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## HPBA Retailer Survey Results – Inventory and Retail Sell-Through Trends

Prepared for the Hearth, Patio & Barbecue Associati on

By Charles Page

Homewarmth, Inc. d/b/a JumpStart Marketing

May 1, 2014Page 2 of 26

I. Introduction

The Hearth, Patio & Barbecue Association (“HPBA”) b elieves that the U.S. Environmental Protection Agency’s (“EPA’s”) proposal to revise it s regulation of new Residential Home Heating appliances under Section 111 of the Clean Air Act, 79 Fed. Reg. 6,330 (Feb. 3, 2014), does not provide for enough time to allow for the channels of trade to c lear for units that were previously certified, grandfathered or otherwise approved or were previou sly unregulated. The proposed rule would provide only a short 6-month sell-through period fo r some product categories regulated under Subpart AAA (what EPA calls a “sold at retail” provision) a nd does not provide for any sell-through period for other product categories regulated under proposed S ubpart QQQQ for Step 1 or subsequent regulatory
steps. See 79 Fed. Reg. at 6,365.

In order to determine the retail sell-through perio d that would reduce or eliminate financial hardship that would otherwise be imposed on hearth product manufacturers, distributors and retailers under the proposed rule, HPBA commissioned a retail er survey in the spring of 2014 that was conducted by Charles Page of Homewarmth, Inc. d/b/a Jumpstart Marketing, Inc. Mr. Page has 37 years of experience that spans the full range of product dev elopment, marketing and sales functions across the hearth industry. He is well recognized as a modern hearth industry pioneer and expert. His curriculu m vitae (CV) is provided at the end of this report.

This survey involved retailers across the continent al United States. Retailers were selected from each of the major selling regions across the countr y. This includes the Northeast, Mid-Atlantic, Midw est, South Central, Rocky Mountain, and Northwest region s as well as California. A total of 26 retailers t ook part in the survey. Some have multiple store locat ions. There were 7 retailers from the Northeast, 3 from the Mid-Atlantic, 4 from the Midwest, 5 from t he Rocky Mountain region, 3 from the Pacific North West, 3 from California and 1 from the South Centra l region. Retailers were selected based on recommendations of experienced factory representati ves in each market area. The retailers had to be actively selling wood burning stoves, fireplace ins erts and pellet stoves. The precise locations of t hose retailers are shown on the map below. Some retaile rs in the survey had multiple store locations and these are not shown on the map.

Locations of Retailers SurveyedPage 3 of 26

In addition, information about the number of employ ees for each retailer is provided in Table 1
as a way of further illuminating the business size range of the surveyed group.

Table 1: Employees per Surveyed Retailer

Participating retailers are referred to by codes in this report that refer to the region in which they are located: NE – Northeast, MA – Mid-Atlantic , MW – Mid-West, RM – Rocky Mountain, NW – Northwest, C – California, SC – South Central. Eac h dealer was assigned a number and, since the surve y contains sensitive and confidential information, th e names of the retailers are not being made public.

While the survey only included retailers, it is imp ortant to note that stoves are purchased by
retailers from two sources – direct from the factor y and through specialized hearth related distributo rs. Hearth distributors serve a very important function for certain manufacturers because they eliminate the need for employees and other overhead that woul d be required to sell and service individual small dealer accounts. While the survey was only given t o Hearth retailers, all of the issues relating toPage 4 of 26

inventory purchases and control as they relate to t he impacts of the NSPS are the same for both
retailers and distributors.

HPBA commissioned this survey to inform EPA and oth er stakeholders of the factors that affect buying patterns, inventory levels and inventory cle arance periods (sell-through) in the hearth industr y and the devastating impacts on manufacturers, distr ibutors, and retailers (most of which are small businesses) if adequate retail sell-through provisi ons are not provided as part of the final rule. De alers and retailers already face substantial uncertainty in determining which and how many models to stock, and the proposed NSPS revisions only increase that uncertainty. And their buying patterns, in turn,
affect manufacturers.

As a result, HPBA urges EPA to adopt an unlimited s ell-through provision for all affected appliances that previously were either certified or grandfathered (based on previous certification or other approval statues) under the provisions of the revised regulation. All such models will have bee n previously approved as clean-burning in one way or another; any sell-through deadline will inevitably “strand” some inventory, and therefore do economic harm to some retailers, while having de minimus environmental impacts. Sell- through periods are a lso needed in some appliance categories for previously unapproved models, and were provided by EPA as transition relief when the current NSPS was promulgated. In those cases, however, time lim its can more appropriately be imposed that balance potential economic harm against potential environme ntal impacts.

After this Introduction (Part I), this report is or ganized into six parts that present and discuss survey results, followed by a conclusions and recom mendation section. Those parts are summarized
below.

• Part II provides an overview of retail sales practi ces and an introduction to the hearth appliance marketplace, including how retailers stimulate sale s in the off-season or when overstocks have
occurred.

• Part III discusses the difficulties for manufacture rs, distributors and retailers in accurately forecasting sales in any given future sales year an d then matching inventory at all levels to those historically unpredictable sales outcomes.

• Part IV discusses impacts that inventory imbalances can have on sales and the financial consequences of “being wrong.”

• Part V focuses on the other factors that influence distributor and retailer buying decisions including credit limits, early-buy programs, wareho use space limitations and the seasonality of the hearth business, all of which limit the amount of inventory that retailers can stock and make it highly unlikely that retailers will attempt to s tockpile previously certified or otherwise previously approved and previously unregulated appl iances prior to the effective date of the applicable provisions in the final rule that would prohibit manufacturers from introducing
further units in a model line into commerce.

