Q4 2020 Flexsteel Industries Inc Earnings Call
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Financial Officer, Chief operating Officer Flexsteel investors. Please go ahead.
Thank you and welcome to today's call to discuss Flexsteel industries fourth quarter in fiscal year 2020, <unk> financial results our earnings release, which we issued after market close yesterday Monday August 24.
Well on the Investor Relations section of our website Www Dot Flexsteel dot com under news about.
I'm here today, what's your read didn't <unk>, President and Chief Executive Officer on today's call will provide prepared remarks, and then we'll open up the calc your question.
Before we begin I would like to remind you that the comments on today's call will include forward looking statement, which can be identified by the use of words, such as estimate anticipate expect 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 forward looking statements.
Such risks and uncertainties include but are not limited to those that are described in our most recent annual report on form 10-K.
They did buy or subsequent quarterly reports on form 10-Q, and other FCC filings the applicable.
These forward looking statements speak only as of the date of this conference call. It should not be relied upon that's predictions of future amounts. Additionally, we refer to non-GAAP measures, which are intended to supplement not substitute for the most directly comparable GAAP measures.
A press release available on the website contains the financial and other quantitative information to be discussed today as was the reconciliation of GAAP to non-GAAP measures.
And with that I will turn the call over to jury dimmer Jerry.
Good morning, and thank you for joining us today.
When we last spoke in April.
I think we all had high hopes that this pandemic would be behind us by now.
Unfortunately, our nation is still in the grip Kobe and its widespread damage to our well being and economy and there is no clear and insight.
Times of crisis tough to resolve of each of us and I am, especially grateful to all our flexsteel coworkers and their commitment and perseverance as we navigate the challenges ahead.
No I would take a few minutes to cover the impact of Kobin 19, our industry in business.
On a macro level.
Consumer confidence and unemployment levels, which are important economic determine its future home furnishings demand have plummeted.
Although the unemployment rate has declined over the past few months. It currently stands around 10%.
Which is notably higher than the pre cold and levels, which were below 4%.
Consumer confidence as measured by the conference Board has dropped sharply from 130 in January and February.
To 92.6 in July.
These economic measures present, both short term and long term risk to the industry.
Due to state local regulations virtually all the brick and mortar stores of our retail partners were close burberry periods of time during our fourth quarter, which greatly depressed sales to man.
As we speak today, the uncertainty around whether a store will remain open restrictions around reduced hours and social justice thing all contribute to the growing uncertainty of our customers and industry.
This uncertainty has led to canceling are postponing marketing events and other customer facing activities.
Then the traditional levers to generate sale.
At the same time.
Country border shutdowns at pose challenges to our global suppliers and disrupted they're available capacity.
This is further complicated by ocean vessel capacity reductions from cobot, which in turn have recently created supply demand imbalances for containers, and resulting surgeon ocean freight cost.
As a parent debt make continues to spread beyond major metro areas. We have had several confirmed cases of copas 19 over the past few months.
Got it required us to temporarily shut down some of our plants and distribution centers <unk>.
<unk> execute C.D.C. recommended cleaning procedures.
Covert related shut downs are costly.
It's brainer capacity and present at risk to our ability to service our customers.
On a positive note despite all consumer demand for furniture rebounded in June and July, but we still like good visibility or whether or not these demand trends are sustainable.
Our beliefs is that the recent pickup in sales was partially related to pent up demand from shut downs across late March two early June.
We also feel the recent unprecedented government stimulus has boys demand near term.
What's the pent up demand and government stimulus dissipate, we expect that demand will likely moderate but to what degree is a major I know it.
As I addressed in our last call, we took quick and decisive actions to fortify our business and financial position.
First and foremost was to ensure the safety and welfare of our employees to the best of our ability.
Next we took some necessary yet painful measures to protect cash including permanent facility closures reductions in force in compensation cuts.
Moving on to our fiscal 2020 summary, I can say it was the most challenging year my career to date, both sales and financial results were severely and negatively affected largely by unanticipated external forces, namely cobot.
And the deterioration of U.S., China trade relations that ultimately result in new 25% tariffs on furniture.
In response, we moved quickly to adjust our cost structure and cash management to successfully navigate the ongoing economic uncertainty brought on by covert 19 and to realign our global sourcing partnerships to minimize exposure to China tariffs wherever possible.
Regardless of these factors beyond our control we made strong strategic progress in our business transformation efforts and are now well positioned to accelerate long term profitable growth.
Our notable accomplishments in fiscal year 20 include first executing with improved strategic clarity and organizational focus the recent exit of our non core RBC eating and remaining hospitality businesses has accelerated our strategic focus on core businesses well.
We are advantage and best positioned to drive profitable growth.
Second reducing operational complexity, our aggressive approach to skew rationalization and streamline our network structure has reduced complexity. These actions are improving the physical flow and cost in our plants in DC.
