HNI Corp (HNI) 2008 Q4 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the HNI Corporation fourth quarter year-end results conference call.

  • (Operator Instructions) I would now like to turn the conference over to Marshall Bridges.

  • Please go ahead.

  • - Treasurer

  • Good morning.

  • Thank you for joining us today for the HNI Corporation conference call to discuss fourth quarter and full year 2008 results, which were announced yesterday after the market closed.

  • My name is Marshall Bridges, Treasurer and Vice President for the HNI Corporation.

  • If you have not received a copy of the financial news release, please call 563-272-7927 and we will send it to you.

  • The release is also available at our website, www.hnicorp.com.

  • We posted a presentation intended to accompany this call, to our website.

  • It can be found by accessing the webcast link under the Investor Information section.

  • We encourage to you review the slides with us during today's call.

  • Joining me on the line today from HNI Corporation are Kurt Tjaden, Vice President and Chief Financial Officer and Stan Askren, Chairman, President and Chief Executive Officer.

  • Stan and Kurt will review the results and then open the call for questions.

  • Before we begin, please be advised that statements made by the Corporation during this call that are not strictly historical facts are forward-looking statements.

  • Forward-looking statements are subject to known and unknown risks, actual results could differ materially from expected results.

  • Additional information concerning factors that could affect the actual results can be found in the conference call presentation posted to the HNI Corporation website.

  • The Corporation assumes no obligation to update any forward-looking statements made during the call.

  • And now the pleasure of turning the call over to Stan Askren.

  • Stan?

  • - Chairman, President and CEO

  • Thank you, Marshall.

  • Good morning, everyone.

  • I'll share a brief assessment of the fourth quarter and then turn the call over to Kurt Tjaden, our CFO, who will review some of the specific financial details.

  • I'll then come back on and share some thoughts on our outlook and then we will open it up for questions.

  • I know everyone is familiar with the very negative and deteriorating economic environment.

  • We are feeling the brunt of these conditions due to the position of our two industries in this economy.

  • In response, we continue to take focus and strong actions during the quarter adjusting our businesses to the harsh marketplace realities.

  • Consistent with our actions throughout 2008, we attacked structural and day-to-day operating costs in every corner of the corporation.

  • These actions, along with declining freight costs and better price realization, allowed us to partially offset weakening demand and exceed fourth quarter expectations.

  • As anticipated, demand varied considerably across our channels and generally weakened as the quarter progressed.

  • Overall, fourth quarter sales were down approximately 5% versus the prior year.

  • Sales in the supply driven channel of our office furniture business were down 16%.

  • Our large stocking customers were much weaker as day-to-day transactional business dramatically declined in the latter part of the quarter.

  • I would like to remind you that this channel historically reacts more quickly to the prevailing economic environment due to its short selling cycle.

  • The remainder of our office furniture businesses were up over 6%, when including the acquisition of HBF, and flat on an organic basis.

  • In our Hearth business, sales of alternative fuel products grew 130% including incremental revenue generated from the acquisition of Harmon Stove Company.

  • This has been a very strong category for us throughout 2008, but demand dropped off precipitously near the end of the year due to much lower energy prices and the negative retail environment.

  • The new construction channel of our Hearth business continues to be extremely challenging.

  • Sales in this channel were down almost 30%, consistent with the extremely negative housing market.

  • We are now at unprecedented demand levels, levels that are likely artificially low and we believe will rebound in the midterm.

  • We moved quickly to realign our businesses to lower demand levels.

  • Our split and focused business model drives all of our businesses to operate close to the markets and the customers they serve, enabling each management team to recognize and quickly react to challenges and opportunities.

  • For instance, we made painful, but necessary, reductions in staffing, in addition to working reduced hours.

  • We anticipate actions taken to date will reduce manufacturing costs over $60 million and SG&A expenses by approximately $25 million in 2009.

  • And we will continue to adjust as dictated by business conditions.

  • We have also attacked day-to-day operating costs such as maintenance, materials, travel, advertising, IT, outside services and freight and we anticipate these efforts will reduce cost of goods sold by $30 million and SG&A by $25 million on an annual basis.

  • We improved our financial flexibility during the quarter, repaying $45 million in debt.

