Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call reporting its operating results for the first quarter 2021. [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, Joel. Good morning, and welcome to our quarterly conference call to review our preliminary financial results for the fiscal 2021 first quarter, which ended May 3, 2020. We certainly appreciate your participation this morning. Paul Toms, our Chairman, and CEO; Jeremy Hoff, President of our Hooker Legacy Brands; and Doug Townsend, Co-President of our Home Meridian division are joining me today. For the question-and-answer portion of the call, our executive officers will also be available to take questions, including Anne Smith, our Chief Administration Officer; and Lee Boone, Co-President of Home Meridian. During our call, we may make forward-looking statements, which are subject to risks and uncertainties. Discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our press release and SEC filing announcing our preliminary fiscal 2020 first quarter results. Any forward-looking statement speaks only as of today, and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today's call. COVID-19 had a material impact on our financial performance in the fiscal 2021 first quarter and on market valuations, discount rates, and other inputs used in our intangibles valuation analysis. Consequently, and despite having completed a similar intangible asset valuation during our fiscal 2020 fourth quarter. We determined that another intangible asset valuation was appropriate given our performance and these changing market dynamics. Given the effort and complexity involved in this project, we need additional time to complete this analysis. Therefore, the results reported this morning and that we'll discuss on this call are preliminary and does not include any noncash impairment charges on our intangible assets, which could result from the impairment analysis that are currently underway. Actual results may differ materially from these preliminary unaudited results that are provided…

Thank you, Paul, and good morning, everyone. The COVID-19 crisis drove the most significant downturn in our business in over 50 years, the pandemic, stay-at-home restrictions, and an economic shutdown from mid-March to mid-May throughout the U.S. resulted in the double-digit sales decline in the company's first quarterly operating and net income losses in over a decade. After beginning the fiscal year on an upturn with an 8.3% year-over-year increase in consolidated incoming orders in February, orders plummeted in March and April as many of our retail customers temporarily closed. Large customers canceled stock orders and other deferred -- others deferred orders. Also contributing to the quarterly income loss and operating margin reduction was a temporary shutdown of production at 5 of our 6 domestic upholstery plants in Virginia and North Carolina, which resulted in unabsorbed fixed costs and operating inefficiencies. However, the business disruption has not been as severe as we initially feared. While consolidated orders declined steeply by over 70% and 65%, respectively, in March and April we had a significant month-over-month improvement in consolidated order rates in May. Orders in fiscal May were down about 7% for the period. And since mid-May, consolidated orders have generally comped above the same period last year. Retailers in some regions of the country have glowing reports about their business the last few weeks, including strong Memorial Day holiday weekend sales. We believe there are several positive factors in play, including pent-up demand, more focus on home environments from people spending so much time in their homes for the last few months, and less competition for discretionary consumer spending from travel, eating out and other activities. In addition, Hooker's domestic upholstery manufacturing facilities for Bradington-Young, Sam Moore, and Shenandoah began ramping up production in early May, and are currently operating at…

Thanks, Paul. In the Hooker Branded segment, net sales declined $12.4 million or 31%. In the Domestic Upholstery segment, net sales declined $8.5 million or 33.7% during the first quarter. Turning to a more detailed look at each of our segments. I'll begin with the Hooker Branded segment. Because traditional furniture stores and small and regional chains, which comprise the lion's share of Hooker Brand's distribution base were closed during the economic shutdown, incoming order rates dropped dramatically during the quarter. Despite the sales decline, the segment's low fixed cost and high variable cost model enabled it to maintain a 29.5% gross margin and 4.9% operating income margin during the quarter. Also, the quarter -- the Spring High Point Furniture Market originally scheduled for late April was canceled and High Point showrooms were closed. Despite that, Hooker Casegoods has been able to sell new collections originally set for spring introductions during a virtual showroom presentation on a password-protected area of the company's website. Before the showroom closed, we prioritized upscale, environmental, and detailed photography of 4 new collections that are already in production. We have done very well selling through the first cuttings via this online presentation to our retail customers, which is very encouraging. Our next step is to produce a 360-degree-style video tour of the collections in our showroom this month. In the Domestic Upholstery segment, incoming orders fell 40% during the quarter. During the month of April manufacturing plant at Bradington-Young and Shenandoah were temporarily closed, while Sam Moore operated at about 50% capacity. Employees returned to the factories and production restarted the week of May 4, and currently, the segment is operating at approximately 75% capacity. Sales declines and operating inefficiencies from the temporary shutdown resulted in significantly decreased gross margins and an operating loss. For all other, which includes H Contract and the newly formed lifestyle brands, net sales stayed essentially flat, and we reported an operating income of $387,000 due to continued solid performance at H Contract, which achieved a 16% increase in incoming orders and 68% higher backlog compared to the prior year first quarter. Now I'd like to call on Doug Townsend to give more detail on the HMI segment this quarter.

