Q1 2020 Earnings Call

Good morning, and welcome to the Flexsteel industries first quarter fiscal year 2020, <unk> earnings Conference call.

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Please note. This event is being recorded I would now like turn the conference over to Dawn encased Investor Relations for Flex Steel industries. Please go ahead.

Thank you and welcome to today's call to discuss like still industries first quarter of fiscal year 2020, <unk> financial results.

It's really switch we issued after market close yesterday Monday October 28 is available on the Investor Relations section of our website Www, Flexsteel dotcom and didn't news and events.

I'm here today with Jerry did Merrill Chief Executive Officer, and markets Hamilton, Chief Financial Officer on today's call management will provide prepared remarks, and then we will open the call to your question before we begin I would like to remind you that the comments on today's call will include forward looking statements, which can be identified by the U.S.

The words, such as estimate anticipate expects and similar phrases forward looking statements by their nature involved estimates projections goals forecasts and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward looking stay.

Such risks and uncertainties include but are not limited to those that are described in our most recent annual report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q , and other FCC filings as applicable these.

Forward looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Additionally management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures the press.

At least available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the gap to non-GAAP measures.

And with that I'd like to turn the call over to Jerry get married Jerry.

Good morning, and thank you for joining us today.

Since our fourth quarter and fiscal 2019 yearend call. We've been busy executing the restructuring plan that we set forth last April to drive transformation and business simplification.

During the first quarter fiscal year 2020, we continue to make progress on all fronts.

That said the only materially better to report in quarter, one what's the completed sale of the Riverside, California facility and other capital assets for net proceeds of 18.9 million. This monetization was a timely and important capital infusion that we.

We'll use to continue driving flexsteel transformation.

As I mentioned on our last call we have been very successful in attracting top talent to our organization for mission critical positions across the company.

This quarter, we have also strengthen our board of directors and I'm very pleased to welcome to new members, who had impressive credential and major areas of importance to us.

Charlie Idle has served as CEO .

Oh, and chairman of for public companies as well as nine years and leadership roles at Simmons betting company.

It's proven leadership change agent and deep understanding of our industry will be valuable asset to us.

Masking S is well respected as an innovator.

Operator, and strategic and this digital consumer and retail industries.

'cause acknowledge leadership in the ecommerce space is especially relevant to guiding our strategy in this important channel.

Mats experiences include being a walmarts global leadership team in its E Commerce U.S. Division.

Chief strategy officer at urban Outfitters.

Having the development of its E Commerce channel.

Well it now serving as interim chairman and CEO of Lucky brand Dungarees.

As you can imagine there's a tremendous competition in the corporate world to attract top board members.

So we're very excited that Charlie and Matt could see flexsteel potential and contribute their talents and insight to transforming our company.

We're very confident that we're on the right path with the right people.

Even with extremely strong headwinds that meet our industry are facing with our high exposure to China. The 25% care is greatly pressure in both our top and bottom line.

Outside of our self driven initiative, where we continue to make good progress.

Unfortunately, we are in reactive mode on tariff.

We have a plan, but it will take some time to bear fruit.

Like others in our industry, we want to move business out of China.

This has resulted in a stampede, the Vietnam and to a lesser degree to other south East Asian countries, causing labor shortages stresses on distribution and logistics as well as basic infrastructure capabilities such as ports in highways.

This challenge is the speed of execution and watched flexsteel can pivot its supply chain without putting our customers business at risk of delivery disruption or potential quality issues.

All that said, we will continue to be as aggressive as possible to reposition the supply chain.

With our China Airport volume down approximately 18% in units in the quarter. The terror has caused unmistakable damage to our business.

Switching gears to E Commerce, we're seeing positive signs of recovery in our E. Commerce channel as sales were up over 5% sequentially in the first quarter versus the fourth quarter of last year.

This is on the back of a fourth quarter, which saw an approximate 24% increase in sales sequentially over the third quarter.

There's still work to unlock the full potential this important channel and I want to see positive sequential comp turning to positive year over year comp.

Before I will feel like we're back on track.