  • Our ability to generate free cash flow remains solid despite the very challenging economic environment.

  • To conclude my comments in this section, I would like to thank our members for their hard work, dedication and sacrifices as we confronted these unprecedented challenges in 2008.

  • I'll provide more comments in the outlook section, but now will turn the call over to Kurt to review some of the specific numbers for the fourth quarter 2008.

  • Kurt.

  • - Vice President and CFO

  • Thank you, Stan.

  • If you would like to follow along, I'll occasionally make reference to the presentation Marshall mentioned, as posted on our website.

  • Please note you do not need to view this presentation in order to understand our comments.

  • So for the fourth quarter 2008, slide eight shows consolidated net sales decreased 4.6% to $638 million.

  • Organic sales were down 9.1%, or $61 million, due to weakness in the supplies driven channel of our office furniture businesses, combined with a continuing decline in the new home construction channel of our Hearth business.

  • Acquisitions added $30.4 million or 4.6% points.

  • Slide nine shows net sales for the office furniture segment decreased 6.5% to $513 million.

  • As Stan mentioned earlier in his comments, this was driven by a 16.

  • 1% decline in the supplies driven channel while the remainder of our office furniture business was approximately flat on an organic basis.

  • Acquisitions added $14.4 million or 2.6% points.

  • Slide 10 shows net sales for the Hearth product segment increased 4% to $125 million.

  • Organic sales declined 9.3% due to a 29.5% decrease in the new construction channel revenue.

  • Acquisitions added $16.1 million or 13.4% points.

  • Gross margins were 33% compared to 36.4% in the prior year quarter.

  • This 3.4% point decline was due to decreased volume and increased material costs which were partially offset by better price realization.

  • Gross profits did include $1.5 million in severance costs.

  • Slide 11 shows non-GAAP SG&A as a percentage of sales at 28% versus 27.5% in the prior year quarter.

  • This increase in percentage of sales was primarily due to higher freight costs and $2.4 million of severance costs, which were partially offset by lower volume related spending, lower incentive based compensation, and our ongoing costs containment initiatives.

  • As noted on slide eleven, non-GAAP SG&A excludes restructuring and impairment charges, transition costs and income generated from adjustments to mandatorily redeemable liabilities related to prior acquisitions.

  • Fourth quarter 2008 included $21.5 million of restructuring and impairment charges.

  • These consisted of goodwill and intangible impairment charges of $21.8 million related to various office furniture reporting units, which was partially offset by a favorable adjustment of $300,000 related to previously-announced facility shutdowns.

  • We recorded $4.9 million of impairment and restructuring costs in the fourth quarter of 2007.

  • Included in SG&A were freight and distribution costs, which as a percentage of sales were 9.6% during the fourth quarter versus 9.3% during the same period last year.

  • The increase is primarily due to the volume deleverage and higher fuel costs in the early part of the quarter.

  • Slide 12 illustrates this change in freight and distribution costs.

  • In the fourth quarter, we effectively closed our price input cost gap and we realized approximately $32 million in incremental price in the quarter and incurred approximately $33 million of increased material and freight costs.

  • As you recall, we had expected price realization of approximately $25 million during the fourth quarter.

  • However, we were able to exceed this, primarily because of earlier price realization and lower volume-based discounting.

  • The annualized tax rate was reduced during the fourth quarter compared to earlier in the year, primarily due to reinstatement of the research tax credit.

  • And for fiscal 2008, cash flow from operations was $174 million, compared to $201 million in the prior year.

  • This reduction was due to lower earnings and a more favorable working capital reduction in 2007.

  • That wraps up my financial comments.

  • Now I'll turn the call back over to Stan.

  • - Chairman, President and CEO

  • Thank you, Kurt.

  • Looking forward, the economic outlook remains negative and uncertain, greatly reducing our visibility and ability to forecast.

  • That said, we'll share with you our best, but limited, current view of the first quarter.

  • We anticipate very weak demand across our businesses consistent with the ongoing and deepening recession.

  • We expect sales in the supply driven channel of our office furniture business to be exceptionally weak.

  • As I previously said, the transactional business for our large customers has declined precipitously.

