Q2 2020 Earnings Call
Yes.
Good morning, and welcome to the Flexsteel Industries second quarter of fiscal year 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may use the stars and the one on your touchtone phone to withdraw your question, please press * then two, please note this event is being recorded. I would now like to turn the conference over to Germany case investor relations for Flexsteel Industries, please go ahead.
Thank you and welcome to today's call to discuss Flexsteel Industries second quarter of fiscal year 2020 Financial results our earnings release which we issued after market close. Yes, Thursday Monday, January 27th is available on the investor relations section of our website at Flexsteel under news and events. I'm here today with Jerry Dittmer chief executive officer and Marcus Hamilton Chief Financial Officer on today's call management will provide prepared remarks and then we'll open the call to your questions before we begin. I would like to remind you that the comments on today's call will be will include forward-looking statements which can be identified by the use of such words as estimate anticipate expect and similar phrases or looking statements by their nature involve estimates projections goals for cats and assumptions and are subject to risk and uncertainties that could cause actual results or outcomes to differ materially wage.
From those Express and the 4th.
I'm looking statements such risk 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 another sec filings as applicable these forward-looking statements speak only as of the date of this conference call and should not be relied upon as legal actions of future events additionally management may also refer to non-GAAP measures which are intended to supplement but not substitute for the most directly comparable gaap measures the press release available on the website contains the financial measure, it contains the financial and other quantitative information to be discussed today as well as the reconciliation wage Gap to non-GAAP measures and with that. I'd like to turn the call over to Jerry.
Good morning, and thank you for joining us today at the beginning of January . I celebrated my one year anniversary has Flexsteel CEO .
The first year being on board we assess the organizational and operational effectiveness of the company and laid out a comprehensive transformational plan should get the supply chain and operations working well.
Additionally, we've completed a significant Talent injection of leadership in subject matter experts into the organization from sales engineering and product development to supply ships change the it since our first announcement last may we made Solid progress on the restructuring plan and the six work strings we identify and we are realizing benefit of these activities in our financial and our business.
Kelly supply chain and operations on the right track is important, but without growth the company cannot win with confidence. Our restructuring program execution is proceeding plan. We're increasing our focus on growth.
We continue to make progress redeveloping our e-commerce Channel as evidenced by our strong growth here topping 30% in the second quarter. This was the first positive Europe comparative in the e-commerce Channel since I joined seen a strong year-over-year comp after a couple of quarters of strong sequential growth is a nice proof point that we were getting it right in our momentum is building in this channel.
we've also
I'm busy moving our largest volume import product groups from China to other parts of Southeast Asia and it begun rolling back prices on these groups as we transition out of the Chinatown story. We saw Adam and rebound almost instantly on these products when the pricing rollbacks hit the marketplace.
We will continue to work our largest volume groups in the Vietnam as soon as possible and ensure that sourced new product introductions are launched from this region going forward.
Improving our service levels to the customers and reducing our lead times and key categories serves as another Catalyst to restarting our growth engine while our cost is serve as increased wage reduced lead times remains one of our top initiative and we are seeing results. It takes consistent delivery at reduced lead times over an extended time. For performance to be recognized and positively impact point of purchase the stationary category. Our largest domestic category still needs to prove out to customers right now. We are still seeing a drag on demand that resulted in stationery products being down twelve and half percent in the first half of the year on the other hand. Our domestic recliner in motion groups, We have not had the same lead time Performance challenges continue to contribute very strong results up 24% and 33% respectively in the first half off.
Year Edition
We are overhauling our new product introduction process using customer insights and building a robust product pipeline for future introductions in all our core categories to further accelerate these growth opportunities in short. Our priorities are clear both the top line with focus in our core categories and channeled by improve our customer experience expanding distribution execute our 6 work streams and build a disciplined approach to product development and lifecycle management. We expect folks and execution on these priorities and turn our sales back to a growth to directory and improve our profitability in the coming quarters. I'm going to turn the call over to Marcus provide a more in-depth analysis of the same results Marcus.