In the first quarter, we've been working out a lot of moving pieces that will soon fall into place as I said earlier, we'll be able to discuss them in more detail as they unfold, but rest assured we're going begun broaden fast to make them happen.

I will turn the call over to markets to review, our financial results and give you some more color on operation.

Thank you Gerry.

As Jerry just discussed our business environment remained very challenging in the first quarter. The implementation of the China tariff continues to have an adverse impact on our financial results.

As we discussed before Flexsteel has significant exposure with approximately 42% as our sales sourced from China.

Net sales decreased 11.6% to 100 million during the first quarter, where the residential business accounting for the biggest shortfall due to continued soft demand related to the price increases imposed by the 25% tariff.

Also our planned exit from the two can track businesses lines.

Custom design hospitality commercial office contributed to lower sales.

Residential net sales declined 7.7% 88.6 million compared with a year ago quarter.

Home furnishings products represented approximately 86% of the residential net sales in the first quarter and were down 8.1% largely due to the tariff impact.

Home furnishings products imported from China, and consequently, subject to the tariff contracted 16% and net sales and 18% in units this quarter, representing approximately 95% or the overall contraction in residential lot sales.

We did see positive comps in our North American manufacturer requires a motion products of 27% 39% respectively.

However, manufactured recliners and motion products represent less than 20% of residential net sales.

Our own styles products distributed primarily through e-commerce decreased 5% to 11.6 million versus a year ago quarter.

On a positive note, we're seeing an improving trend with products sold through this channel as they grew approximately 5.5% on a sequential basis.

As Gary noted this is the second quarter in a row of sequential growth in E Commerce channel.

Contract net sales were down 5.7 million of which 4.3 million was primarily driven by our decision to exit the commercial office and custom design hospitality product lines, coupled with a decline in our vehicle seating and health care products due to softer demand.

We reported net income of $9.6 million or $1.17 per share compared to net income of 1.3 million or 16 cents per diluted share in the first quarter last year. Net income included 6 million a restructuring expense primarily for facility closures professional fees and employee termination costs related to the transformation program.

Ram and a 200000 dollar inventory impairment related to the restructuring.

Reported net income also included a net gain of 18.9 million from the silver Riverside property. Excluding these one time items that totaled $12.8 million non-GAAP . Adjusted net income was 8000 or $0 per diluted share compared with non-GAAP adjusted net income of $2.3 million or 29 cents per diluted share in the.

Year ago quarter.

Turning now to profitability results for the quarter gross margin as a percent of net sales in the first quarter was 70.2% versus reported 90.2% in the prior year quarter.

The 200 basis point decline was primarily driven by the following a decline of 220 basis points due to lower volume and product mix a decline of 40 basis points related to depreciation for Dubuque manufacturing plant.

The decline of 40 basis points in foreign currency exchange, which was partially offset by an increase in our labor productivity of 110 basis points for the consolidation of our manufacturing plants as part of our ongoing restructuring plan.

Selling general administrative expenses decreased $2.7 million to $17.5 million.

In the prior year quarter, we incurred a onetime severance expense of 1.3 million related to the retirement of our former CEO .

In addition restructuring actions taken during the fourth quarter of 2018 drove point 8 million of savings in the first quarter compared with a year ago period.

As a percentage of net sales I've seen a was 17.4% compared with 17.8% last year.

Regarding taxes income tax expense was $3.2 million or an effective tax rate of 25.2% during the first quarter compared to tax expense, a point $5 million and the comparable period or an effective tax rate of 27%.

Now turning to the balance sheet during the first quarter net cash used in operating activities was 3.3 million and we ended the quarter with 36.2 million in cash and cash equivalents up from 22.2 million at the ended the fourth quarter.

Working capital current assets mines current liabilities.

At September Thirtyth was $125.8 million compared to $118.2 million at the end of the fourth quarter.

The increase in working capital was primarily attributed to proceeds from the silver Riverside, California facility, which drove the increase in cash cash equivalents of approximately 14 million.

This was partially offset by decline and other current assets and trade receivables of $9.3 million and a decline of $4 million in accounts payable largely due to restructuring related expenses accrued at the end of the fiscal year and paid in the first quarter.