  • We expect the rest of our office furniture business to substantially decline, driven by weakness in day-to-day business.

  • However, we are seeing relative solid project activity, given the weak market conditions.

  • Job sizes are typically smaller and the bidding process more competitive.

  • However, our cost position, product breadth and selling model serve us well in this environment.

  • We expect government sales will continue to be a bright spot for office furniture businesses.

  • Our focus selling model, strong brand recognition and value proposition position us well in this sector.

  • We have grown at double digit rates in this sector for seven years running and expect to continue to bump market growth in 2009.

  • Our Hearth business is currently under severe stress.

  • New home construction continues to decline and the alternative fuel category is now rapidly weakening with lower oil prices in a negative retail environment.

  • We are expecting a substantial loss in the heart product segment for the first quarter, due to current market conditions and normal seasonality.

  • We continue to adjust and right size this business, however, it is becoming more difficult to do so while protecting long-term value.

  • Throughout all of our business, our response is to continue resetting our cost structure, while investing in new products, selling initiatives and operational improvements.

  • We will continue to adjust to the challenging marketing conditions and improve our position for the future.

  • I'll have Kurt provide the financial outlook for the first quarter.

  • Kurt?

  • - Vice President and CFO

  • Great.

  • Thank you Stan.

  • I would like to reinforce our lack of visibility, given the volatile and uncertain economic conditions.

  • What I'm about to cover reflects our best view at this current time.

  • For the first quarter 2009, we are anticipating overall sales to be down 24% to 30%.

  • For the office furniture segment, we expect sales to decline 23% to 29%, driven by a sharp decline across all channels, partially offset by the favorable impact of acquisitions.

  • Hearth sales are anticipated to decline 28% to 34%, driven by a deeper decline in the new construction channel.

  • Alternative fuels and other remodel retro fit products are expected to be down 15% to 20%.

  • Gross profit margin is expected to decline approximately 3% to 4% points versus the prior year quarter GAAP results.

  • This decline is driven really by volume deleverage.

  • Excluding restructuring and transition charges, SG&A as a percentage of sales is expected to increase 2.75% to 4.25% points versus first quarter 2008 when it was 30%.

  • While the percentage of sales increase is primarily due to volume deleverage, actual SG&A dollars will decline.

  • We anticipate SG&A related restructuring and transition costs to be approximately $1.6 million in the quarter.

  • These charges relate to the Hearth business and are associated with distribution location realignment.

  • Net interest expense is projected to be $3.25 million and the effective tax rate is projected to be 34% during the quarter.

  • For the year, we are expecting capital expenditures to be approximately $35 million.

  • Really focus on new products with spending more heavily weighted to the first and second quarters.

  • We project depreciation and amortization to be approximately $70 million for the year.

  • So, consistent with these projections, we are expecting a loss in the first quarter.

  • This is a direct result of the rate and magnitude of the economic decline coupled with our normal seasonality.

  • First quarter has historically been our lowest quarter for revenue and profit and we expect this to continue to hold true for 2009.

  • We do expect to be profitable for 2009 for the full year.

  • This summarizes our outlook for the first quarter 2009.

  • I'll now turn the call back to Stan for closing comments.

  • - Chairman, President and CEO

  • So, in closing here, we believe the economy and the markets we compete in will continue to deteriorate for the foreseeable future.

  • We are responding to the these conditions and adjusting our businesses accordingly.

  • Despite the difficult environment, we are optimistic about the future because of enhancements we are making to our cost structure and investments we are making to improve our businesses.

  • With those comments complete, we'll now open it up for questions.

  • Operator?

  • Operator

  • (Operator instructions).

  • Our first question is from the line of Todd Schwartzman from Sidoti & Company.

  • Please go ahead.

  • - Analyst

  • Good morning, guys.

  • First question is on operating costs.

  • How much more can you take or can you speak to what types of actions we may see down the road?

  • - Chairman, President and CEO

  • Well, I think Todd, certainly our response would be consistent with what we have said in the past.

  • We adjust our cost structure based on incoming order rates across-the-board.

  • So, we are always looking for structural costs to reflect back on some of the moves we have made in the previous year.

  • We consolidated a couple of manufacturing operations, made some realignment with distribution capacity, load planning, third party transportation.

