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HNI Corporation (NYSE:HNI)

Q4 2008 Earnings Call

February 18, 2009 11:00 AM ET

Executives

Marshall H. Bridges - Treasurer and Vice President - Mergers and Acquisitions

Stan A. Askren - Chairman, President and Chief Executive Officer

Kurt A. Tjaden - Vice President and Chief Financial Officer

Analysts

Todd Schwartzman - Sidoti and Company

Matthew McCall - BB&T Capital Markets

Budd Bugatch - Raymond James

Mark Rupe - Longbow Research

Christopher Agnew - Goldman Sachs

Craig Kennison - Robert W. Baird & Co.

Operator

Ladies and gentleman, thank you for standing by. Welcome to the HNI Corporation Fourth Quarter Year End Results Conference call. At this time all participants are in a listen-only mode, later we will conduct a question-and-answer session, instructions will be given at that time. (Operator Instructions).

I would now like to turn the conference over to Marshall Bridges. Please go ahead.

Marshall H. Bridges

Good morning, and thank you for joining us today for the HNI Corporation conference call to discuss fourth quarter and full year 2008 results, which we announced yesterday after the market closed. My name is Marshall Bridges, Treasurer and Vice President for HNI Corporation.

If you've 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 you to 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 and 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 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 at the HNI Corporation website. The corporation assumes no obligation to update any forward-looking statements made during the call.

And now, with pleasure turning the call over to Stan Askren. Stan?

Stan A. Askren

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'll open it up for questions.

I know everyone is familiar with the negative and deteriorating economic environment. We're feeling the brunt of these conditions due to the position of our two industries in this economy. In response, we continue to take focused strong actions during the quarter, adjusting our businesses to the harsh market place reality.

Consistent with our actions throughout 2008, we attacked cash structural and day-to-day operating costs in every corner of the corporation. These actions along with declining freight cost and better price utilization 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 progresses. 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 transaction of business dramatically declined in the latter part of the quarter.

I'd 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 the 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 a 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 markets. We're now at unprecedented demand levels, levels that are likely artificially low in the mid-term. We moved quickly to realign our businesses to lower demand levels. Our split focus business model drove 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 $16 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'd 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 I'll turn the call over to Kurt to review some of the specific numbers for the fourth quarter of 2008. Kurt?

Kurt A. Tjaden

Thank you Stan. If you like to follow along, I'll occasionally make reference to the presentation that 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 the weakness in the supplies driven channel of our office furniture businesses, combined with the continuing decline in the new home construction channel of our hearth business. Acquisitions added $30.4 million or 4.6 percentage 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 percentage points; slide ten shows net sales for the hearth product segment increased 4% to a $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 percentage points.

Gross margins were 33% compared to 36.4% in the prior year quarter. This 3.4 percentage point decline was due to decreased volume and increased material cost which were partially offset by better price realization. Gross profit did include $1.5 million of severance cost.

Slide 11 shows and 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 cost, and $2.4 million of severance cost which were partially offset by lower volume related spending, lower incentive based compensation, and our ongoing cost containment initiatives. As noted on slide 11, 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 cost 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 was primarily due to the volume de-leverage and higher fuel cost in the early part of the quarter. Slide 12 illustrates this change in freight distribution cost. In the fourth quarter we effectively closed our price input cost GAAP and we realized approximately $32 million in incremental price in the quarter and incurred approximately $33 million of increased material and freight cost. As you recall we had expected price realization of approximately $25 million during the fourth quarter. However, we are 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.

Stan A. Askren

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're seeing relatively 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 our office furniture businesses. Our focus selling models, strong brand recognition and value proposition position us well in this sector. We've grown at double-digit rates in this sector for seven years running and expect to continue the both 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 hearth products 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 product selling initiatives and operational improvements. We will continue to adjust to this challenging market conditions and improve our position for the future. I'll have Kurt provide the financial outlook for the first quarter. Kurt?

Kurt A. Tjaden

Great. Thank you, Stan. I'd 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 of 2009, we're 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 remodeled retrofit products are expected to be down 15 %to 20%. Gross profit margin is expected to decline approximately three to four percentage 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 two and three quarters to four and one quarter percentage 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're expecting capital expenditures to be approximately $35 million, really focused 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 through for 2009. We do expect to be profitable for 2009 for the full year.

This summarizes our outlook for the first quarter of 2009. I'll now turn the call back to Stan for closing comments.