• Part VI addresses potential outcomes to manufacture rs, distributors and retailers caused by the various uncertainties imposed by the proposed NSPS requirements and what that means to retailers including challenges associated with know ing what to buy, how much to buy and what will happen to leftover inventory of “obsoleted” mo dels. Dealers already are hesitant toPage 5 of 26

purchase models that may become stranded inventory, which in turn negatively impacts manufacturers. Moreover, retailers need time to se ll their existing inventories after the new NSPS goes into effect.

• Part VII contains conclusions and recommendations.

II. Overview Of Retailer Sales Practices

Retailer sales practices are governed in large part by the unique attributes of the hearth appliance market and retailers’ relationships with manufacturers. Retailers typically operate within a certain territory for each manufacturer that they p romote. All manufacturers like to have some overla p in territories between dealers so that there are no gaps in representation. Manufactures decide how many dealerships there will be in a given market ar ea, but usually there are no formal boundary lines. In theory, retailers can sell anywhere, although they are constrained by the need to service the applianc es they sell, as discussed in greater detail below. D ealerships are technically not franchises, although some states treat them as such.

Retailers use a variety of tactics to stimulate flo or traffic in the off-season and to sell overstocked or slow moving inventory, including spe cial manufacturer sponsored sales and retailer sponsored sales. Manufacturers typically do joint promotions with retailers where the costs are share d. For instance, there might be a free blower promotio n where the retailer splits the price of the blower
with the manufacturer. The manufacturer offers a d iscount coupon on-line and in addition creates advertising materials that the retailer can use to promote the offer. The cost of the advertising wil l also be split with the manufacturer. Offering a “premiu m” like a free blower rather than discounting the stove is a lower cost method of stimulating sales o f that stove model.

Retailers also will advertise appliance discounts t o increase floor traffic and sales like money off the list price of the stove, money off on the insta llation or even free installation. Sales are typic ally done prior to the start of the prime selling season in a n attempt to pull the season forward a bit and get work for the retailer’s installers when things are typic ally slow. Inventory clearance sales are typically offered after the season ends. Having a sale is no guarant ee that potential customers will show up, however. If the market is not there, no one shows up! There al so is no guarantee that what the retailer has on sa le
will be what the homeowner wants. Retailer sales a re necessary, but every stove that is sold at a discount is money lost. But sales can help by free ing up cash for making payroll or buying faster mov ing stoves as well as helping to keep installation crew s busy. This is a balancing act that each retailer must face based on its own situation.

Sales are successful when consumers are looking for bargains. It is common for homeowners to shop around with multiple retailers to find the bes t price. They also may visit a retailer 2 or 3 tim es before making the decision to purchase. This cauti ousness has been fueled by a lackluster economy and a trend to spend wisely and less often. Retailers, having been burned numerous times with overbuying, are now very cautious. Most do not like early buy programs. Retailers want to reduce risk, but they also need to make a profit, so they take a gamble every year so that they get adequate margins to survive.

Government sponsored change-out programs are also v ery effective in moving inventory. As part of those programs, consumers are given rebates for replacing older dirty burning stoves with EPA certified stoves. In Massachusetts, for instance, homeowners are being offered $750 standard vouchers ($2000 for low-income homeowners) toward the replac ement of older non-EPA-certified woodstovesPage 6 of 26

with new, low emission, high efficiency wood or pel let fired stoves. These homeowners would not normally choose to replace their older stoves, but this rebate incentive gets them to take action. Another program which results in significant stove purchases is state-sponsored sales tax free holiday s. Typical savings are around $300 – the same incentiv e that these homeowners would get if the stoves were on sale, but nevertheless this incentive works year after year and thousands of stoves are sold a s a result of this program in Massachusetts.

These kinds of sales tactics, however, have inheren t limitations, such as how much stoves can be discounted. In addition, dealer territories and th e location of adjoining retailers have the effect o f restricting market areas. Retailers also face fina ncial constraints due to the costs relating to serv icing stoves in outlying areas that reduce profitability and discourage dealers from selling outside of thei r core market areas. Retailers also face substantial mark et uncertainty, as discussed below.

III. Forecasting And Inventory Control Are Difficul t, If Not Impossible Tasks, For The Hearth Industry

It has always been difficult for manufacturers to p redict how much inventory to build and for
distributors and retailers to know how much invento ry to buy. That uncertainty is not because of lack of experience or knowledge but is attributable to the fact is no one knows exactly how large the market i s going to be in a given year or which models will se ll well and which ones won’t. The manufacturers make educated guesses based on forecasts from previ ous years and general market conditions. Retailers rely on past experience, incentive progra ms offered by their manufacturers and in good part on their gut feelings. If their forecasts are wron g and their stove purchases are out of balance with demand, the excess inventory sits unsold. This tie s up resources, hinders cash flow and can ultimatel y lower profits. It is not uncommon for distributors and retailers to be stuck with slow moving invento ry going into the next season and often for 2 years or more.

As EPA has recognized, the hearth industry is domin ated by small companies that don’t have the resources available to do sophisticated forecasting . And even if they did, there are so many factors that
have to be taken into consideration that few would get it right every year. Most hearth-related companies have suffered in the past by either over- building (manufacturers) or over-buying (distributors/retailers) inventory. The industry i s now more mature and careful about inventory contr ol, but even so the nature of the business almost guara ntees that there will be excess inventory at all le vels – manufacturer, distributor and retailer.

Some of the unknowns that the industry faces can ma ke forecasting and inventory control very difficult include: the demonstrated volatility of the woodstove and pellet stove marketplace, the wid e variety of models, finishes, and colors that retail ers must stock to anticipate consumer preference, t he fact that the percentage of sales by fuel type may vary widely over time, the inventory pressures caus ed by operating in a competitive marketplace, the fluc tuating prices of home heating fuels, changes in weather patterns, and other changes in the marketpl ace, including natural disasters.