Capital expenditures for the first quarter were zero point $5 million as we mentioned previously we expect annualized capex to be in the range of $5 million to $6 million.

The company currently maintains 20 million on a revolver of which 80.7 million remains available at September Thirtyth.

As we began the second quarter, it's all about execution, we have the right talent in place to execute our transformation plan. The remain fully committed to returning flexsteel to profitable growth and long term value creation with that I'll open the call for questions.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

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The first question today comes from JP Morgan of Global value Investment Corporation. Please go ahead.

Okay.

And gentlemen, congratulations on the progress you've made it looks like things are moving quicker pace.

Thanks, Jay Jerry said that.

You said that you discuss additional details on your restructuring plan is events unfold given the speed at which you are progressing on this plan do you anticipate nudging progress on a quarterly basis or would we expect some sort of interim announcement.

Yes. Good question JP right now the plan is that we'll definitely come back to you each quarter.

And give a detailed.

Plan of where we're at where we're going if there is something that major obviously, we come out but at this at this point in time, our plan is to come out just during the quarterly reviews.

Okay.

Can you provide some more detail on your customers reactions to the new pricing paradigm, given tariffs what might be done.

Two.

Being done to mitigate the affected the tariffs either from the.

By year end or from the customer end.

And then maybe elaborate on some of the bright spots that you'd mentioned and how we might expect customer behaviors going forward.

Yeah, I'll do that JP. So we just got done and I think I met with Jeff who works at their from also down at high point, which is the show. That's every six months and others. We introduced a lot of new product that will be coming from other places the sites over in China. So obviously, there would be no Tara.

And markets. His prepared comments you heard us talk a lot about about what's happened to us so far but going forward. What we think we can begin to mitigate a lot of that of course, there's a lot of port congestion and things like that that are making a little bit slower.

From a pricing standpoint, we pretty well being able to secure our slots going forward, albeit the others. So short term.

Issues will have just because of oh, the tariffs in there, but going forward, our plans or that the tariffs will may well have a lot less exposure to us now that's assuming they stay at 25% of course as you know they can go to 30 to 50 whatever on of course, we hope they all go down but at the end of the day, we'll deal with those as they come.

Our customers if you really the big thing we saw at the high point show is that everybody really come out with what we'll call nine tariff pricing. So if you had gone guar showroom you would've seen us not mentioned tariffs at all this is a new price. These are the new slots and our customers were very comfortable about it's we're pretty excited.

What about Oh, we for the most part well have that behind is here and then next six to 12 months.

Great and then finally can you provide an update on your property footprint, particularly as it relates to properties that Youve previously announced were being closed or consolidated and the transition of your facility.

Sure Marcus you want to go to handle that yeah. So JP. We've as you know we've sold the Riverside property in the quarter. So that's that's now gone a we are.

Trying to sell or Harrison, Arkansas facility.

We've had some interest in that and that property and then we're also selling a one of our warehouses and Humminbird, Indiana, which we've also had some interesting nothing nothing confirmed yet or no no offers on it yet, but but some interest.

In terms of the Dubuque. The legacy debuted property, it's in the process of being torn down and yeah weve they've they've already turned down you know I would say probably 50 to 100000 square feet of the facility in future calls over 700000 square foot facility. So we're in the prop process of Oh remediation.

That site the plan at this point in time is to get the facility down to the ground.

You know and and a and then we'll we'll decided what we do next after we get to that point.

Great. Thank you for your time.

Thanks Avi.

Again, if you haven't question. Please press Star then one.

Again, it is dot one to ask a question.

Oh no further questions. This concludes our question and answer session I would like to turn the conference back over to Jerry <unk> for any closing remarks.

Thank you very much I appreciate those that are listening to the call today I want to thank JP for coming out of asking some questions.

We feel we are the right people in place and a clear direction to continue our journey together to Reenergize, our company and accomplish our goals are better serving our customers generating profitable growth and improving shareholder returns.

I want to thank our board of directors for their guidance all our employees for their contributions that our transformation. We are most grateful to the support of our shareholders I look forward to updating you on our progress next quarter. Thanks again.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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