Stan A. Askren

So, in closing here we believe the economy in the markets we compete will continue to deteriorate for the foreseeable future. We are responding to the conditions and adjusting our businesses accordingly. Despite the difficult environment we are optimistic about the future because of enhances 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.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question is from line of Todd Schwartzman from Sidoti and Company. Please go ahead.

Todd Schwartzman - Sidoti and Company

Hi, good morning guys. First question is on operating cost. How much more can you take or can you speak to what types of actions we may see down the road?

Stan Askren

Well, I think Todd, our response would be consistent with what we've said in the past. We adjust our cost structure based on the incoming order rates across the Board. So, we are always looking for a structural cost and we reflect back on some of the moves we've 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 segments, and it's just good old fashioned grind it out sort of a cost control, including the very painful sort of adjustments to staffing.

Todd Schwartzman - Sidoti and Company

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

Stan Askren

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

Todd Schwartzman - Sidoti and Company

Okay. As to the dividend, what is your comfort level going forward with maintaining that pretty nice quarterly payoff?

Stan Askren

Well, we just announced our dividend payout here in the last week or so. The Board reviewed that dividend payout every quarter, and we believe strongly in maintaining that at least some dividend going forward.

Todd Schwartzman - Sidoti and Company

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

Stan Askren

We don't really have that detail, we're don’t breakup out that detail. Todd. Certainly, it kind of I think follows what's going on, 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 downturn are hurt the worst. Our government business is very strong, so markets where there is bases and government activity we're doing better.

Todd Schwartzman - Sidoti and Company

Okay. Thank you.

Stan Askren

You bet.

Operator

Thank you. Our next question is from the line of Matt McCall from BB&T Capital Markets. Please go ahead.

Matthew McCall - BB&T Capital Markets

Thank you. Good morning everybody. Can you hear me?

Stan Askren

Yeah, go ahead.

Kurt Tjaden

Yes Matt.

Matthew McCall - BB&T Capital Markets

First, Kurt just to make sure you said three to four points gross margin below GAAP, what was the GAAP number per share, I just want to make sure I'm looking at the right number?

Kurt Tjaden

GAAP number last year was 32.7%.

Matthew McCall - BB&T Capital Markets

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 a little slower for the guys that can't write that fast.

Stan Askren

That's fine, sorry about that. So what we are talking about is actions we've taken to date will reduce manufacturing cost over $60 million, and then SG&A expense reduced by approximately $25 million in 2009.

Matthew McCall - BB&T Capital Markets

Okay.

Matthew McCall - BB&T Capital Markets

That to date meaning that as of, did you recognize the benefits of those in the Q4 results? Or what percentage 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?

Kurt Tjaden

Matt, we did not recognize much of that in the fourth quarter. That all those actions were taken place and of course we had some severance. And those numbers that Stan just quoted were staffing numbers.

Matthew McCall - BB&T Capital Markets

Okay.

Kurt Tjaden

And those are statements related to staffing only and there are some other numbers that we quoted subsequent to that involved sort of day-to-day operating cost and that was $30 million in cost of goods sold and $25 million in SG&A.

Matthew McCall - BB&T Capital Markets

So the first part is staffing, the second part is operating costs, and none of either of those were included in the Q4 result?

Kurt Tjaden

You are correct on the first on statement. Limited amount in Q4, saying “none” will probably mislead you.

Matthew McCall - BB&T Capital Markets

Okay. Well I'm just trying to get to the big delta on the margin line. What was the big benefit there, where do the benefits come from relative to your expectations?

Stan Askren

Matt, maybe three items that really explain why we beat our previous expectations; one was price, we had 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 cost, and then we had lower freight cost than we expected was the last one.

Matthew McCall - BB&T Capital Markets

Okay. And then of the 33 million in increase for material and freight, how much of the, the slide I think showed a year-over-year decrease in freight, but so breakdown that 33 million and is it a year-over-year number or -- I assume it is?

Marshall Bridges

Correct.

Matthew McCall - BB&T Capital Markets

And then...

Marshall Bridges

It's a year-over-year number.

Matthew McCall - BB&T Capital Markets

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

Marshall Bridges

The $3 million input cost increase is what I think you are asking about?

Matthew McCall - BB&T Capital Markets

Yes.

Marshall Bridges

So, $5 million of that was freight and 28 million was materials, and that material mix had less yield in it than in previous quarters and more other materials.

Matthew McCall - BB&T Capital Markets

And then as we look forward to next year assuming that the current spot market or your costs remain unchanged, what's the potential benefit as we move through '09?