Thank you, Jeremy. Good morning, everyone. HMI's first quarter sales were $57.7 million, down 14.7% from the prior year. Preliminary Q1 operating loss was $2.4 million, an improvement of 52% over the prior year results. While the global economic slowdown from COVID-19 significantly impacted Q1 orders, sales, and profits, the HMI bottom-line improvement over prior year results is attributable to the company's fundamental turnaround strategy. Some of these improvement indicators are: First quarter allowances were 21% below prior year, contribution margin as a percent of net sales improved 360 basis points over the prior year and the fixed expenses were $1.5 million below prior year. These are all areas of concentrated management focus, among many others. The COVID-19 pandemic significantly interrupted our Asian supply chain during the first half of Q1. Our factories were unable to operate normally due to the massive quarantines in Asia and many production facilities were forced to close temporarily. All of our factories in China and Malaysia were closed for a month as those countries had country-wide shutdowns. The nationwide retail shutdowns in the U.S. that started in mid-March severely impacted our shipments for the balance of Q1. Only recently, are we beginning to see conventional furniture retailers reopened for business. Nonetheless, there were some bright spots that outperformed expectations during the quarter. Specifically, our e-commerce business increased significantly, outperformed all expectations, and accounted for 35% of our total sales in the quarter. Business with several of our Mega and Mass accounts held up much better than originally projected. Fortunately, some of our customers, such as wholesale clubs, big box stores, and Mass merchants were able to remain open, while dedicated furniture retailers in many locales were forced to close temporarily. These bright spots, combined with major spending reductions and other cost control measures enabled…

Thanks, Doug. Average selling prices were up in the low to mid-single digits in both the Hooker Branded and Home Meridian segments. However, consolidated average selling prices decreased 2.1% due to a change in the mix between divisions. Unit volumes in the higher-priced Hooker Branded and Domestic Upholstery segments were down in the low to mid-30% range, much more than the 18% decline in the Home Meridian segment. Increased average selling prices in the Hooker Branded and Home Meridian segments were attributable to favorable product mix and helped to offset a small decrease in average selling price in the Domestic Upholstery segment. However, these factors were not sufficient to offset the nearly 21.6% unit volume decrease, which resulted from lower orders across all 3 segments. Consolidated gross profit decreased $6.9 million from $25.5 million to $18.7 million and from 18.8% to 17.8% as a percent of net sales. Hooker Branded gross profit decreased in absolute terms and as a percentage of net sales due principally to the net sales decrease. In the Home Meridian segment, despite a net sales decline, gross profit increased in absolute terms. And as a percentage of net sales, reflecting some of the turnarounds Doug referred to earlier. In the prior year period, Home Meridian's gross margin was negatively impacted by unexpected quality-related charge racks as well as unrecovered tariff and freight costs. These issues did not recur in fiscal 2021, which we believe is the result of the resourcing transition to Vietnam, which has helped to reduce product costs and the exit of temporary warehouses, which has reduced warehousing and handling costs. The Domestic Upholstery segment's gross profit decreased significantly in absolute terms ahead of percentage of net sales due to the net sales decline and the inefficiencies resulting from operating at significantly reduced production…