Thank you, Jerry and good morning. Net sales decreased 13% to 103 million or a decline of approximately fifteen million during the second quarter. However, it's noteworthy that we saw an increase of 2.6% from the first quarter exiting the commercial office and custom-designed Hospitality products accounted for 7.3 million of the decline from the second quarter of fiscal 2019. Our office is domestic product group stationary delivered disappointing second-quarter results with sales off 15.3% as Jerry discussed We Believe with our improved lead times in this category. We should begin with a recovery over the next couple of quarters on a positive note. We were very pleased with our continued strong performance in our domestic recliners in motion groups, which were up 19.4 and 27.2% respectively in the quarter.
We're also very pleased.
So they're ready to assemble Furniture sold under the home Styles brand and distributed primarily through the e-commerce Channel reported up 30.1% in the quarter and delivered 39.1% growth over the first quarter of 2020. This puts are ready to assemble category up 12.6% through the first half of fiscal 2020. I'd like to turn briefly to contract performance. We expect the wind down remaining custom-designed Hospitality orders to be completed by the end of this fiscal year the wind down accounts for nearly three-quarters of our overall sales contraction and contract in the quarter and through the first six months.
Vehicle seating products also contributed to the sales decline down 22% in the quarter and 14% year-to-date for context our vehicle seating products are sold almost exclusively to premium glossy motorhome manufacturers. These products are manufactured in our Dubuque Iowa manufacturing plant with a smaller portion manufacturing are Starkville Mississippi plan representing approximately 6% off or did they tell it's important to note. The line is cyclical in nature and in our opinion has neared or perhaps across the peak demand through the cycle. Also this product line carries a fair bit of complexity strict Regulatory Compliance requirements and specialized engineering support to be successful in the automotive space as with all all product categories. We continue to evaluate the long-term growth and prosperity potential of each product line within our portfolio relative to Resource requirements in other opportunities.
Turning the profitability reported a net loss of five point four million dollars or $0.68 per share compared to net income of 1.6 million dollars or Twenty cents per diluted share in the second quarter last year with the reported net loss included a 5.1 million dollar pre tax restructuring expense from some in some other immaterial charges related to inventory impairment in a small gain-on-sale off some assets related to restructuring excluding these items the company reported in adjusted net loss of 1.5 million or nineteen cents per share. Please refer to the non-GAAP disclosure included in our fiscal second-quarter earnings, press release for more information on the calculation of our adjusted net loss.
Gross margin as a percent of net sales in the second quarter declined 250 basis points to 15.6% versus 18.1% in the prior quarter. We took advantage of an expected strong selling seem to lean in on holiday season promotions to take back share gross sales and moving inventory across both the e-commerce and brick-and-mortar channels this activity accounted for approximately 90 basis points off of depression in the quarter is part of our customer and product profitability initiative. We started rationalizing products in the portfolio, which resulted in an inventory valuation allowance further pressuring margins in the corner by approximately 150 basis points, effectively managing the product lifecycle rationalizing the products cutting off the tail and simplifying our product offering is key to improving product profitability for the long-term additionally as part of our turnaround strategy. The operations supply chain teams have been committed to improving the customer experience through reduced lead times resulting in approximately 80 basis points of increased costs money.
To mitigate this cost increase with our Network.
Optimization workstream selling General administrative expenses decreased 1.3 million to 18.1 million as you will recall on the second quarter of the prior year. We had approximately 700,000 of one-time expenses related to the CEO transition and pleased to report we've made tremendous progress on delivering the restructuring savings associated with the optimization workstream. This progress was partially offset wage salaries depreciation charges associated with our Erp transition to the new scope and higher incentive compensation.
We reported at one point six million dollar income tax benefit or an effective rate of 22.8% during the second quarter compared to tax expense of zero point six million in the comparable period or an effective tax rate of 27.5%
turning to the balance sheet. We had a very good quarter managing the balance sheet and generated 4.1 million operating cash including restructuring payments of 5.3 million within the quarter. Our progress was damaged by an on purpose plan to take it full advantage of the holiday season and strong consumer sediment to lean deeper into our Channels with smart and targeted promotions to reduce the inventory and Take Shape Market Chef key categories where we were confident in our ability to execute
working capital
Current assets. My my current liabilities at December 31st was 121 million compared to 118.2 million as of June 30th 2019 the increase in working off of 15.1 million dollar increase in cash and cash of Cleveland's primarily due to the nineteen point seven million dollars in proceeds from the Riverside property sale recorded in the first quarter of fiscal 2018.