A. Volatility In The Market

The woodstove and pellet stove marketplace is notab ly volatile. The following chart tracks HPBA Reported Free-standing Woodstove and Pellet St ove Shipment Data from 1999 – 2013. It clearly
shows that future market size has no correlation wi th previous year’s sales. For retailers this is a particularly vexing problem because they not only h ave to guess how many stoves to buy, but how manyPage 8 of 26

The complexity of the problem of managing inventory increases in light of all of the various stove models that a retailer typically carries. Fo r example, in the Northeast, the 7 dealers surveyed offered a minimum of 8 brands of wood and pellet bu rning appliances and one of the largest dealers
even offered 18 different brands. Each of these br ands usually has 3 or more models of stoves. And t o further complicate matters each model may be availa ble in different colors or enamel finishes, all of which retailers must stock to provide a sufficient choice to consumers and to account for consumer preference.

Table 2 shows the number of brands that each of the retailers offer for sale. In addition, the Table shows how many brands of pellet and wood stov es are purchased direct from the manufacturer or through a hearth distributor.

Table 2: Number of Brands and Method of PurchasingPage 9 of 26

C. Percent Sales By Fuel Category Can Change Over T ime

Retailers also face challenges caused by the change in percent sales by fuel category from year to year. In the Northeast, for example, you find a mix of retailers; each may offer only specific fue l categories. In urban areas like greater Boston, ma ny retailers will focus their efforts selling gas s toves, fireplace inserts and fireplaces. In other areas o f the state, retailers will sell gas and wood appli ances or a combination of gas, wood or pellet appliances. O ther retailers just promote pellet stoves and centr al heating systems. The problem for these retailers i s that there is no way of accurately forecasting wh ich fuel category is going to dominate in a given year. In August 2013, 30 experienced retailers were interviewed to get their opinions as to which categ ories were going sell in the subsequent months and very few had any idea. Six weeks later it became a pparent that, for those retailers selling both wood and pellet burning appliances, the pellet models we re going to take the lion share of stove sales.

Another example of the difficulty of forecasting ca n be seen on the graph of U.S. Woodstove and Pellet Stove Shipments 1999-2013 Quarterly and Annual (Source: HPBA ), Figure 1, supra

. Looking at shipments of pellet stoves in the 2 nd and 3 rd quarter of 2006, pellet stoves spiked higher than the previous year, but then in the 4 th quarter sales dropped precipitously. Manufacturer s, distributors and dealers had bought inventory and yet the market dro pped so fast and so far that it was difficult to se ll stoves even far below suggested retail.

D. Competitive Environment

Retailers naturally face certain challenges as a re sult of competition. In any given year there will be “hot” sellers that will dominate business in a g iven market. Consumer preferences may be driven by a number of factors including price points, applian ce styling and performance advantages, weakness of other competitors in the market and special program s either offered by the retailer or in combination
with incentives from the manufacturer. For retail ers, the best-selling appliances can be difficult t o keep in stock while the slow movers just take up space, tie up cash and decrease profits. There are also f ickle consumers who buy stoves, then change their minds a bout making the purchase and want their money back. They may have found a stove they liked more from another retailer or found the same model available at better price. Most retailers will ref und the customer or refund the consumer minus a charge for restocking, but they then have to keep t hese models until they can find another buyer.

E. Price Of Home Heating Fuels

Retailers are at the mercy of the fluctuating price s of home heating fuels. Heating costs, and in particular spikes in fossil fuel costs, do stimulat e sales of alternative fuel products like wood and pellet stoves. Conversely, steady or decreasing fossil fu el costs can depress the market. In 2008, when oil prices were high in the Northeast, the demand for p ellet stoves outstripped manufacturer’s capacity an d there was an acute shortage of stoves. The followi ng year, after oil prices dropped, pellet stoves we re no longer selling and everyone in the distribution chain was stuck holding inventory. The drop in demand happened very quickly and no one predicted i t.

F. Weather Related Factors

Weather also plays a significant role in creating c onsumer demand for wood and pellet appliances. Typically when there is a severe winte r, the following selling season is good. But cold weather can also drive up the demand for wood and p ellet fuel and also the price consumers pay for thePage 10 of 26

fuel. For this latest selling season (2013-2014), for example, there is an acute pellet fuel shortage in the
Northeast at the end of the season due to below nor mal temperatures. Will this dampen next year’s sales of pellet appliances or will it stimulate sal es of wood or gas appliances? No one knows at this point and yet manufacturer’s early buy programs are being launched and retailers are making decisions that may ultimately load them with inventory that they m ay or may not need.

G. Global Uncertainty

Finally, the general economic outlook, stock market swings, political unrest, and natural disasters influence our nation’s stove buying habit s. It may not be one factor that stimulates or depresses sales, but a combination of global factor s that are hard to predict. For example, after the
Hurricane Katrina disaster there was a fear that th ere were going to be oil shortages and spikes in ho meheating oil prices in the Northeast. This caused a dramatic spike in pellet stoves sales. Stove shop s were filled with customers and manufacturers could not k eep up with demand. A year later, pellet stove
demand had vanished. This is another case where ma ny retailers and distributors were stuck with inventory that took multiple seasons to sell.

As these factors demonstrate, the markets for wood and pellet burning appliances are unpredictable. It is almost impossible for the ind ustry to know exactly what to build or buy. The si ze of the market varies each year and what sells is deter mined by a number of factors including the competition, styling trends, the price of home heat ing fuels, the weather and world events. Hearth retailers try very hard to order carefully and to j udge market trends, but getting it right every year is very difficult to do, consequently dealers often ca rry unsold inventory from one year into the next. Because of the market uncertainty and fluctuations in the market, hearth retailers need more than one season to sell previously certified or otherwise ap proved and previously unregulated models under the proposed rule. If the market is down or a given pr oduct category is not selling, hearth retailers wil l face devastating financial impacts if the stoves they ha ve on hand cannot be sold. They need adequate time to bring their inventories down to zero.

