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 Dustin Henderson - Eagle Asset

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference reporting its operating results for the Fourth 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, Latoya. Good afternoon and welcome to our quarterly conference to review our sales and earnings for the 2016 fiscal year and the fourth quarter, both of which ended on January 31, 2016. We appreciate your participation this afternoon. Joining me today 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 uncertainty. A discussion of factors that could cause our actual results to differ materially from management's expectation is contained in our press release and SEC filings announcing the 2016 annual and fourth 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. This morning, we reported consolidated net sales of $247 million and a net income of $16.2 million or $1.49 a share for our 52 week fiscal year, which ended January 31, 2016. Net sales for the year increased $2.6 million or a little over 1% compared to the $244.4 million of 2015, primarily due to higher average selling prices in the casegoods segment and upholstery segment, lower discounting in our casegoods segment, and higher volumes in our all other segment. Net income for the year increased nearly 30% to $16.2 million compared to $12.6 million in the prior year, and earnings per share were $1.49 compared to $1.16 last year. For the 2016 fourth quarter, sales decreased $4.3 million to $60.6 million, a 6.7% decrease compared to net sales of $64.9 million in the fourth quarter last year. For the fourth quarter, we reported consolidated net income of $4.2 million compared to $4.3 million in the same period last year. During the fourth quarter of our fiscal 2016, we reached an agreement to purchase Home Meridian International, a privately held furniture supplier. That acquisition, the largest in the company's 91 year history, was completed on February 1, 2016, the first day of our 2017 fiscal year, and is not reflected in our fiscal 2016 results, except for a little over $1 million of acquisition related costs incurred last year. Now, Paul Toms will comment on our 2016 performance.

Thanks, Paul, and good afternoon, everyone. Our improved operating profitability performance across all divisions, despite sluggish demand for a good bit of the year was the highlight of last fiscal year. Since October, we have struggled with reduced demand and a reduced backlog in most of our Hooker divisions, a challenge that resulted in the approximate 6.7% consolidated sales decrease in the fourth quarter. For the year, sales were up approximately 1% on a consolidated basis. We were gratified to see portions of our business grow 5% or more, such as Bradington-Young, H Contract, and our international sales. Even while challenged with a soft incoming order rate for the last four months of the fiscal year, we were able to improve operating profitability across all divisions, make progress on multiple operational and strategic fronts and to generate strong cash flow. Our ability to generate strong cash flow from operations enabled us to reinvest in our existing businesses and to invest in our long-term growth through the acquisition of Home Meridian International, expanding our reach into more moderate price points and new channels of distribution. As Paul Huckfeldt stated earlier, that acquisition closed on February 1, 2016, the first day of our 2017 fiscal year. We've been focused on integrating the companies the last couple of months and are excited about HMI becoming a solid contributor to overall sales and profitability and are looking forward to sharing best practices to help us each grow and become more efficient. Also during the year, we successfully launched a new Cynthia Rowley for Hooker Furniture brand, partnering with global lifestyle and apparel icon Cynthia Rowley, an award-winning fashion designer. The co-branded collection of over 150 pieces of trend forward living, bedroom, dining room, and accent furnishings from both Hook Furniture casegoods and Sam Moore upholstery rolls out in stores this spring and summer. Regarding our operating profitability gains this year, it was particularly pleasing that all divisions contributed. Overall, consolidated operating income increased by $5.2 million or approximately 28%, to close to reaching 10% of operating income for the consolidated company. The upholstery segment operating income more than double compared to last year. Bradington-Young built on previous solid performance to grow operating profit by 71% on the strength of a 5% sales increase and manufacturing cost improvements. Sam Moore, our fabric chair division reported almost $1.5 million in operating income in its first profitable year since being acquired by us in 2007, even while implementing a new enterprise resource planning system. The casegoods division built on solid gains last year to report a 7% increase in operating profit and generated an operating margin of approximately 12%, despite flat sales for the year and approximately $1.1 million of professional fees related to the Home Meridian acquisition. There were a number of factors that helped us improve profitability performance, including the dramatic improvement in upholstery profitability, sustained double-digit operating margins in the casegoods segment, lower inflation driven by the strength of the US dollar, relatively low discounting to our customers throughout the year, favorable freight rates, and reduced medical costs. Our all other segment, composed of strategic new startups, H Contract, and Homeware, also contributed to the year's results. H Contract, which sells casegoods and upholstery to the senior living market, grew net sales nearly 70% over the prior year and reported a 6.2% operating income margin in its second full year of operations. While still a relatively small part of the mix, we are pleased with the progress H Contract has made and believe it will continue to grow at well above industry average for several years. Homeware, our other internal growth initiative grew sales by almost 30% and reduced operating losses by 40%, while repositioning and refining its strategy. At this time, I would like to call on Hooker Furniture's President, Mike Delgatti, to give more details about our performance and accomplishments this year, as well as highlighting some of our plans to stimulate demand and sales in the near term.