And an increase in trade receivables of 3.4 million offset by an increase in accounts payable of two million a decline in inventory of 7.1 million and a decline in other current assets of 6.2 million primarily due to the collection of income tax refund.
Capital expenditures in the second quarter where 1.3 million we expect annualized capex to be in the range of 4 to 5 million the company currently maintains $20 on a revolver of which 18.7 a remained available at December 31st, 2019. This concludes our prepared remarks on the quarter results. And now I'll turn the call back to Jerry who is at the Las Vegas furniture market for his observations from the chef following that will open the call for your questions.
Thanks Marcus. We're having a robust traffic and great discussions in placements with our Retail Partners in showing them are enhanced winning assortment. We are continuing to discuss the same our development and refinement of our seamless retail experience between digital platforms and brick-and-mortar stores. We recognize that the success of our business is not directly related to the success of our Retail Partners, and with that. Let's open up the call for some questions. Thanks.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
Our first question comes from JP gregan with global value investment Corp, please go ahead.
Good morning, Jerry as you noted in your opening remarks your restructuring plans comprehensive and involves both quantitative and qualitative elements marks. I believe you touched on the cost savings element a liquid elaborate on where you stand and taking some cost out of the business if we see that in the current. Or if not, when will fully appreciate those savings?
Sure J D. So we've we've seen some pretty good. We've seen quite a bit of savings on the sg&a. We're we're further ahead on sg&a than we are and in the operation side effects with your getting the plants fully staffed and up to speed. We saw some pretty good productivity in the first quarter out of the plants. We we had a little bit of a setback you too in terms of our overall productivity there as we as we get stuff transferred in settled into the new facilities, but on the sg&a side, we're certainly seeing much more action, um through the through the first couple of quarters,
Okay, you've noted the advantages to shifting production from China to Vietnam. Can you add some more color about how that ship has preceded and how complete the process is and off constantly your Geographic exposure to each market. I can do that. So appreciate the question. So the actual percentages continue to come down. I mean we were probably 60% of our total is in China. I don't have the exact number of of where we'll Land Rover done, but it'll probably be closer to maybe a quarter of our volume is when we're all complete for the most part. It's not going well. We've transitioned a lot of our products. In fact that we've been able to transition over and and take the new pricing without the tariffs. We've seen really good order. So that happened we see a good pickup but we continue to do that. We probably are in the middle Innings of doing that. We've got several of our suppliers that were already there and a few that are moving their birth.
we have a couple that are obviously struggling because a lot of the
Stuff coming from China, but overall we've been real pleased with our with our suppliers and partners over there and how they're performing.
Great, finally Marcus you've suggested in the past that the company might be searching for alternate sources of funding and you recently renewed your line of credit back based on your operating cash flow this quarter. It seems like that might not be an imperative anymore. Can you provide an update on potential additional capital for the business?
Yeah, so we've we've we've as you said we had a really good quarter from a cash flow perspective and we expect that to continue. So we we've we've backed off in terms of are looking for those alternative financing methods what what I you know, you know is is you'll see in the in the release and you've seen the queue coming up here in a couple of days you'll see that we've done a nude are one credit line that expires the end of December we extended that through June , you know, so nothing nothing really changed there. And of course we haven't drawn on any of the lines outside of the lines off letters of credit that are on the one the one line. So that's where we're at from liquidity standpoint on on loans.
Great. Thank you.
your time
Once again, if you have a question, please press * then 1 our next question comes from Mike use with sgf, please. Go ahead. Good morning. Couple questions for you just on the stationery business what percentage of the mix does that represent?