Stan Askren

There are some potential benefits; it's a very dynamic environment right now. And you couple that with the pricing environment, we're not able to quantify that right now, but we do expect to benefit. That benefit will be less in the first quarter due to the nature of our contracts, we have a lot of contracts that – were the price lagged the market by about a quarter. So, we're in the first quarter we're still seeing some prices that were set in the fourth quarter of last year.

Matthew McCall - BB&T Capital Markets

Okay. Thanks, Marshall. And the last question Kurt, I think you said you expect to be profitable this year and I would expect it as well in saying that are you expecting the normal seasonal pattern of the pick up post Q1 on the top-line?

Kurt Tjaden

Yes, I that's fair to assume that.

Matthew McCall - BB&T Capital Markets

Okay. Alright. Thank you guys.

Marshall Bridges

Thank you, Matt.

Operator

Thank you. Our next question comes from the line of Budd Bugatch from Raymond James. Please go ahead.

Budd Bugatch - Raymond James

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

Stan Askren

Hi, Budd.

Marshall Bridges

Good morning.

Budd Bugatch - Raymond James

First of all I think you all deserve kudos for what you've done in the fourth quarter and the results you posted; I know that this is a very difficult time. Also give you kudos for the governance action you took yesterday, you disclosed yesterday. And finally the disclosures were terrific and they've improved markedly and, we thank you for them.

Stan Askren

Good, thank you.

Budd Bugatch - Raymond James

All that said, obviously it's a very difficult time. So, we'd like to get some clarity on some of the items. 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 factors into your your 3 to 4% lower gross margin, Kurt?

Marshall Bridges

Okay. Budd that kind of goes back to the question that Matt asked and it's very dynamic. So, we do expect to realize more price, incremental price and incremental costs in the first quarter. But it's moving around as both items fluctuate. That being said, we do expect that to widen as the year goes on, as materials come down.

Budd Bugatch - Raymond James

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

Marshall Bridges

Correct. We'll see incremental price in the first half is the bigger rate and then also some in the third quarter, and it will tail off in the year as we average our October price increases.

Budd Bugatch - Raymond James

And you should starting to see some benefit of raw material deflation now, particularly in steel I would think. Are you feeling that impact yet or you're still burdened with some of the, I think you are probably burdened with year-over-year cost increases, until you get maybe half year?

Marshall Bridges

That's correct, again the steel will begin to impact more in the second quarter in the first, that the nature of our contracts, which gives us time to adjust our price to new cost. Diesel and freight of course is hitting us real time.

Budd Bugatch - Raymond James

Okay. And as you look at the business by segment, you've given us a lot of detail at the income statement line. You've talked, I think about significant loss in the first quarter in hearth. How do you feel? Can you give us any quantification or the range of the two as such?

Marshall Bridges

I think we do expect a large loss in hearth, and we expect office furniture to be just below breakeven and then our unallocated corporate overhead would run somewhere to what it did in the fourth quarter.

Budd Bugatch - Raymond James

Okay. Explain to me, I am a little curious, you were down 16% transactionally in the fourth quarter. OfficeMax I think reported comps this morning of down 13. Your guidance would seem to indicate, I know we're getting a fall off in the project business but are we seeing another step down in transactional from the 16th?

Marshall Bridges

Yeah we think so.

Stan Askren

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

Budd Bugatch - Raymond James

Well because it's discretionary, right? Right Stan?

Stan Askren

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 because it's still 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.

Budd Bugatch - Raymond James

Okay. My final question is if we do the math, and tell me where I am wrong, and you can comment at what you want. We get sales as like in the mid 390, 4 to 428 and on the EPS loss of anywhere between $0.28 to $0.41 for first quarter. Is that in the that the way your math works?

Stan Askren

That's not bad math.

Budd Bugatch - Raymond James

Well its terrible math, its unfortunate math and unfortunate for all your members.

Stan Askren

Yeah. Absolutely.

Budd Bugatch - Raymond James

And holders. But we do appreciate the way that you run the company. So, thank you very much. And good luck on getting through this.

Stan Askren

Thanks, I appreciate it.

Operator

Thank you. Our next question is from the line of Mark Rupe from Longbow Research. Please go ahead.

Mark Rupe - Longbow Research

Hi, guys, congrats on the execution as well on tough times. You mentioned in the press release the early cycle nature of the transaction side of your business, and the hearth business, I know that's true in nature. I am just curious to see did that prove out in the last down turn or any previous downturns?

Stan Askren

That's correct.

Mark Rupe - Longbow Research

I mean, any detail on that, I mean in the last downturn how those business did react?

Kurt Tjaden

It's hard to compare Mark, because the last downturn was really a business led downturn, its kind of the dotcom bust.