Thanks, Paul. While we have limited visibility of how the economic and healthy crisis may fluctuate in the coming months and still faces significant headwinds of the high level of unemployment. Our business is improving, and we are in better position than we expected to be at this time. The company remains in exceptional financial condition. In times like these, we believe a strong balance sheet is even more important than the income statement. We're grateful for the adaptability and resilience of our employees and look forward to bringing back our administrative and management team members into the offices when the states say we can. And more importantly, when we feel its safe based on the status of the virus and the communities around our corporate locations. We expect the second quarter to be significantly better than the first. Barring a second wave of infection, we expect business each quarter to improve as we go through the year. We're confident we will emerge from this crisis as a stronger company. This ends a formal part of our discussion. And at this time, I'll turn the call back over to Joel for questions.

[Operator Instructions]. Our first question comes from Anthony Lebiedzinski with Sidoti & Company.

So first, I just wanted to get a better sense about your sales channel mix. Obviously, you called out that within HMI, 35% of the sales came from e-commerce, which is much higher than typically. So just wanted to get a sense as to what that was for the entire company? And also, if you could comment also about the warehouse clubs. And also, just overall, broadly speaking, as far as your sales penetration to nontraditional sellers of furniture that are -- that were not closed during the pandemic?

All right. Yes, that's a lot of questions within that question. But I'll take a stab about it. I don't think Hooker's Legacy Brands sales in the e-comm channel were to the same degree that Home Meridian's. In other words, [they weren’t] [ph] 35% of our volume in Q1, I don't believe. I don't have a number for overall, but I would guess that it's somewhere in a 15% to 20% range. Our Domestic Upholstery has very little penetration in the e-com channel. So that would kind of bring the overall down. We are fortunate to sell-through e-com's. And in addition, we're fortunate to be in clubs like Costco or Sam's or other warehouse type clubs that we're able to operate. We're in other retailers that were open during this period because they sell some groceries, and they were considered essential. So we had some big-box retailers and for customers that also were able to operate in this. I'm not sure what other parts of your question, have I not answered. So I'll take a stab of that.

I think that, yes, within that multipart question, yes, I think that, that pretty much, I think, covers that. So yes, thank you for that, Paul.

Anthony, this is Doug. I'll just chime in a little. HMI's sale to those other emerging channels, Mass merchants that were open, clubs, and then hospitality hotels that we were still developing is another 20% plus of HMI's business on top of the e-commerce. To give you some flavor?

Got it. Okay. That's very helpful, okay. Okay. So yes -- so Doug, you also talked about some control -- cost control measures that you implemented. I was just wondering if you could expand on that and perhaps maybe quantify what are some of the just overall these permanent cost control measures?

Okay. Well, color on it is, it's everything from the things that Paul had talked about earlier, Paul Huckfeldt about travel, reducing -- basically cutting spending everywhere we could. In addition to -- we've cut salaries 10% to 15%. We had laid off about 10% of our workforce. We had furloughed about half the people in our corporate offices on rotating furloughs. So the combination of all of that as well as just managing spending in a fairly draconian way just to be as safe as possible. If we look at it for the first quarter, we reduced our spending, our overall fixed cost base $2 million relative to what we have budgeted to spend..

Got it. Okay. That's very helpful. And as far as your exposure to China, obviously, because of the tariffs, you've been reducing your product sourcing there. So where did you guys wind up at the end of Q1?

In Q1, 12% of our shipments came from China. Obviously, a little deflated by the fact that China was closed for a whole month. If you looked at it over the 6-month period, it's about 18%. Going forward, that's probably something in between those two numbers.

Got it. Okay.

And I think if you look at total company, that number that we gave being around 22% of sales at the end of last year, probably not significantly different. It might be in the high teens for Q1.

Okay. Got it. Paul. Okay. And then a couple of questions, if I may. So you talked about, obviously, seeing better results so far in your second quarter. Can you just remind us as to -- when you look at the different regions within the country, where do you have the most exposure to? And I assume that probably the Northeast is going to be lagging the rest of the country. But if you could just kind of expand on that, that would be great.