  • So big moves like that.

  • In addition, our split and focus model drives eight different operating companies that are tuned and tailored to their specific market segment and it's just good old fashioned grind it out sort of cost control, including the very painful sort of adjustments to staffing.

  • - Analyst

  • Those eight different operating companies, looking out three to five years, what should we expect that number to be?

  • - Chairman, President and CEO

  • Right now, Todd, looking out three to five years is not even something we are really spending a lot on time on, to be candid with you.

  • - Analyst

  • Okay.

  • As to the dividend, what is your comfort level going forward with maintaining that pretty nice quarterly payout?

  • - Chairman, President and CEO

  • Well we just announced our dividend payout here in the last week or so.

  • The board reviews that dividend payout every quarter and we believe strongly in maintaining that, at least some, dividend going forward.

  • - Analyst

  • Okay.

  • Lastly, with contract furniture, can you speak to order trends in Q4 and subsequent by geographic region?

  • - Chairman, President and CEO

  • We don't really have that detail.

  • We don't break out that detail, Todd.

  • You know, certainly it kind of, I think, follows what's going on the economy across-the-board.

  • So, markets that are hit hard with the banking crisis, the financial crisis are the worst.

  • Markets that are hit hard with sort of the housing down turn are hurt the worst.

  • Our government business is very strong, so markets where there's bases and government activity we are doing better.

  • - Analyst

  • Okay.

  • Thank you.

  • - Chairman, President and CEO

  • You bet.

  • Operator

  • Our next question is from the line of Matt McCall from BB&T Capital Markets.

  • Please go ahead.

  • - Analyst

  • Thank you.

  • Good morning, everybody.

  • Can you hear me?

  • - Chairman, President and CEO

  • Yes, sorry Matt.

  • - Analyst

  • Sorry.

  • First, Kurt, just to make sure, you said three to four points gross margin below GAAP.

  • What was the GAAP number last year?

  • I just want to make sure I'm looking at the right number.

  • - Vice President and CFO

  • GAAP number last year was 32.7%.

  • - Analyst

  • Okay.

  • Thank you.

  • And then Stan, you went through, I tried to keep up, but you went through two different items you said $60 million savings gross margin, $25 million SG&A.

  • Then $30 million cost of goods.

  • $25 million SG&A.

  • Can you walk through those a little slower for the guys who can't write that fast?

  • - Chairman, President and CEO

  • That's okay.

  • Sorry about that.

  • So what we are talking about is actions we have taken to date will reduce manufacturing costs over $60 million.

  • And then SG&A expense reduced by approximately $25 million in 2009.

  • - Analyst

  • Okay.

  • That's to date?

  • Meaning that as of, did you recognize the benefits of those in the Q4 results?

  • Or what percent did you recognize?

  • Maybe just the way we can look at it on a run rate basis?

  • When do you get that full run rate?

  • - Vice President and CFO

  • Matt, we did not recognize much of that in the fourth quarter.

  • A lot of these actions were taking place and, of course, we had some severance.

  • Those numbers that Stan just quoted were staffing numbers.

  • - Analyst

  • Okay.

  • - Vice President and CFO

  • Those were segments related to staffing only and then there is some other numbers that we quoted subsequent to that, that involved sort of day-to-day operating costs.

  • And that was $30 million in cost of goods sold and $25 million in SG&A.

  • - Analyst

  • So, the first part is staffing the second part is operating costs?

  • And none of those, none of either of those was in -- were included in the Q4 results?

  • - Vice President and CFO

  • You are correct on the first statement.

  • You know, limited amount in Q4.

  • To say none, Matt, would probably mislead you.

  • - Analyst

  • Okay.

  • Well, I'm just trying to get to the big delta on the margin line.

  • What was the big benefit there?

  • Where did the benefits come from relative to your expectations?

  • - Vice President and CFO

  • Matt, we had maybe three items that really explained why we beat our previous expectations.

  • One was the price, we realized more price than expected and that offset lower volumes.

  • We also had just lower SG&A spending, which reflects some of the items we just discussed.

  • That day-to-day operating costs.

  • And then we had lower freight costs than we expected when we last spoke.

  • - Analyst

  • Okay.