Thanks, Paul. As you mentioned, it was gratifying to see every division contribute to our operating profitability achievements. Taking each company individually, I'll start with Bradington-Young, which built on a solid performance last year to grow operating income 71%. We believe Bradington-Young's 5% sales increase is outpacing overall growth in the leather upholstery industry and that we are continuing to gain share in the premium leather upholstery market. Bradington-Young's profitability was up both year-over-year and quarter-over-quarter. It was a great year, with sales and market share gains driven by our luxury motion upholstery program, as well as our comfort at home dedicated retail space program, which now represents over 40% of our total business. At Sam Moore, it was gratifying to report, as Paul mentioned, almost $1.5 million in operating income, representing the first profitable year since being acquired by Hooker in 2007. This milestone was achieved even while Sam Moore implemented a new ERP system. Sam Moore is now reaping the benefits of the substantial time and financial investment we've made in a new system. Information is more readily available for customers and for internal planning, scheduling, and purchasing, and we are moving closer to our goal of one face to the customer. While Sam Moore's sales volume declined from the previous year, some of the loss sales were in unprofitable sales programs. Focusing on more profitable sales and improved manufacturing efficiency contributed to the income turnaround. Another major accomplishment at Sam Moore that we have been working on for some time is improved service levels. We are now shipping 75% to 80% of our orders to retail customers in less than four weeks, which is an historic level of service performance. At Hooker Upholstery, our imported leather upholstery division, we experienced a modest sales decline from competitive pressures, particularly in the motion category. Despite the volume decline, Hooker Upholstery was able to increase operating income. Also during the year, Hooker Upholstery successfully entered the new product category of stylish and functional barstools and counter stools, a category we expect to grow as Millennials move into their first homes and baby boomers retire or downsize, both groups are turning to open floor plans, where bars and counters are part of the family living area. Hooker casegoods was challenged throughout the year with demand, particularly the fourth quarter. The high end consumer and large ticket deferrable purchases, like casegoods have been most affected in the current economic climate. Within casegoods, international sales and e-commerce sales were bright spots, with international sales growing 6% year-over-year and e-commerce sales growing over 30%. Growth in China and other international markets is expected to significantly outpace the growth rate in the US, which makes international sales a key area of growth. Our aggressive efforts in the growing online retail distribution channel also paid off with double-digit volume increases in our e-commerce sales. Growth in the e-commerce channel continued to outpace overall furniture industry growth and is an important component of our long-term sales growth. The same team also manages our digital marketing and advertising efforts, which will be growing in intensity and frequency the rest of the year, particularly the spring. In order to stimulate demand and direct consumers into our authorized retailer stores, we have developed an aggressive calendar of marketing events for the entire year. The next campaign, a national spring savings event in April, is expected to be our largest campaign of the year. And currently, we have 450 retailers spanning over 650 locations across the country participating in this promotion. During the event, dealers receive a discount on all Hooker, Bradington-Young, and Sam Moore products, and the savings will be advertised both locally by participating retailers and across multiple national digital channels. Finally, in that promotion, we will launch another comprehensive national digital campaign in May to introduce the Cynthia Rowley for Hooker Furniture brand to consumers as we roll the line out in retail stores. Next week, the April market will open and we are optimistic about our new product introductions. As a result of a good pre-market in March, we ordered two of our best collections, so that they will be produced and shipped to retailers in early fall in time for the peak selling season. Even with the lull we've had in business, retailers are reasonably upbeat and confident that the sales environment will improve during the fall. At this time, I'd like to turn the call over to Paul Huckfeldt to give us more details of our performance during the fourth quarter and fiscal year.