IV. There Is Pressure On Manufacturers, Distributor s And Retailers To Make, Purchase And Hold Inventory And This Can Create Overstock Situations At All Sales Levels

For both distributors and retailers, having stoves on hand or being able to get stoves quickly is very important. The market is competitive with mul tiple dealers offering different brands in a given market area. If a particular stove model is unavai lable for immediate sale or has a long lead time, t here is a good chance that the customer will go elsewher e for their purchase. A one-to-two week lead time may be acceptable but a three-or-four week lead tim e is probably not. This is certainly true during t he peak selling season, October, November, and Decembe r. The need for having inventory is compounded by the fact that most retailers are showing numerou s models of appliances in their showrooms. Manufacturers face a similar challenge trying to su pply what the retailer wants in the shortest possib le

time.

Having product available is the only way that a giv en stove model can remain viable. Distributors and retailers will not tolerate produc ts that have long lead times and will drop stove mo dels if they are hard to get. For most manufacturers, t his means that they must have some buffer of stove inventory on hand and ready to ship or the needed p arts in stock so that they can make stoves quickly when the need arises. This is a careful balancing act and it is common to keep more stoves in the warehouse than are needed, just so the sale will no t be lost to a competitor due to backorders.Page 11 of 26

However, there are also disincentives to building a ny significant level of extra inventory of stoves u nless there is a known and reliable demand in that year.

A. Inventory Levels

Hearth retailers have different ways of doing busin ess and philosophies when it comes to determining acceptable inventory levels of wood and pellet burning appliances, but all are familiar wi th the impact of having inventory. For some retailers , having inventory on hand can give them a competitive edge by allowing them to make immediate sales, including sales to cash and carry customers as well as customers who will be having t heir stoves installed by the dealer. The retailer is
able to schedule the customer’s installation and ta ke them out of the market, capturing the sale. If the retailer had to order a stove, the lead time might allow the customers to change course and buy from
another retailer.

Many well established retailers feel that they can afford to invest in inventory. They take advantage of freight discounts for multiple stove p urchases and manufacturers incentive programs. For them, carrying inventory is just another cost of do ing business. They maintain higher inventories jus t before and during the selling season and reduce inv entories during the off-season.

The Inventory on Hand Analysis Table 3 shows typica l on-hand inventories for the retailers surveyed. Inventory size varies among retailers; s ome retailers hold a significant amount of inventor y while others keep minimum amounts on hand. There a re a number of factors that shape a retailer’s approach to inventory like past experiences with ex cess inventory and the resulting financial difficul ties, the percentage of business they do cash and carry, their cash flow, their confidence level that their manufacturer (or distributor) can supply product in a timely manner, the strength and outlook of the stove market and the advice they receive from their accountants.

Distributors face many of the same inventory contro l issues that retailers do, only the numbers of stoves on hand are often larger. Distributors s erve an important function for retailers in this re gard. They hold a buffer of stoves so that in peak sellin g periods they can provide quick delivery of produc t to retailers. Some retailers buy from distributors sp ecifically for this reason – they can order small quantities of stoves – often 1 or 2 and buy their s tove accessories from them as well, so they save on freight costs.Page 12 of 26

Table 3: Inventory on Hand

Out of 26 retailers surveyed, 5 had less than 10 s toves on hand, 4 had 20 or less, 8 between 21
and 50 stoves and 9 retailers had over 50 stoves on hand. These are important numbers because they
show the kind of financial commitment that dealers are making in order to have inventory. The majorit y of retailers – 65% – had greater than 20 stoves on hand and 34% had over 50 on hand.

In addition to stoves on hand, retailers have show room stoves and burning displays. Table 4
Showroom Stoves and Burn Models below shows the number for each of the dealers surv eyed. Showroom models have not been burned, so in theory they can be sold as new stoves, but in realityPage 13 of 26

some get damaged and scratched and stained in the c ourse of being demonstrated, so they cannot be
sold at full retail.

Table 4: Showroom Models and Burn Models

B. Discounts And Other Incentives Trigger Hearth Re tailers’ Purchasing Decisions.

There are a number of marketing programs offered b y manufacturers and distributors to entice retailers to purchase stoves early and/or to buy a greater number of stoves. Those programs include:

• Column pricing – Most manufacturers offer discounts based on the number of stoves that are purchased. This is referred to as column pricing a nd it can be based on the number of units purchased on each order or in some cases over the y ear. While the bench mark margin is 40%, retailers can get a greater margin (up to 45%) and therefore make more money if they make a greater commitment to purchase and hold inventory. Manufacturers may also require that the retailer display a certain number of stoves, or dev ote a certain percentage of their floor space to
their models. Additional benefits to retailers for buying more stoves may include an increased co-op advertising allowance. Manufacturers general ly offer a 2% co-op allowance (based on monthly or yearly sales) but this percentage can be greater when the retailer makes a larger commitment. Most co-op programs will reimburse the retailer 50% of the cost for specific types of advertising and marketing efforts, but again the manufacturer can offer to pay a larger percentage to reward retailers who are making bigge r purchases.Page 14 of 26

• Pre-buys or early buys – Most manufacturers offer incentives to purchase s toves before the selling season starts. The incentives may be in th e form of a discount on the appliance, an early pay discount, a lock in of a current price before a price increase, a discount on freight, dating
terms or a combination of these incentives. Almost all of the retailers surveyed participated in early buy programs. As a rule of thumb, most manuf actures try to get their retailer networks to buy about a third of what they will need for the ye ar in their early buy purchase. The survey indicated that there was a range of participation f rom a low of 5% to a high of 75%. In the Northeast, the average percent of stoves purchased by the 7 survey participants was 50% of yearly sales. Survey participants indicated that th e pre-buys or early buys programs started in the first quarter of the year and the money was due between August and November. Since each manufacturer offers a different program, a retailer carrying multiple brands will have various program start dates and dates for when the invoices are due under that program. In the Northeast for instance, of the 7 retailers, three c arried 8 brands of wood and pellet stoves, one carried 11, one 15 and the largest one 18.

