4% sales gain into a 45% increase in net income year to date and believe we’re very well-positioned to continue to perform at a high level of efficiency and to capitalize on improved demand when it occurs. This concludes our formal remarks. At this time, I will turn the call back over to our operator Ben and we will entertain questions. Thank you.

[Operator Instructions] And our first question comes from the line of Matt McCall of BB&T Capital Markets.

So let’s see, let’s, I guess, start with the top line, Paul or Paul, you talked about I guess, it’s Paul Toms, you talked about the low in orders. Looks like you had a bit of a tough comp as we progressed through the end of last fiscal year. I know some of that was price, but are your low – is the low you’re seeing in your orders, is that consistent with what you think the broader industry trends are like right now and is that consistent with what commentary you are getting from your retailers?

Yes on both questions. I have had a chance to speak with some peers, and I think generally what we're seeing, others are experiencing and then speaking with both customers at market and with our sales representatives since [ph] market, I think business is a little bit challenging in a lot of places. There are obviously a few exceptions both sides, both little bit better in some places that are more oil driven or worse than overall, but generally I think our customers experienced the low. I’d also like to point out that as you said fourth quarter last year really strong shipments, we don't really talk in percentages each quarter about orders, but obviously fourth quarter shipments are reflective of what we saw in third-quarter orders. And in October and November last year, we had our two strongest months of the year for orders that was driven by better conditions in the industry. Some of it was driven by our container direct business and retailers wanting to get containers on order to try to beat the Chinese new year shutdown, and also a year ago we were having a lot of port congestion challenges, especially in West Coast ports, but even in some East Coast ports. And so we were encouraging people to get containers ordered coming out of market so that we could get them shipped prior to Chinese new year shutdown in late January and that boosted fourth quarter orders last year as well. So our order trends really month over month are fairly consistent. The last three or four months it's just compared to prior year that we’re seeing a bit of a drop.

So definitely a comp issue there, do the comps ease as we move into December, January, February into the spring?

Yes.

And maybe hit the outlook a little bit, you talked about a couple of things. You talked about maybe using more promotional activity and then you also talked about some of those new collections benefiting the near term as those start to ship. Can you talk about the net impact when you take into account the tough comps and you take into account the outlook for, maybe use a little bit of price and then the new collections, how do you think about overall growth as we hit Q4 into Q1?

Well, Matt, this is Mike. We’re certainly encouraged by the fact that the European traditional collection Archivist that I mentioned earlier was very well received in the October Market. We already have orders from 218 dealers, and as I said that product will begin to ship late this month into January, so that will be a clear benefit to the quarter. In terms of our more aggressive posture in terms of promoting, we hope that – the result will be to stimulate some incremental sales. Last week was a particularly strong week for us which was a first week of -- full week of the promotional activity that we put out on the streets, but in terms of margin while it may have an impact, we believe that it will be modest because we will stay pretty much within our budgeted discount -- sales discounts.

And Matt, kind of to follow on to what Mike said, I don’t know that we can really give you guidance on where we’re going to finish the fourth quarter topline versus the fourth quarter last year. I think it will be a tough – probably the toughest comp we’ve had so far this year, and as I’ve said, we’re concerned about lower orders and across all of our companies lower orders for the last two months, October and November were probably mid-single digits on a consolidated basis.

And Mike mentioned margin outlook, back of my notes and my understanding was kind of a 10% all in operating margin for the company was a nice kind of long-term bogey for Hooker overall, you did better than that this quarter and sounds like you had various puts and takes, but can you walk through how to think about the margin as we progress through, maybe a better -- obviously the more recent order trends would not be as encouraging but as we move into next year and we return to some growth, is that 10% number still the right number, is there upside to be had there?

I think there is a little bit upside, casegoods as we just pointed out in our comments has been over 10% for five quarters now, and I don't see anything that I think is going to have a dramatic change from what we've been experiencing for the last five quarters. Import upholstery and Bradington-Young are real close to that 10% threshold, Sam Moore has made a lot of progress this year. They are not close to 10% but they are significantly better than they were anytime over the last five or six years and improving consistently. Homeware is unprofitable, but it’s a really small part of our overall business. Contract is also a very small part, although it's about 2 to 3 times the size of Homeware, and it's contributing in the mid-single-digits operating income. So all in, I think we’ve certainly – and casegoods is still two thirds of our overall volume. So, I think a 10% operating income target is still very viable, and I think with a little bit of help on the topline, I don’t see any reason that we can’t continue to try and get there on a consolidated basis.

We did get a little help from freight rates. That's something we don't control unlike quality costs or pricing of some of those. The freight has been marginally favorable for us right now but I agree with Paul, I think there's a little bit of room above the 10% -- I mean 10% is a good goal, I think there's room to stretch a little bit especially with improved sales.

Did you quantify the freight help, Paul?

It kind of depends on where you are measuring from but for the quarter I’d probably say $0.5 million.

Well lot of the – we obviously don't have a crystal ball but I don't think we see freight rates changing anytime soon. We’re certainly not getting that message from any of our providers, and we also don't see price increases coming from our vendors in Asia. I think the strength of the dollar has really worked our advantage in the new products. I think we – sometimes someways can show better values than in products that we brought out a year or two ago, that are slightly different economic environment in Asia. So I feel like the inputs are fairly stable and we’re I think running pretty efficiently in most of our businesses, we’ve just made a little bit of topline help.

I’ve got two quick ones left. So you mentioned ERP couple times, is the way to look at ERPs we look out in the next fiscal year, is there any opportunity from a margin perspective from either the elimination of expenses associated with the implementation or some type of efficiency gains that could help margins?

Both Matt, certainly costs associated with the implementation and the disruptive aspect of the ERP system implementation, what we’re also finding, the Sam Moore go live was in early May, we’ve worked through all the issues. Things are starting to smooth out and it’s having a real positive impact on that business in terms of manufacturing efficiencies, visibility to work in process, better communication to our dealers, communicating to our dealers more accurate information and it really has been a contributor to the improvement of overall service. Having said that we’re in the process of implementing the ERP system at BY. We anticipate that will impact costs over the coming months, hopefully go live will be sometime late in the first quarter or early second quarter but we expect some of the same challenges of BY that we had at Sam Moore over the coming months. Hopefully we will have learned from some of the mistakes and the implementation will go smoother but at Sam Moore it was an ERP system to a new ERP system. At BY it's an AS400 to an ERP system so that present some unique challenges.

And some of these benefits will follow, we’re not going to – certainly start recognizing it, so we will see that over time.

And then the final one I have is, really good cash position and revolver availability and Paul, you sounded pretty bullish, Paul Toms, you sounded pretty bullish about overall industry fundamentals. Any update to your thinking about putting some of that cash to use or have your priorities remained the same?

I think our priorities are about like they have been for the last few years but we are looking for opportunities to expand the company through acquisition into different distribution channels or different product lines and that’s still our top priority. Absent that, we talked quarterly about returning cash to the shareholders through increased dividends or share repurchase.

You know Matt, we are cautious company and we’re not going to rush out buy something to just buy it. End of Q&A

[Operator Instructions] And I do have a question from the line of Morgan Andrews of Duff & Phelps. And perhaps we’re experiencing some technical difficulties from that line. And we appear to have no further questions in queue. I’d like to turn the conference back over to management for any closing remarks.

All right. We appreciate everybody joining us for the third quarter call. We appreciate your interest and hopefully we will have a good quarter to talk about in early April. Thank you and have a great holiday. Good bye.

Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day.