Mark Rupe - Longbow Research

Yes.

Kurt Tjaden

As you recall the housing, the homeowners just chugged on through. In fact we had some great results in our hearth business during that time. This downturn is really led by the consumer and by this credit crisis.

Mark Rupe - Longbow Research

Right.

Kurt Tjaden

And so I think we're reticent to kind of 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

Mark Rupe - Longbow Research

Yup.

Kurt Tjaden

Than the long selling cycle.

Mark Rupe - Longbow Research

Okay. And then, I believe Allsteel took a decent amount of share in the last downturn. Is there are any kind of optimism looking at that that Allsteel still have some opportunity here or is that a scale issue back then?

Stan Askren

Well, your summary is accurate. They took share in the past and we think that'll continue to take share in this downturn.

Mark Rupe - Longbow Research

Alright. Best of luck guys.

Stan Askren

Thank you, Mark

Operator

Thank you. Our next question is from the line of Chris Agnew from Goldman Sachs. Please go ahead.

Christopher Agnew - Goldman Sachs

Thanks very much, good morning. First question, very minor; just to confirm that the guidance you've given excludes any restructuring charges?

Kurt Tjaden

That's correct, Chris. Other than what we identified specifically in the call.

Christopher Agnew - Goldman Sachs

Okay. Great. Then also I think, I know with the visibility, but just thinking conceptually about your cash flow for the full year you gave us CapEx and G&A. Would it be fair to assume that you should be positive in cash flow from working capital perspective on lower volumes and with commodity price deflation through the year, would that be a fair assumption?

Marshall Bridges

Yes, I mean we expect free cash flow to be similar to what it was in '08, despite lower profitability offset by more working capital management and lower CapEx.

Christopher Agnew - Goldman Sachs

Okay. Got you. And finally, just wonder if you could give us any color in contract business. You said there's still project activity. Can you give us any color either by geography or by end markets or by type of activity, because I'll assume its not new construction activity.

Stan Askren

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 see everything has kind of stepped down a notch.

Christopher Agnew - Goldman Sachs

I mean, do you see any benefit from as maybe corporations are downsizing headcount and maybe moving or renegotiating leases and moving to new premises, does that generate activity for you?

Stan Askren

Yeah, it absolutely does. We we're always looking for furniture events and anytime we 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 is stepping down, the overall environment is stepping down, so it still is a negative environment.

Christopher Agnew - Goldman Sachs

Okay. Got you. Thank you very much.

Stan Askren

Thank you Chris.

Operator

Thank you. Our next question is from the line of Craig Kennison from Robert W. Baird. Please go ahead.

Craig Kennison - Robert W. Baird & Co.

Good morning everybody.

Kurt Tjaden

Hi Craig.

Craig Kennison - Robert W. Baird & Co.

So I would not go all about comments as well. I wanted to ask about your dealer network, are you seeing any dealers struggle here to the extent that they may leave the business?

Stan Askren

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 fixed cost. So, they're 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, its typically staffing and then may be 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.

Craig Kennison - Robert W. Baird & Co.

Thanks. And as you look at your backlog to what extent are orders cancelable, and are you seeing any up tick in that?

Stan Askren

Yeah, we are seeing a little bit of up tick in cancelable, again because we're a produce to order in a short lead time, sort of business. 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 cancellations, but not much.

Craig Kennison - Robert W. Baird & Co.

And then lastly if you could just comment on commodity trends that you're facing and also whether you expect to benefit at all from the stimulus package with new schools for example?

Stan Askren

Yeah, commodity trends are generally favorable now. The declining, as Marshall said, is dynamic because you do have some commodities that the producer maybe taking capacity off line and so they are able to hold prices more. You're seeing input cost jump around but overall it's favorable.

As far as related to stimulus well, we're 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're very keenly interested in sort of the housing stimulus and there's lots of things being bandied around, and around mortgage protection and around incentives to buying homes et cetera. I think that's yet to be determined as to exactly what the real impact is going to be, that kind of bouy home ownership and therefore new construction.

Craig Kennison - Robert W. Baird & Co.

Great. Thank you.

Operator

Thank you. And there are no further questions at this time.

Stan Askren

All right. Well, thank you very much for joining us on the call. Thank you very much for your interest in HNI. And we look forward to talking to you in the future. Have a good day.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 12P.M. Central Time today to midnight February 25th. You may access the replay service by dialing 1800-475-6701 and entering access code 982540. Again that number is 1800-475-6701 and enter the access code 982540. That does conclude our conference for today. Thank you for using AT&T Executive Teleconference. You may now disconnect.

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