Thanks, Mike. For the year, net sales were up in our casegoods segment, thanks to higher average selling prices, which were the result of strong sales of our best price point products and to lower discounts. Our improved inventory management process, something we've been working on for several years, contributed to lower discounting by reducing inventory obsolescence expenses. We have had less inventory to dispose of and we've been able to discount excess inventory less by being more selective in some of our promotions. Unit volume decreased in this segment due to challenging conditions at retail during the second half of the year [ph] and product availability challenges due to late deliveries of some of our October 2014 market orders, which resulted in delayed reorders during the second half of fiscal 2016. Outages of key component products for certain suites also delayed some shipments during the third quarter. The decrease in volume was more than offset by the higher average selling prices though. Net sales in the upholstery segment decreased due to lower unit volume, partially offset by higher average selling prices in our leather upholstery division. The volume decreases were in our fabric upholstery division due to the effects of discontinuing unprofitable sales programs, along with some lingering post-ERP implementation inefficiency during the second half of fiscal '16. Unit volume was also affected by decreases at Hooker Upholstery due to price pressure in the motion upholstery category. Overall, average selling prices increased nearly 1.5% during the fourth quarter and 2% for the fiscal year, primarily due to the mix of products shipped from the lower casegoods discounting I mentioned earlier, some of that was partially offset by higher discounting in the upholstery segment. For the full year, gross profit increased by $5.9 million to $68.7 million, and gross profit as a percent of sales increased to 27.8% from 25.7% in the prior year. In addition to increasing net sales, the favorable impact of lower discounting in the casegoods segment also improved gross margin. Lower costs also contributed to improve gross margin, thanks to declining freight costs and lower domestic upholstery manufacturing costs due to somewhat lower leather prices, decreased contract manufacturing, and lower medical claims expense. Gross profit for the 2016 fourth quarter increased both in absolute terms and as a percent of net sales to $18.1 million or 29.8% of net sales. This compares to $17.5 million or 27% of net sales in the same period a year ago, and was driven primarily by the same factors as our full year results. Selling and administrative expenses increased in absolute terms, but remained constant as a percent of net sales for the 2016 fiscal year. The increased expense was due to the $1.1 million in professional services related to the HMI acquisition, along with slightly higher commissions on increased sales, higher bonus expense on improved earnings, although it was partially offset by decreases in bad debt and banking expenses. The acquisition related costs also impacted SG&A on a percentage basis, partially offset by lower spending as a percent of sales at H Contract and Homeware as their revenue grows and they exit the start-up phase of their operations. Operating income for the 2016 fourth quarter was flat to prior year at $6.5 million, and increased to nearly 11% of net sales compared to 10% in the prior year. For the year, operating income was $24.3 million or 9.8% of net sales compared to $19 million or 7.8% in fiscal 2015. At the end of the year, we reported cash of nearly $54 million, no debt and about $13 million available on our line of credit. This strong balance sheet gave us the ability to pursue the HMI acquisition, which we believe will broaden our reach in the industry and expect to be quickly accretive. To complete the acquisition, we used about $26 million of our cash and took on $60 million in debt. Also part of this transaction, we increased our line of credit to about $30 million. Since closing, we made an unscheduled payment of $5 million on our term loan in addition to the regularly scheduled monthly payments. This credit facility remains in place until February 1, 2021. Also related to the acquisition, we expect to record significant intangible assets on our consolidated balance sheets during the first quarter of fiscal 2017 and expect to record about $3.2 million of amortization of those intangibles during fiscal 2017. After that, the amortization expense we expect to drop to about $1.5 million a year, starting in fiscal 2018. We'll be filing an 8-KA with pro forma and historical consolidated financial - or pro forma consolidated information and historical HMI information in the coming weeks, which will provide additional insight into what our new company will look like. We urge you to take a look at that when it comes out. Now, I'd like to turn the discussion back to Paul Toms for his outlook.

Thanks, Paul. As we look ahead, we are prepared for the current weaker demand environment to persist through the spring and possibly summer for our legacy Hooker business. Additionally, we'd like to point out that Home Meridian's business is somewhat more seasonal than Hooker's business and that their first quarter typically accounts for about 20% of their annual sales. Our focus will be on doing everything we can within our control to generate demand and position ourselves to take advantage of an upturn in business when it occurs. This includes the national sales events Mike referred to, as well as working closely with our retailers to develop custom events in their local areas. While we are prepared for continued sluggish demand in the near term, we are planning for better sales this fall and are ordering new products more aggressively to be ready to hit retail floors by Labor Day to take advantage of the traditionally stronger fall selling environment. Additionally, we will be focused on internal improvement, such as the culmination of our ERP system conversion at Bradington-Young. We are also excited to focus in the coming months on integrating Home Meridian into our company and sharing best practices that will help us both grow and become more efficient. That ends the formal part of our discussion. At this time, I'll turn the call back over to our operator Latoya for questions. Thank you.