• Lead Time Discount Program – One of the largest manufacturers in the industry offers a program which increases the discount the retailer r eceives as the lead time before manufacturing and ship date increases. For instanc e, the retailer might receive a 6% discount if
the stove is ordered 6 months in advance and a 2% d iscount if the retailer orders 2 months in advance. This has proven to be a popular way of bu ying because the retailer has some flexibility to add or cancel product orders to coincide with up s and downs in the market.

• Special Sales - Manufacturers sometimes offer special sales to ge t rid of slow moving or soon to be obsolete appliances or just to stimulate sales i n the offseason. Incentives are most often special freight discounts or free freight, dating t erms or cash discounts for early payment.
Sometimes a manufacturer will throw in an extra sto ve at no charge when the retailer buys a specific number of stoves.

Over half of the hearth retailers surveyed took adv antage of incentive programs in addition to early buy programs to purchase stoves in the hopes of increasing their profits. The reason manufacturers do this is simple; most cannot afford the expense of building and holding inventory for 6 months in anticipation of selling it during the bus y season nor can they afford the attendant financia l risk that this scenario creates. Building pre-comm itted stoves in a measured way prior to the start o f the season levels production requirements and reduces t he chance of backorders during the season. Supply chain issues come into play as well. Stoves includ e many vendor-supplied parts. Vendor backorders or shortages can halt production. Leveling production helps mitigate the risks of vendor part supply problems. Some manufacturers have space constrain ts as well. Manufacturers are willing to pay a premium to get hearth retailers to purchase early s o that production delivery problems are minimized
and the financial burden and risks are shared.

In addition, the marketing programs offered by manu facturers provide a way to reward retailers who buy larger volumes so that they can make more m oney (in other words, get higher margins), and in turn will buy even more stoves. 1 Floor planning from finance companies, where the manufacturer is required to take back unsold inventory, is no longe r available in the hearth industry. When a retaile r

1 See Cost-Effectiveness Analysis of Alternative Woodstov e New Source Performance Standards, NERA Economic Consulting, May 2014, Appendix B.Page 16 of 26

time would be significant. For example, the total number of woodstoves for the 16 retailers that had 10% or more of their inventory unsold at the end of the year was 730 stoves.

From a nationwide perspective, the significance of unsold inventory if not allowed to flow through the distributor and retail channels could h ave dire consequences for the hearth industry. According to Richard Wright, the publisher/editor o f the largest industry trade journal Hearth & Home Magazine, there are approximately 3760 hearth retai lers in the United States. This number includes categories such as specialty retailers, hardware st ores, propane dealers and others who may sell stove s as part of their businesses. Although the retailer survey sample size is very limited, it does repres ent a diverse sample. By looking at the average inventor y held over at the end of the year and the average number of units sold by the surveyed retailers in T able 5, it is possible to estimate that, on average , 17% of units purchased by retailers are still in invent ory at year’s end. By looking at total free-standi ng wood and pellet stove shipments per Fig. 1, and recognizing that the HPBA figures undercount to tal shipments by at least 10%, the total shipments of free-standi ng wood and pellet stoves in 2013 was about 140,000 units. If, on average, 17% remain unsold, about 24 ,000 are held over units. If approximately 65% of these units are wood burning with an average retail price of $2120, 2 the inventory of wood burning appliances would be worth at retail over $33 millio n. Using a similar estimate with pellet stoves whi ch are approximately 35% of sales and have a higher es timated average retail of $2500, the inventory reta il value would be over $21 million for a combined esti mated value of over $50 million for both wood and pellet burning appliances. For the retailers in th e survey, the average held over inventory has a ret ail value of nearly $110,000. The bottom line is this: No matter how the numbers are sliced, there are millions of dollars in unsold inventory within the retail network of hearth retailers at the end of ea ch year. Not all of this, of course, would be potenti ally stranded inventory, but a substantial part of it could be, depending on how the various parts of the value chain react to the upcoming revisions to the NSPS. In short, there is real potential for devastating e conomic injury to the hearth industry here, which m ust be addressed with appropriate sell-through relief p rovisions.

In addition, if showroom models were factored in, t he cost of stranded inventory would be even higher. Retailers use a combination of static disp lays and burning models to demonstrate the features and benefits of the products they sell. Display cr edits and burn credits are provided as a financial incentive to purchase and display these models. Di splay stoves have proven to be the most important
sales tool a retailer has. The retailer needs a va riety of stoves, including styling options, various sizes and heat outputs, price points and specific install ation related options – like clearances and hearth pad requirements – to meet market demand in as many cat egories of stoves as possible. For every model on the showroom floor, there needs to be inventory somewhere in the system so that product can be made, sold and installed in a reasonable period of time after purchase. The number of wood and pellet burning stoves on display can be significant. In t he Northeast, for instance, of the 7 retailers surv eyed the lowest number of units on display was 12 while one of the largest dealers had 49 units on display. The average for the 7 retailers surveyed was just o ver 30 stoves per showroom. (Four of the dealers h ad
more than 1 location and this was factored in to de termine average number of stoves per showroom).
Refer to Table 4 Showroom Stoves and Burn Models fo r the number of showroom and burn model stoves of the HPBA retailers surveyed.

2 The weighted average retail price for free-standin g woodstoves is $2120 according to the CostEffectiveness Analysis of Alternative New Source Pe rformance Standards for Woodstoves done by the Hearth, Patio and Barbecue Association on March 20, 2014. See Cost-Effectiveness Analysis of
Alternative Woodstove New Source Performance Standa rds, NERA Economic Consulting, May 2014, Appendix B.Page 17 of 26

The goal for most retailers is to have something fo r everyone without using too much valuable showroom space for very slow movers. In any given showroom there will be the hot sellers, medium
sellers and slow movers. What sells is determined by market conditions in a given year as well as the preferences and skill of the sales people. If the market is soft for a given product, no amount of salesmanship can turn a slow mover into a hot selle r.