  • And then of the $33 million in increase from material and freight, how much of -- the slide, I think, showed a year-over-year decrease in freight.

  • So breakdown that $33 million.

  • Is it a year-over-year number?

  • I assume it is.

  • - Vice President and CFO

  • Correct.

  • The year-over-year number.

  • - Analyst

  • And then how much of it was material and how much of it was freight?

  • - Vice President and CFO

  • The $33 million in input cost increase is kind of what I think you are asking about.

  • - Analyst

  • Yes.

  • - Vice President and CFO

  • So, $5 million of that was freight and $28 million was materials.

  • And that materials mix had less steel in it than in previous quarters and more other materials.

  • - Analyst

  • Then as we have looked forward to next year, assuming that the current spot market or your costs to remain unchanged, what's the potential benefit as we move through '09?

  • - Vice President and CFO

  • There is some potential benefit.

  • It is a very dynamic environment right now.

  • Couple that with the pricing environment.

  • We are not able it to quantify that right now, but we do expect a benefit.

  • That benefit will be less in the first quarter due to the nature of our contracts.

  • We have a lot of contracts where the price lags the market by about a quarter.

  • So, in the first quarter we are still seeing some prices that were set in the fourth quarter of last year of.

  • - Analyst

  • Okay.

  • Thanks, Mark.

  • So then the last question, Kurt, I think you said you expect to be profitable this year.

  • I would expect it as well.

  • But in saying that are you expecting the normal, seasonal pattern of a pickup post Q1 on the top line?

  • - Vice President and CFO

  • Yes, I think that's fair to assume, Matt.

  • - Analyst

  • Okay.

  • All right.

  • Thank you, guys.

  • - Chairman, President and CEO

  • Thank you, Matt.

  • Operator

  • Thank you.

  • Our next question is from the line of Budd Bugatch from Raymond James.

  • Please go ahead.

  • - Analyst

  • Good morning Stan, good morning Kurt, good morning Marshall.

  • - Chairman, President and CEO

  • Good morning.

  • - Analyst

  • First of all, I think you deserve kudos for what you have done in the fourth quarter and the results you posted.

  • I know that this is a very difficult time and I will also give you kudos for the governance action you took yesterday, or disclosed yesterday.

  • And finally the disclosures are terrific and they have improved markedly and we thank you for them.

  • - Chairman, President and CEO

  • Good.

  • - Analyst

  • All that said, obviously it's a very difficult time.

  • So we'd like to get some clarity on some of the items maybe --.

  • I apologize for that.

  • In the first quarter can you kind of segregate what you think pricing impact will be from raw materials and fuel?

  • And how that factor into maybe your 3% to 4% lower gross margin Kurt?

  • - Chairman, President and CEO

  • That kind of goes back to the question that Matt asked.

  • It is very dynamic.

  • So, we do expect to realize more incremental price than incremental costs in the first quarter, but it is moving around as both items fluctuate.

  • That being said, we do expect that to widen as the year goes on.

  • As materials go down.

  • - Analyst

  • And as pricing roll off essentially in the first quarter do we have any that rolls through second and third?

  • - Chairman, President and CEO

  • Correct.

  • We'll see incremental price in the first half is the bigger weight.

  • And then, also, some in the third quarter and it will tail off toward the end of the year as we anniverse our October price increases.

  • - Analyst

  • And you should be starting to see some benefit of raw material deflation now, particularly in steel, I would think.

  • Are you feeling that impact yet?

  • Are you still burdened with some of the -- I would think you are probably burdened with year-over -year cost increases until you get maybe half year.

  • - Chairman, President and CEO

  • That's correct again the steel will begin to impact more in the second quarter than the first, due to the nature of our contracts, which gives us time to adjust our price to new costs.

  • These will -- I am afraid, of course, it's hitting us real time.

  • - Analyst

  • Okay.

  • And as you look at the business by segment, you have given us a lot of detail at the income statement line.

  • You have talked I think of significant loss in the first quarter in Hearth.

  • How do you feel, can you give us any quantification or a range of the two segs?

  • - Chairman, President and CEO

  • I think that, if you do expect a large loss at Hearth, and we expect office furniture to be just below break even and then our corporate, I will say the corporate overhead would run similar to what it did in the fourth quarter.