Right. I think the Northeast and maybe the upper Midwest, even the northwest may be slower reopening than parts of the south or west. But it's really hard to -- I mean, we can look at our traditional customers and kind of know where the sales are. But when you get into e-com and catalogs, plugs, it's really harder to know exactly where furniture ends up in this region. So -- but I think you could probably be safe to say, certainly, on the Hooker Branded as well as the Domestic Upholstery segment that we are more concentrated in the southern parts of the country, the south, I'd say, we're in the Texas and Oklahoma, the Sunbelt, than we are in the Northeast. But we have a very good presence in the Northeast. I think for some of the other channels of distribution and probably for through Home Meridian than we do through the other two segments.

Got it. Okay. And then operationally, so obviously, you have your domestic upholstery plants. You talked about now operating at 75% capacity. Just wondering operationally, what are you guys doing differently as far as from a safety protocol perspective? And as -- and can you be as -- I assume that you probably can't be as efficient as pre-COVID, but I mean, just wanted to get a sense as to how we should think about additional costs related to just dealing with COVID.

Anthony, this is Jeremy. We've obviously followed all the CDC guidelines, and we're being as careful as possible. I mean, our number one priority throughout entire crisis has been the safety of our employees and that will remain our focus. We're doing -- we're obviously doing social distancing within our factories. We're utilizing the mask. I don't know what the additional cost, that part of your question, I don't see substantial additional cost to practicing the safety measures that we put in place.

I would agree, it's not like a meatpacking plant where you have people right on top of each other. I think they're naturally spread out a little more in a manufacturing facility. But we are -- I don't know that we can really quantify that impact financially on taking a more safe position.

That would suggest that it's not material..

The big part of this is communication, Anthony. Every week we have calls to make sure we understand the dynamics that are today, and we do that on almost probably more of a daily basis than a weekly basis. So as this thing changes, we change with it. And we want to make sure we stay on top of that.

Got it. Okay. And then my last question is, I've read about that, obviously, you have sold home office type of furniture for a while. Just wondering as in the new post-COVID world, how are you guys thinking about the new product categories or collections? And if you could expand on your exposure to home office, that would be great.

On the Hooker Legacy side of the business, specifically casegoods, fortunately, we were planning a major home office launch of a new program for this fall. So that's obviously timely, I would call it a little bit luck candidly. But we are going to be in a great position for what trends we see coming up. And also, we have a -- the other part of our major introduction is new casual dining program as well. And both of those categories are seeing positive trends in the marketplace. I'd like to let -- pass it to Doug as well for his side of the business.

Sure. Yes. Home office products, unfortunately, for Home Meridian has been a fairly small category for us. But obviously, once we saw this trend 2 months ago, we started additional product development in the category. So we're racing to add products in the category.

Our next question comes from JP Geygan with Global Value Investment.

The COVID-19 situation has overshadowed some existing issues, namely product quality issues and tariffs, and I know you addressed each of those to some degree. But can you add any color around those to particularly the success of your efforts to rebuild your club relationships?

Sure. JP.

It's Home Meridian, so I'll let Dough Townsend answer that.

JP, this is Doug. Yes, our relationships with our clubs are strong. Our sales are growing slightly with them after the fallback that we took last year. We've got no quality issues, no problems. We're both growing with them in their retail stores as well as on their online on the dot-com sites. And yes, so really no issues. Those issues are behind us. We don't have any in quality charter backs or anything like that? In terms of tariffs, we mentioned before, we've moved a substantial portion of the business out of China and into Vietnam and Malaysia. And the few products that we still have in China that we're paying the 25% tariff on our products that inside the marketplace can withstand those cost increases. And so we pass those on.

Great. Looking ahead, can you talk generally about the outlook of your customers, especially considering that the COVID-19 pandemic might have brought about an acceleration in changes of consumer behaviors in the way consumers shop?