Retailers have to balance the benefits of buying i nventory with the costs of keeping inventory. On the plus side, due to the programs offered by ma nufacturers and distributors, retailers make a greater margin the more they buy – this helps their bottom lines. Early buy programs usually start at the end of the selling season or at the beginning of th e slow season however you look at it. Most are launched the first quarter of the year and have dea dlines for purchasing by sometime in March, April o r May. These programs allow the dealer to have stove s to sell during the weak sales months of April, May, June, and July. Having inventory also allows retailers and dealers to shorten their lead times a nd allows them to capture more cash and carry customer s and lock in fixed and timely installation dates s o that customers will not look elsewhere. Showing a variety of stoves in their showrooms is also a bene fit – it allows retailers to have something for every s egment of the market. On the negative side, invento ry ties up money that could be used to support cash fl ow, make store improvements, hire more staff or buy more of the better selling models.

The HPBA survey confirmed that there are retailers who are keeping substantial inventories and there are retailers who only buy product when they need it. Despite that variance, many retailers hav e unsold inventory at the end of the season. And all dealers have showroom models and burn displays that they need to purchase and use to demonstrate f eatures and benefits of the products they sell. An y mandate that would limit the time a retailer would have to sell previously certified or otherwise approved and previously unregulated inventory would have negative financial impacts. For retailers carrying larger inventories, the consequences would be extreme. For others who maintain smaller inventories the impact would be less, but even for these retailers there would be negative impacts whe n you factor in the need to sell showroom display sto ves. In sum, it is clear that there is high risk t o the retailer, and potential for great financial loses i f these stoves had to be sold in a short period of time –
such as in 6 months after the final rule becomes ef fective (or by the time the rule becomes effective if the appliance is regulated under proposed new Subpa rt QQQQ).

V. There Are A Variety of Other Factors That Influe nce Distributor And Retailer Buying Decisions

Due to the forecast and inventory difficulties face d by manufacturers, distributors and retailers, HPBA believes that EPA should adopt an unlimited se ll-through period for previously approved appliances under the proposed rule and a minimum of a 2-year sell-through period for previously unregulated appliances to alleviate undue harm to r etailers. That benefit comes with a correspondingl y low cost to the environment for either type of appl iance because retailers will not be able to stockpi le previously approved (or previously unregulated) app liances in light of restrictive credit limits, invo ice due dates, space constraints, seasonal consideratio ns, the limited effect of discounts, and the fact t hat retailers must ensure that they are able to service the appliances they sell.

A. Retailers Must Balance Stove Purchases With Cred it Limits

Credit limits are one of the important reasons that retailers and distributors are less likely to stock up in any great quantity in advance of the co mpliance deadline dates on models that do not meetPage 18 of 26

the new NSPS requirements. Although distributors and retailers take advantage of volume purchases, early buy discounts, lead time discounts and other incentive programs offered by manufacturers because they need inventory to sell in the off-seas on when cash flow is low, they need the extra margi n dollars they get from making quantity purchases so that they can have a 40% or more average gross margin, and, by purchasing in volume, they are show ing their commitment to the manufacturer so the manufacturer will not appoint another retailer in t heir area. The pressures to buy inventory, however,
need to be balanced with the retailer or distributo r’s credit limits, which limit how much a retailer and distributor can increase their inventory. While normal in-season credit limits are often ig nored for early buy programs because manufacturers need to fill up their distribution pipelines and are willing to tak e greater risks to do this, there are always limits p laced on the amount of product that can be purchase d.

Distributors have similar credit limit restraints. One distributor indicated that his bank would only finance 50% of the new inventory purchased. F or another distributor the bank limited purchases t o 50% of the saleable inventory on his books.

In addition to credit limits placed on retailers by manufacturers and distributors, the retailer also has limits on the line of credit they have with the ir local banks. Those limits restrict the amount o f inventory of previously certified or otherwise appr oved and previously unregulated models that retaile rs could stockpile in advance of effective dates in th e final rule.

B. Invoice Due Dates Also Limit Retailer Purchases

All early buy programs have specific dates when the money is due to the manufacturer. Sometimes it may be a specific date just prior to t he start of the prime selling season and in other c ases it might be payments spread out over a 3 or 4 month period during prime season. No retailer will buy stoves that they don’t think the will be unable to pay for when the payment is due. This is a very important limiting factor that often prevents retai lers from making larger purchases in order to gain greater margins. If payments are late, the retaile r’s credit limit will go down. If late payments ar e not made in a reasonable period of time, the retailer i s put on credit hold and they will be unable to get stoves or parts and accessories that they need to c ontinue selling stoves and remain viable as a
business.

C. Retailers Face Space Limitations

Most distributors and retailers have a limited amou nt of storage space and as a result are careful how much inventory they buy at any one time . Space is needed for not just the appliances but is also necessary for the decorative and installation accessories that are required for these appliances. Typical accessories include decorative grills, heat shields, hearth pads, fire starters, fireplace glo ves and paint, among many others. In addition, there is a need for storing the venting products that are required for both cash and carry customers and inst allation crews and these include Class A prefabricated chimneys, and chimney connectors and chimney caps.

D. Seasonality And Buying Patterns

The seasonality of the hearth business governs many of the retailers’ buying decisions. Offseason buying is limited to showroom models (usu ally at discounted prices or special terms) and early buy purchases where the money is due starting in early fall. In theory, the number of stoves purchased in a traditional early program should be about equal to the number of stoves needed to carryPage 19 of 26

the retailer through the weak months of April, May, June and July to the start of the season which is usually in August, but this is not always the case. Warm late summer and early fall weather can delay the start of the selling season. Retailers will be gin to take in more inventory as the season starts and they try to keep their inventories balanced so that they have more of their best-selling models in sto ck in anticipation of sales in October, November and D ecember.