  • - Analyst

  • Okay.

  • Explain to me, I am a little curious.

  • You were down 16% transactionally in the fourth quarter.

  • Office Max, I think, reported comps this morning of down 13%.

  • Your guidance would seem to indicate, I know we are getting a fall off in the project business, but are we seeing another step down in transactional from the 16%?

  • - Chairman, President and CEO

  • Yeah, we think so.

  • But I think if you dig into the numbers of some of these larger companies that are reporting it, then the furniture -- you'll find that their furniture business, I think, is softer than the rest of their business.

  • - Analyst

  • Because it's discretionary, right Stan?

  • - Chairman, President and CEO

  • Big ticket discretionary items in this economy right now are getting deferred, I think at a significant rate.

  • So as we said, the day-to-day transactional stuff is the stuff that's getting hit first, going, cycling down consistent with sort of what we talked about in the past.

  • And I think the project business is hanging in there okay.

  • It's down as well, but not as much.

  • And we'll just have to watch and see how it develops as we go forward.

  • - Analyst

  • Okay.

  • Well, my final question is, we do the math, and tell me where I'm wrong and you commented what you want, we get sales in the mid $390 million, $400 million to $428 million, then on EPS loss of anywhere between $0.28 to $0.41 for first quarter.

  • Is that in the -- is that the way your math works?

  • - Chairman, President and CEO

  • That's not bad math.

  • - Analyst

  • Well it's terrible math.

  • That's unfortunate math and unfortunate for all your members and holders.

  • - Chairman, President and CEO

  • Absolutely.

  • - Analyst

  • But we do appreciate the way that you run the company.

  • So thank you very much and good luck on getting through this.

  • - Chairman, President and CEO

  • Thanks, Budd Appreciate it.

  • Operator

  • Thank you our next question is from the line of Mark Rupe from Longbow Research.

  • Please go ahead.

  • - Analyst

  • Hey guys.

  • Congrats on the execution as well in tough times.

  • You mentioned in the press release the early cycle nature of the transactional side of your business and the Hearth business and I know that's true in nature.

  • I'm just curious to see did that prove out in the last down turn or in any previous down turns?

  • - Chairman, President and CEO

  • That's correct.

  • - Analyst

  • Any detail on that?

  • You know in the last down turn, how those businesses did react?

  • - Chairman, President and CEO

  • You know it's hard to compare, Mark.

  • Because the last down turn was really a business let down turn.

  • Kind of the dot com bust.

  • As you recall the housing -- the homeowner just chugged on through.

  • In fact, we had some great results in our Hearth business during that time.

  • This down turn is really led by the consumer and by this credit crisis.

  • I think we are reticent to do a whole lot of comparison here other than to say we believe that the short selling cycle stuff is going to come back faster than the long selling cycle.

  • - Analyst

  • Okay.

  • Okay.

  • And then I believe Allsteel took a decent amount of share in the last down turn.

  • Is there any kind of optimism looking at that that Allsteel still has some opportunity here?

  • Or was that a scale issue back then?

  • - Chairman, President and CEO

  • No your summary is accurate.

  • They took share in the past and we think they'll continue to take share in this down turn.

  • - Analyst

  • All right.

  • Best of luck, guys.

  • - Chairman, President and CEO

  • Thank you, Mark.

  • Operator

  • Our next question is from the line of Chris Agnew from Goldman Sachs.

  • Please go ahead.

  • - Analyst

  • Thanks very much.

  • Good morning.

  • First question, very minor, just to confirm that the guidance you have given excludes any oil restructuring charges?

  • - Chairman, President and CEO

  • That's correct, Chris.

  • Other than what we identified specifically in the call.

  • - Analyst

  • Okay.

  • Great.

  • Then also, thinking about, I know with the visibility, but just thinking conceptually about your cash flow for the full year, you gave us CapEx and D and A, would it be fair to assume that you should be positive in cash flow from a working capital perspective on lower volumes and with commodity-priced deflation through the year?

  • Would that be a fair assumption?

  • - Chairman, President and CEO

  • Yes.