Anybody is welcome to chime in. But I would say, I mean, obviously, we've seen e-commerce strengthening this. I think some of that will be sustained. I don't think it will be at the level it was when bricks-and-mortar were close, but I think people probably that weren't shopping online before have gotten somewhat comfortable doing that. So I expect that channel of distribution to remain advantaged. Other channels, clubs, that's been pretty steady. We had a little bit of a hiccup last year, obviously, but I think we've gotten past that. Catalogs seem to have done equally well in the downturn. Bricks-and-mortar, I think, it really varies by the individual retailer. We've had some small mom-and-pop independent retailers that have actually gone out of business here in the last few months. That's not totally unexpected that may have happened even absent the crisis of the pandemic. But you also have strong regional players that I think are going to very well going forward. And some of them didn't close all their stores, I don't think closed any of their stores. I would say a lot of our bricks-and-mortar customers significantly increased their e-com business here in the last few months, which wasn't a big part of their business before, but maybe it goes from 2% to 10%. So I think they've learned that they can sell online and maybe have found ways to take advantage of that as the stores reopen as well. So that would be my response, but certainly, Doug or Jeremy are welcome to chime in or leave.

Yes, I have one comment or two comments on that. One is, in terms of channels, I think hospitality channel is going to be challenged, at least in the near-term with all the disruption that hotels have gone through and just the reduction of travel and how many empty hotels we have. So I think that's 1 channel that's going to be challenged for the near term, at least. And then in terms of the brick-and-mortar and traditional channel, there is going to be disruption. Some people have gone out of business, some of the weaker ones having issues. But it's going to create huge opportunities for the stronger ones. And a lot of the bigger players that we deal with are actively looking for those opportunities, waiting for those opportunities and are looking to do some expansion and things like that. So while there will be some deduction, I think there's also going to be growth with some of the stronger ones.

Great. That's good detail. Finally, as manufacturing ramps up again, both internationally and domestically, can you elaborate on any supply chain constraints that you might see?

I think generally when the pandemic hit and stores specifically had to close in mid-March, the reaction by almost everybody was slow things down, cancel orders. We're not going to need the inventory. We certainly saw that from our large customers, which we passed on to our suppliers in Asia. We canceled some stock orders ourselves, probably more at Home Meridian, where we went into this a bit over inventory, less at Hooker, where we were chasing inventory going into this. But I think that for the Asian suppliers, first of all, they came back from Chinese New Year, a lot of their plants, they couldn't run because of people having to shelter at home and government mandates to close. There was disruption from their suppliers on components and subparts that they needed. About the time they got back ramped up and producing at a regular schedule than the pandemic head over here, and you saw those order cancellations. They laid off some of their workforce, they slowed things down. And then I know for us, and I suspect for many other people in this industry like us, by mid-May, you realize, hey, maybe this isn't going to be as bad as we originally thought, let's start getting orders back in place that kind of seesaw is definitely not ideal for manufacturers. So I think we're going to see -- we are seeing already some lengthening on lead times from suppliers in Asia. But I think for most of the people that we source with we are a significant customer. If not their largest customer, one of their top 2 or 3 customers. So I think we enjoy a pretty good position and would get preference in manufacturing time, and I think they're working extremely hard to try to supply us with what we need. Doug, anything to add to that?

No, I would just reiterate kind of with as big of a disruption as this was with the massive cancellations of orders in retail that flowed all the way to Asia and with many of our factories shutting down for 2 to 4 weeks at a time just to preserve cash on their end. It's amazing to bounce back and the lack of disruption we're having. And we have longer lead times here or there a couple of weeks. But nothing material, nothing that's affecting the business in a big way and I'm actually very impressed with how that's happened in the supply chain.

[Operator Instructions]. Our next question comes from John Deysher with Pinnacle.

I was just curious on the product that's coming in from China, subject to the tariffs, where you still feel you can bring that in and raise prices. What type of product is that from China that you feel you can bring it in and pass-through the price increases?