The seasonal nature of the business is significant. If stove models become non-compliant as the market is waning in the spring, then there will be at least four months – April, May, Jun and July – before the prime selling season begins in August. There are also timing differences which have been observed from region to region. Generally the sell ing season in the Northeast season starts first, wh ile California it starts last. The seasonality of the business enhances the risk to retailers should the NSPS mandate only a certain number of months to sell off non-compliant inventory. The offseason months of April, May, June and July are usually are slow sell ing months and sales events used to stimulate sales during these offseason periods often don’t work. R etailers need multiple peak selling seasons (August through March) to be certain that all of their pote ntially stranded inventory will be sold.

E. Retailers Have A Limited Ability To Use Discount s To Move Products

Retailers also will not be likely to stockpile prev iously approved appliances prior to the effective dates of the final rule because they have only a li mited ability to use discounts to move products. Manufacturers discourage heavy discounting because the discounting retailer will draw sales from the surrounding retailers. One company has stated in w riting that a retailer can discount up to 10% but
cannot combine this discount with other offers. Th is is another reason why it makes no sense for a retailer to buy quantities of stoves in excess of t ypical amounts; they may not be able to sell them cheaply enough to entice buyers, they lose money wh en they sell them at too deep a discount and they may get stuck with stoves that don’t sell at the sp ecial sales.

In addition, discounts don’t always work to reduce inventory. For example, after the pellet stove boom in 2008, sales died so quickly that dist ributors and retailers had a lot of excess inventor y. Some retailers were offering two free tons of pelle ts (a $500 value) with each stove purchase and even with this incentive, customers were not buying.

F. Retailers Must Be Able To Service The Appliances That They Sell

Finally, the service area size that retailers must cover limits retailer’s market area and the size of retailer’s inventory. Retailers are required to se rvice what they sell. Service can be in the form o f free site visits within a certain period after the sale to help customers with operational questions and performance issues such as smoking problems caused by improper chimney draft and low heat issues
due to the size and moisture content of the fuel. Service work may also be warranty related; a stove part may break, or some part may be missing. Manuf acturers rarely reimburse retailers enough to cover the cost of the repair. In addition, drive time an d mileage expenses are rarely covered under the manufacturer’s warranty reimbursement. A third typ e of service work is work that is performed outside of the warranty period. Here retailers can charge more, but not so much that their customers go elsewhere to get the work done at a lower cost. Th e reason why these 3 types of service have the effe ct of limiting market areas for retailers is that it i s too expensive to service customers outside a give n distance or drive time from their stores. This is another reason why it makes no sense for retailers to buy a large number of soon-to-be non-compliant stov es in hopes of flooding the market – the market is only so large for a retailer because they cannot ma ke money servicing the outlying areas.Page 20 of 26

Credit limits, invoice due dates, space constraints , seasonality, the limited utility of discounts, and the fact that retailers may only sell what they can service all are limiting factors for distribut ors and retailers when it comes to inventory purchases. Th ese financial constraints will be a factor in distributors and retailers decisions to buy non-com pliant stoves in advance of looming deadlines for s ellthrough. As a result, while appropriate sell-throu gh relief period would greatly benefit retailers to ensure that they are not left with stranded invento ry after the effective dates in the final rule, pro viding unlimited time to sell previously certified invento ry or a 2-year period for previously unregulated appliances will not cause retailers to stockpile an unusually high number of appliances.

VI. Distributors and Retailers Need Adequate Time To Avoid Standing Inventory.

A. How Much Time Is Needed To Sell Existing Invento ries?

In the HPBA Hearth Retailers Survey, retailers were questioned as to how much time they needed to sell best-selling, moderate selling and s low moving appliances. The majority of retailers f elt that they needed 12 to 24 months to sell moderate a nd slow selling inventory. It has to be assumed that for dealers specifying 12 months for a moderat ely or slow selling model that they mean 1 complete selling season plus time at the beginning or end of the season depending on when the stove could no longer be sold. A retailer specifying 24 months me ans they need 2 complete selling seasons. Four of the retailers felt that they needed much more time than 24 monthsPage 22 of 26

Retailers’ reluctance to buy models that are not g iven an unlimited sell-through period will have profound financial impacts on appliance manufacture rs. Many retailers will stop buying appliances the y are not absolutely sure that they can sell, and the manufacturers will lose the revenue from the sales of these stoves; revenue that is needed to fund the de sign, testing and the launch costs for new NSPS compliant models. It has been reported that this i s already happening in the warm air furnace market and will be exacerbated unless EPA grants adequate sell-through relief.

B. Dealers Will Be Hesitant To Purchase Models That May Become Stranded Inventory Under An Inadequate Sell-Through Period

The uncertainty surrounding the proposed changes to the NSPS will affect retailer buying behavior unless EPA grants retailers a sufficient s ell-through provision to allow them to clear invent ory. Retailers are plainly concerned with being stuck wi th stranded inventory. In the survey, retailers we re asked if they knew the date that a given appliance could no longer be manufactured, how would this affect their purchase of the appliance? As Table 7 demonstrates, 15 of the 26 retailers surveyed (ove r 57%) indicated that they would not buy, would not k eep inventory on hand, would close out inventory or would hesitate in buying depending on how long t hey could sell the appliance.Page 23 of 26

Table 7: Buying Attitudes Related to Existing Mode ls

VII. Conclusion And Recommendation

As the retailer survey demonstrates, the revised N SPS should offer distributors and retailers certainty, not confusion, so that that distributors and retailers can best manage their buying choices and disposition of held-over inventory. Retailers alre ady face substantial uncertainty in determining whi ch and how many models to stock, and the proposed NSPS revisions only increase that uncertainty. The 6-Page 24 of 26

month sell-through provision for current EPA certif ied models (with no sell-through for appliances tha t EPA proposes to regulate under new Subpart QQQQ) wi ll have a chilling impact across the entire industry. Retailers will stop buying products so t hey don’t get stuck with unsellable inventory at a time when the manufacturers need the revenue to support the substantial product development effort needed to bring their product lines into compliance with the much more stringent standards EPA has proposed.