I don't know. I don't know that I have that off the top of my head. I mean it's a from our domestic business. It's probably you know, twenty twenty-five percent of our of our domestic business overall wage. It would be you know, something less than 10% of our total business, but it's an important part of a business. Okay, and can you remind us what happened there and why the lead times will actually improve over the next few quarters. Yeah. We've actually if you go back into our transformation over the last six eight months, he's made a lot of product moved and some of the facilities we shut down manufacture that product since we've got our double in stock bill in war plants are absorbing that and that's just one area that was going a little bit slower, but we're actually back to normal lead times right now. We've just got to prove that to our partners going forward, but for the most part we think it's behind us. We're feeling pretty good about it.
Okay.
And then just a question on the vehicle seating business. Did you say that was 6% of the overall Revenue in the first half of the year, is that correct? Correct. Okay, so it represents roughly two-thirds of the contract Revenue at this point, right? It would be 6% of roughly $100 in quarterly Revenue, which is 6 million of the contract. Revenue was nine million. So it's about two-thirds, right?
Ballpark, that's correct. Okay, and how are the margins on that business the the vehicle seating?
There's a largely there go ahead and Mark that jerk. I just got to see the margins markets higher different places. So that's probably be a little go-ahead market.
So the margins on that are are are you know have been have been I'll just call it challenge because of the relocation in the new facility and Dubuque wage, um has put quite a bit of you know, depreciation expense Etc on that business. And as well as the volume in that business has declined mainly because of the cyclical nature of it. We've reached the age the overall industry has been down for the last year and in projected to be down again in 2020. So we we we find that business to be challenged from a margin perspective.
so you you
My understanding the RV business is there was a lot of wholesale destocking last year and Retail performed by I don't know five six seven points better than the wholesale numbers. That's so it looks like Wholesales now improving which should help that business for you or are you seeing that that at all?
No, we're not. Actually we're seeing we're seeing that business decline. We saw as I said, we saw Decline and 2019 will see a further decline in 2028 is what we're we're projecting through that cyclical nature that business.
Okay, just a few more if I can sneak them in the aggressive pricing that you saw in the December quarter. Should we expect that to carry over to the back half of the year of the March and June quarter month?
Joe
So I think that we we we were pretty aggressive in in during the holiday season of promoting some products specifically in e-commerce and a little bit on our on our China business that was coming in from overseas trying to get out of that inventory where we were overstocked in some areas and and making room for for the switch over to the Vietnam product. So we've done I think a really good job there and overall resetting the settings the the inventory in both those areas. So I don't I don't see that continuing through the third quarter as heavy choice will look for opportunities to do spot promotions Etc, but it's not something we're going to continue to drive like we did and in the key for holiday season.
Okay, and you already touched on this?
With the prior call or but a little more specific on the cost saves you said there was a little bit of a step back on the on the operational front just from a productivity standpoint and the December quarter. I think the September 3rd you had about two million dollars in in in cost saves. What were there actually any on a net basis between the GNA operationally any saves in the December quarter?
Yeah, and the December quarter from from a gross margin perspective. We we didn't we didn't feel much productivity versus the prior-year course, but in the sg&a side, we saw just in the quarter about a million dollars of little over a million dollars of restructuring savings.
So is the $18 a quarter in sg&a a good number at this point on a go-forward basis?
I think we can you know, that's probably about that's probably about right I think at this stage. Okay, and one last one for you. I saw a cash flow statement. There was something related with that tax and it looked like a reversal to me. So what was that $943,000 all in the December quarter, that would have would have that benefited margins.
Yes.
So that that that did benefit gross margin and that was all in the December quarter. That was all in the December quarter. Okay. Thank you very much.
once again, if you have a question, please press * then 1
At this time, there are no further questions. I would like to turn the conference back over to mr. Jerry Dittmer for any closing remarks.
Hey, thanks, Sarah. So you saw it being a little clunky today because I am actually at the furniture show in Vegas, and Marcus is in Dubuque. So that's why you heard a little bit on her hand off, but I do want to let you know that we're working hard to transform our company and achieve its full potential. I am confident in our teams and Associates ability to execute even in the face of strong headwinds. We're grateful for all our partners continued support. I look forward to updating you on our progress next quarter everybody. Have a great day. Thanks.
the conference is
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