So it really runs across several businesses in Home Meridian. I think some of their hospitality business, they're things that are sourced in China that are not easily sourced in other countries. If we're running large cuttings of upholstery for some of our customers that can buy thousands at a time than that's probably better done in China, and they -- and the customer is the import of record and pays the tariffs associated with it. Our contract, hospitality customers, I believe all are paying the tariffs, that's something that's produced in China in our line of curios, which is we're a dominant player in that category. It's a niche business, but there are parts of that that are better produced in China, and we're able to get paid for it. On the Hooker side of the business, we have a vendor that we've done business with for 20 years in China. They also have a newer plant that was opened a couple of years ago in Vietnam, but their China plant is able to produce product that nobody else we've found is able to produce a similar product. It's very -- lot of hands-on, great finishing, lot of detail that it just -- its hard to do in Mass production. And we're historically have been paid for higher prices that come out of that plant. And even with the tariffs, we raised prices in early, once tariffs went to 10% and then went up the additional 15% to 25%, we were able to pass most of that along. And the part that was not mitigated by the vendor, helping us too. So I think the parts of the business that are still in China, as we said earlier, the customers are willing to pay us a tariff. So it's not like last year where we had unrecovered tariff cost. I think now the things that we source are very intentional. It is becoming smaller month-by-month and quarter-by-quarter, but I think we're in much better position related to tariffs on China production than we were a year ago.

Okay. That's helpful. I'm a little fuzzy on the headcount right now. At year-end, you had approximately 1,250 full-time employees. Where are you with full-time employees approximately today? And where do you see that number going as you get to the point where you think you'll be operating over the next few months or so?

Okay. And I can understand you being confused because we throw numbers around 1,000 employees and a 1,250. At the end of last year, we had 1,250 employees, about 250 of those were in Asia, in Vietnam, and China, primarily with a few in Malaysia. The U.S. employees, the 1,000, I would say that we reduced headcount by about 35. So we're at 965. Some of those are furloughed, but I expect most of those employees to remain employees. I don't see our business being impacted long-term where we need to shrink our workforce beyond what we already did. In Asia, we were probably somewhat inflated in that 250 employees because we were in the process of moving production out of China to Vietnam. So last year, you had employees both in China and in Vietnam, trying to move the production. And I think we're at a point now where we don't need all of those and actually reduced headcount there, I guess, and Doug, you can help me here, but maybe 50, 75 people out of that 250, and that's probably...

Yes, that's a good number.

Okay. So the headcount is going to come down a little bit. But overall, you'll be slightly below where you ended last year.

Maybe 100 employees, so 8%, something like that. And the majority of that would be in Asia.

Okay. Is the CapEx budget still targeted for $3 million this fiscal year?

That's probably a reasonable number, although I think we're monitoring that and will -- we evaluate every project as we go. Obviously, in a crisis like this, the cash conservation is a priority. So we'll continue to evaluate that. But typically, our capital spend is low even in a good year.

Yes. No. That's one of the benefits of owning your company is a low CapEx. Where are we with the refinancing? I know both the term and the revolver come due February 1, about 7 or 8 months away. Where are we with refinancing? And does the write-down, if it happens, impact any of the covenants for the existing debt facilities?

The covenants are on EBITDA. So we don't expect that to be a problem. To be honest, the refinancings kind of get on hold because we wait to see a little more stability in the market. We have the luxury of having sufficient financial resources that we don't really -- by the end of the year, we won't need to refinance the term loan. If the terms aren't appropriate, I think we'd like to, but we have other resources like the cash surrender value of life insurance that if we don't refinance, I think it doesn't affect our operating cash, operating position. So it's been on hold temporarily. I think we'll restart that process shortly and now we start to see a little more clarity in both our results. And so till yesterday, we thought there was more clarity in the financial markets too.

Okay. So even in a worst-case scenario with the write-down of the intangibles, you don't expect that to impact the refinancing process?

Yes.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Paul Toms for closing remarks.

Thanks, Joel. I really have no additional remarks. We appreciate everybody joining us today, although we never liked to have a loss. We hadn't had 1 in 10 years. I think given what we've just gone through, it's not bad performance, and we certainly are very encouraged by what we've seen since about the third week or middle of May, and we hope that that's sustainable. We think that furniture is advantaged right now, and we're in a good position to take advantage of any uptick in business, including what we've seen over the last 3 or 4 weeks. So we look forward to being back with you in early September, hopefully having better results to talk about then. And again, thank you for joining us today. Good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.