Thank you. [Operator Instructions] First question comes from Matt McCall of BB&T Capital Markets. Your line is open

Thanks. Good afternoon, guys.

Hey, Matt.

So let's see. Let's start with the margin performance, pretty good margin performance on a down top line. Can you - you gave a lot of factors, but can you kind of high level it for me? And I am more thinking about how I should look at it as we incorporate HMI. So is this kind of a starting point for the legacy business and then layer in HMI, maybe remind me of the impacts we should bake in?

I think this is generally a reasonable starting point. Discounting - I expect to see discounting go up a little bit. I think as we do some of these promotions, we won't incur any more obsolescence discounting, but I think we're trying to focus on driving some more business. So this may be a high point, but I don't think it's out of line. Upholstery is performing well. There are some volume challenges. But basically upholstery is - should be able to deliver something close to these margins as well, perhaps down a little bit. I think we had a strong end to the quarter. So I think that this may be a little bit of a high point, but not much.

Okay.

The other impacts, Matt, that showed up in the fourth quarter that would continue are I think right now we're seeing very favorable ocean freight rates.

Okay.

Don't see that changing in the near term. We've been very fortunate with our medical plan that the costs there, that's very unpredictable, but we are off to a reasonably good start this year. And then we're just not seeing any inflation in the inputs, I mean, whether it’s leather or mechanisms or foam or the inputs into the imported products. We're not seeing any increased costs from our suppliers in Asia or domestic suppliers for our upholstery operation. So expect those to continue for the perceivable future.

But keep an eye on freight rates because they are at historic - at pretty low rate levels right now.

Okay. All right. So you are not seeing it now, no anticipation of anything. I know we've seen still prices go up, oil prices a little bit. You're talking about freight rates. I mean, is there anticipation that we could face some or are you going to assume that this trend kind of continues through the balance of the calendar year?

We think presently there is excess - a significant excess capacity in steamship lines. So we expect the rates to continue favorable for the next 3 to 6 months is probably as far as we can see.

Okay. So on the inventory, it looked like inventory ticked up a little bit as a percent of sales, maybe a two-part question. Can you talk about that? And then Paul Toms, you just talked about making some investment in some new inventory in advance of a stronger fall season. Can you talk about what gives you the confidence that what we're seeing now is just a seasonal lull and not something a little bit more dramatic from a softness perspective?

Okay. Remind me the first part of your question again, I was focused on the second part.

That's all right. Just the - it looks like in up-tick inventory as a percent of sales in Q4 relative to the normal seasonal pattern we saw last year, I guess, and also the year-over-year patterns we've seen through the remainder of this year. Is anything going on there, is that just kind of near term noise?

You know what, I am not concerned at all about the inventory levels. They may be slightly higher than they were last year or when you are looking at sales, of course, we had decreased sales. So inventories are flat would be a larger percentage.

Right.

But we were fortunate in that we kind of saw business softening. Last summer and fall, we reduced our ordering accordingly, and I think our inventories are pretty well sized for right now. We always have a little bit more inventory right, I guess - well, ahead of Chinese New Year, we'll have inventory that ships and we take ownership of as much as we can of products that we introduced in October. So maybe a little bit of that going up in the yearend inventory numbers as well. As far as how we see business, I think we feel like business was impacted. It's the same things you’ve heard from everybody else in this industry that’s reported recently. But I think the volatility in the stock market late last year and early this year had an impact on consumer confidence and on the sale of big-ticket items. And so we certainly felt that. We feel like the market has stabilized, recovered a lot of what it lost and that consumer confidence will rebound. We have mentioned previously, I think, and maybe others have as well, the impacts of depressed oil prices in some regions. And for us, two of our largest customers are based in South Texas and Oklahoma. So unemployment in those regions is about 10%, and those customers are definitely feeling it more than other parts of the country. And I don't think the reduced price of gas really makes a big difference in our customer demographic, as much as maybe not having some of the professional jobs, banking and legal and whatever around the oil industry. So that’s been an impact. Housing seems to have slowed. I don't think that will be forever. But for whatever reason, it seems like it's a little bit of a downtick in housing more recently. And of course, we're very closely correlated to housing. So none of us really know when things are going to turn around. But I guess we feel like, for the reasons I just said, that maybe in the near term, it could stay a little bit choppy. But I don't think any of those are long-term structural problems that we are facing. So we feel like at the worst, we expect it to turn up for Labor Day, which it always does and hopefully a little bit sooner than that.