For these reasons, HPBA urges EPA to adopt an unlim ited sell-through provision for all previously approved appliances. Dealers and distri butors need adequate time to clear discontinued models without imposing extreme financial consequen ces to their businesses and manufacturers need the regulatory scheme to provide adequate assurance s in this regard to retailers and distributors, who will not even purchase models involving significant risk that inventory will become stranded by regulatory restrictions on sell dates. For previou sly approved models, avoiding any stranded inventor y will have de minimus environmental effects. The m inor trade-off of the impact to the environment from products already meeting emission limits far o utweigh the dire financial risks to manufacturers, small-business distributors and retailers and signi ficant profit loss if these products reach a point where they can no longer be sold and so should be a simpl e policy choice for EPA.

Manufacturers, distributors and retailers will suff er these same economic consequences for discontinued products which were not previously app roved. EPA recognized this in establishing a 2 yea r sell-through relief provision when the current NSPS was promulgated, 40 C.F.R. § 60.530(a), and needs to follow this precedent and establish similar sell -through provisions in the final NSPS under Subpart QQQQ. Failing to do so would cause unnecessary har m to these small businesses that could easily be alleviated with adequate sell-through provisions.Page 25 of 26

Curriculum Vitae – Charles Page, Homewarmth, Inc. d /b/a Jumpstart Marketing

Total Years in the Hearth Industry: 37 years

Companies and Dates of Affiliation:

• 1977 Jøtul Stoves: Technical Advisor

• 1978 Southport Stoves: Customer Service Manager

• 1979 - 1986 Vermont Castings: Technical Product Ma nager, R & D Coordinator, New Product Manager & Fireplace Product Manager

• 1987 - 1992 Thermal Energy Storage Systems (TESS Fi replaces): Director of Product Development and President

• 1992 Protech Systems (Ventinox): Vice President of Marketing

• 1993 JumpStart Marketing (Business Marketing Consu lting): Owner & President

• 1995 - 2010 Harman Stove Company: Northeastern Man ufacturers Representative

• 2011- present HomeWarmth Inc.: Northeastern Manufa cturers Representative for Industrial Chimney Company

Positions Held and Description of Responsibilities:

• Kristia Associates –Jøtul: Wrote and produced the first comprehensive training and repair manual for Jøtul product line of wood burning stove s.

• Southport Stoves - As technical director and customer service manager was responsible for development of technical support materials and prod uct training for three brands of European coal and wood stoves – Surdiac, Morsø and Efel.

• Vermont Castings – Held various positions in Research & Development, r esponsible for obtaining laboratory and code group listings, assis ted in the development of many Vermont Castings appliances and related accessories. Provi ded technical support and product training to dealer network in North America and Europe includin g writing installation, operations and repair manuals. Marketing functions included forec asting and sales analysis, product planning, new product specs and feasibility analysis, and pro duct launch coordination.

• Thermal Energy Storage Systems -Developed new models and a viable product line of modular masonry fireplaces, developed national advertising and marketing programs, established dealer network and consumer direct sales promotions for TE SS Inc.

• Protech Systems - Developed and implemented new company wide strate gic plan. Coordinated all aspects of marketing and sales, including devel opment of dealer and distributor programs, marketing materials, advertising and inquiry tracki ng systems.

• Jumpstart Marketing - Provided wide range of marketing and advertising service to manufacturers and service companies. Services inclu ded market surveys, public relations and advertising, brochures, promotional materials and s ales training.

• Harman Stove Company - As Northeastern Factory Representative developed strategy to build dealer network throughout New England and New York and took sales from $30,000 to over 19 million per year. Wrote marketing materials used n ationally. Worked closely with owner and R&D to develop new products for the retail market. Built training facility to educate dealers on installation, troubleshooting and repair of Harman stoves. Provided technical support and marketing assistance to network of 100 dealers.

• HomeWarmth Inc. - Northeast sales representative for ICC Chimney – Excel chimney, RSF and Renaissance Fireplaces. Responsible for recruiting dealers in New England, New York andPage 26 of 26

Eastern PA. As liaison between dealers and R&D, re sponsible for developing many new innovative venting components.

Significant Accomplishments:

• Developed first of its kind high school curriculum on wood heating and alternative energy that received national recognition. At Vermont Castings:

• Designed and patented system for installing stoves into fireplaces.

• Wrote test standard for domestic hot water heaters in solid fuel burning appliances adopted by

ULC.

• Specified and assisted in design of two fireplace i nserts with a European manufacturer for the European market.

At TESS:

• Redesigned and patented a system for renovating hea t circulating fireplaces.

• Supervised the design and building of state of the art testing laboratory for masonry fireplaces. Used lab to obtain independent lab listings for TES S fireplace models.

• Launched two new fireplace models.

At Harman:

• National Sales Rep for 15 consecutive years.

• Instrumental in making Harman the number one pellet stove line in the US market.

• Assisted in design of several VESTA award winning p roducts.

Trade and Professional Group Affiliations and Posit ions Held

• Board of Directors – Wood Heating Alliance, 1987 an d 1988

• WHA Government Relations Committee, 1987 and 1988

• Member – Fireplace Manufacturer’s Caucus (WHA)

• Board of Directors and Treasurer – Hearth Education Foundation – Served on Board for approximately 8 years.

• Secretary for Task Group writing standards for the construction of masonry heaters – American Society for Testing and Materials (ASTM E1602)

• Member of NEHPBA for past 17 years