  • I mean we expect pre-cash flow to be similar o what it was in '08, with the slight lower profitability offset by more working capital management and lower CapEx.

  • - Analyst

  • Okay.

  • Got you.

  • And finally, just wonder if you could give us any color in the contract business?

  • You said there is still project activity.

  • Can you give us any color either by geography or by end market?

  • Or by type of activity?

  • Because I'll assume it's not new construction activity.

  • - Chairman, President and CEO

  • Yeah, I think probably the extent of the color, Chris, would be to say the government business is strong, obviously the banking the financial institutions is not strong.

  • There are some other industry segments that are continuing to kind of weather through.

  • But overall, you would say everything is kind of stepped down a notch.

  • - Analyst

  • I mean do you see any benefit from maybe corporations are downsizing headcount and maybe moving or renegotiating leases, and moving to new premises?

  • Does that generate activity for you?

  • - Chairman, President and CEO

  • Yeah it absolutely does.

  • We are always looking for furniture events.

  • And those are -- anytime you have a move, either growing or declining, there is typically furniture activity there.

  • And that's always an opportunity for us.

  • That said, the overall sort of economy stepping down, the overall environment is stepping down.

  • So it still is a negative environment.

  • - Analyst

  • Okay.

  • Got you.

  • Thank you very much.

  • - Chairman, President and CEO

  • Thank you, Chris.

  • Operator

  • Thank you.

  • Our next question is from the line of Craig Kennison from Robert W.

  • Baird.

  • Please go ahead.

  • - Analyst

  • Good morning, everybody.

  • - Chairman, President and CEO

  • Good morning, Craig

  • - Analyst

  • So, I would echo all of Bud's comments as well.

  • Wanted to ask about your dealer network.

  • Are you seeing any dealers struggle here and to the extent that they may leave the business?

  • - Chairman, President and CEO

  • Well, I think the answer is yes.

  • I mean, but not on a dramatic, massive scale, Craig.

  • As you know, it's generally a business that does not have a lot of quote fixed costs.

  • So they are not businesses that -- dealers don't typically carry a lot of inventory.

  • The guys who do carry inventory are the national wholesalers, the regional wholesalers.

  • But the dealers themselves typically are a pretty high variable cost.

  • It's typically staffing and then maybe they'll have an office lease and some other expenses.

  • So it's very, very rough on them but generally they are able to adjust cost structure and weather the storm pretty well.

  • - Analyst

  • Thanks.

  • And as you look at your backlog, to what extent are orders cancelable?

  • And are you seeing any uptick in that?

  • - Chairman, President and CEO

  • Yeah, we are seeing a little bit of uptick in cancelable.

  • Again because we are relatively -- we are a produced order in a short lead time sort of business, you know?

  • So if we get an order if it takes four weeks, that's a pretty long sort of fulfillment cycle.

  • So that kind of protects from a lot of people getting orders placed and then their business changing dramatically.

  • So a little bit of cancellation but not much.

  • - Analyst

  • And then lastly, if you can just comment on commodity trends that you are facing and also whether you expect to benefit at all from the stimulus package with new schools for example.

  • - Chairman, President and CEO

  • Yeah, commodity trends are generally favorable now.

  • Declining as Marshall said, it's dynamic because you do have some commodities that the producer may be taking capacity offline and so they are able to hold prices more.

  • You are seeing input costs jump around, but overall it's favorable.

  • As far as related to the stimulus bill, we are still sorting that out.

  • I don't think there's going to be a significant near term impact.

  • Certainly as we indicated government business has been a very large growth engine for us over the last several years.

  • We like to see lots of spending on furniture by the government.

  • We do well in that situation.

  • So, that will help and then we are very keenly interested in sort of the housing stimulus, and there's lots of things being bantied around, around mortgage protection and around incentives to buy homes, et cetera.

  • I think that's yet to be determined as to exactly what the real impact is going to be to kind of buoy home ownership and therefore new construction.

  • - Analyst

  • Great.

  • Thank you.

  • Operator

  • There are no further questions at this time.

  • - Chairman, President and CEO

  • All right.

  • Thank you very much for joining us on the call.

  • Thank you very much for your interest in HNI.

  • We look forward to talking to you in the future.

  • Have a good day.