Okay. No, that is helpful. Thanks, Paul. So let's see, a couple more here. Paul Huckfeldt, you said, I think you said something about $1.1 billion in expenses related to HMI. If I miss read, but I thought I saw in the release that it says $600 million, am I talking about two different numbers there?

$600,000

I'm sorry, $600,000 and $1.1 million. Yes, sorry.

I'm not authorized to spend $1.1 billion.

Yes, there you go. I'm sorry. I put $1 billion, that should have been an M, go ahead.

Yes, for the year, we spent $1.1 million on professional services; $600,000 in the fourth quarter.

Oh, I got you. That was a year number. All right. Sorry about that, all right. Mike, you used a term I haven't heard before. You were talking about one face to the customer. Can you explain exactly what that initiative involved?

Yes. Prior to the implementation of the new ERP system at Hooker, most recently Sam Moore and soon BY, each business was on a unique operating system. So once BY goes live, then all brands will be on the same operating system. A customer calls in to Hooker, its one phone number, one phone call to reach their contact in customer care or whatever other area of the business. So we'll act more and like look like one business. So that’s why we refer to it as one face to the customer. It will also help us better manage our business, and that will be generating the same information across all brands. For example, we anticipate the sales management tools that we are able to generate will be very helpful in managing sales and they will be consistent, once BY goes live, across all brands.

Okay, perfect. Thank you, guys.

And Matt, lust to add on to what Mike said. When we talk about one face to the customer, we are talking about Hooker BY, Sam Moore, and Hooker Upholstery. Home Meridian has always been operated - we've always said we are going to operate that separately, independently. They are on their own system and totally different customer service and everything. So we're referring to our legacy Hooker companies.

Okay, perfect. Yes, I'll remember that. Thank you.

All right.

Thank you. The next question is from Dustin Henderson of Eagle Asset. Your line is open.

Hi. Thanks for taking the call. When you say that Home Meridian is more seasonal and their first quarter is only 20% of revenues, is that now the same first quarter as you?

Yes, looking at what would be our first quarter of February, March, and April, it’s their slowest quarter. And the reason for that is that their business is much more driven by large accounts and container-direct shipments out of Asia. And almost always Chinese New Year falls in the first - well, in February, late January, February. So it impacts shipments for 2 to 3weeks out of Asia that are direct to their customers. Hooker's business is about 85% serviced out of our warehouses. And so we have inventory we continue to ship and we see virtually no impact from Chinese New Year. So the first quarter for Hooker typically is roughly 25% of our annual business. But Home Meridian has the seasonality from Chinese New Year, and then they have a large customer that they roll out significant new product in the second and fourth quarters. So that impacts those quarters in addition to their normal business.

Okay. Terrific. And what kind of lead time do your partner retail stores typically give you on their ordering?

Well, for Hooker, it depends. If they are ordering stock, and they are large enough to buy containers, they can plan 3, 4, 5 months out. If a lot of what we sell is sold orders, customers come in, seen something, liked it, wants to order maybe a variation of it out of a catalog. We have over 90% of our products in stock all the time. So on those orders, they would expect shipment within a week and probably promising delivery to the consumer within 3 to 4 weeks.

Okay. I was just trying to parse out some of the visibility you guys had, because you are commenting on Labor Day sales and things like that in the fall?

In our industry, the fall kicked off by Labor Day is typically our strongest quarter. And I think part of it is driven by people are through with vacations, the kids are back in school, and the consumers have turned their attention back to home. Also, with the holidays coming up in November and December, if they are going to do some decorating, they tend to - that's a time of year where they tend to spend in some of the dining areas and more public areas of the house. And as long as I've been in this industry, it seems like the fall is typically a stronger part of the year.

Okay, super. Thanks for taking the questions.

Okay. Thank you.

Thank you. I am not showing any further questions at this time. I'll turn the call back over for closing remarks.

All right. Well, we're disappointed with the weaker top line than we've been used to. We are going up against a very strong fourth quarter last year, but still we were disappointed in our demand and top line for the quarter. But we're very focused on operating in this environment. We think we can remain very profitable, and we are focused on all the things we have some control over. We are excited about Home Meridian being part of this company, and excited about releasing the first quarter of consolidated results with them 60 days from now. So got a lot to work on, and we're again, very bullish about the future. Thank you for joining us.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.