Which in turn will provide flexsteel customers with a better overall experience.
Next we made significant and broad based talent upgrades in fiscal year, 20, including senior management and our sales leadership.
All key functional areas have been stabilized and improved organizational structure in business processes, and we haven't still being deployed a deeper customer understanding across the business, which is driving market back decision, making throughout the company.
The actions, we took to substantially reduce structural cost now provide the company with a multiyear path to improve profitability on a lower sales base.
Two significant areas of structural cost takeout include closing, our Dubuque, Iowa, and Starkville, Mississippi manufacturing sites and exiting our Lancaster, Pennsylvania distribution center, which have greatly reduced fixed cost and simplified our network.
Second we have reduced <unk> expenses by right sizing our workforce, while improving the organizations agility to quickly respond to changing market conditions.
Finally, we've made good progress in expanding our digital capabilities and ecommerce penetration with both etailers and brick and click retailers.
These improvements will continue to provide new sources of growth in risk mitigation to future economic shocks to our retail brick and mortar distribution.
Well, we're early in our journey to become a true Omni channel company. We are highly committed to this strategy to position ourselves, where and how consumers want to buy furniture now and into future.
Now I'll turn the call over to dairy to discuss our financial and operational results and I'll be back for some closing comments on what we see ahead Derrick.
Thank you Jerry as Jerry just discussed like many companies, we felt an enormous impact of covert 19 in the most recent quarter. The man started dropping rapidly at the end of March and came to US screeching halt in April when virtually all of our brick and mortar retail partners close their stores to varying degrees due to cold.
Slide 19.
At the same time, we saw healthy increase in our ecommerce sales yet this gain was greatly overshadowed by the loss of brick and mortar sales.
Fourth quarter net sales were $64.8 million.
Down $35.4 million or 35% compared to $100.2 million in the prior year period.
Residential sales, which represent approximately 90% of our business in fiscal 2020 were down $24.4 million or 29% during the fourth quarter due primarily to the adverse impact of the cobot pandemic impact on our business.
Within residential home furnishings product sold through retail stores were down $34 million or 46% well E commerce sales were up $9.5 million or 86%.
On the contract front total sales were $4.1 million, reflecting our decision to exit the noncore RBC eating and remaining hospitality businesses.
For fiscal year 2020, net sales declined 17% to $366.9 million first the sales of $443.6 million in fiscal 2019.
The lower sales in fiscal 2020 were a function of higher China Terra the covert 19 pandemic in the exit of the RV seating in remaining hospitality businesses.
Decline was partially offset by an increase in our ready to assemble furniture sold through E Commerce, which grew 35.7% year over year, primarily driven by increased demand.
As retail stores began opening up around memorial day, we experienced a surge of sales related to pent up consumer demand.
Which was sustained for several weeks in June.
To give you some contextual perspective on the monthly sales momentum in the fourth quarter.
April sales were 43% of prior year sale.
Sales were 61% of prior sales.
June sales were 90% prior sales and in July we were even with 100% of prior sale.
Well July sales were encouraging near term sales demand remains highly variable and vulnerable to the uncertainty surrounding cobot 19.
The variables include the potential return a full or partial store shut downs the continuation of enhance employment benefits and other government stimulus programs intending to mitigate the impact of high unemployment the potential worsening of U.S., China relations and the unknown is related to the upcoming presidential election.
Our fourth quarter financial results were impacted by a multitude of factors, making it difficult to accurately accurately parse what normalized earnings would have looked like given the number and magnitude of individual factors, including.
Dramatic fixed cost volume deleverage due to the precipitous drop in sales from cobot 19 related store shutdowns.
Second sizable cost inefficiencies from quickly closing our plants and distribution centers during cobot 19 shutdowns and then subsequently ramping operations back up.
Third onetime costs associated with the exit of the RV and remaining hospitality businesses and the closure of a DC and fourth one time costs associated with our SKU rationalization efforts and the deep discounting required to sell those discontinued items.
We reported a fiscal fourth quarter net loss of $25.7 million or $3.23 per share that compared to a net loss of $19.9 million or $2.52 per diluted share in the prior year quarter.
Reported net loss included a 20.8 million dollar pre tax restructuring expense.
3 million dollar inventory impairment charge related to the company's exit of certain product lines, and a $2.9 million right of use asset impairment expense related to leases.
Excluding these expenses the non-GAAP adjusted net loss was $3.7 million or 47 cents per share in the fiscal fourth quarter as compared to a non-GAAP adjusted net loss of $4.3 million or 54 cents per diluted share in the fourth quarter last year.
Please see the non-GAAP disclosure included in the earnings release for a detailed reconciliation of GAAP to non-GAAP adjusted net loss.
Turning now to profitability results for the quarter gross margin as a percent of net sales in the fourth quarter was 9.2%.
First as they reported 5.3% in the prior year quarter.
There was quite a bit of noise that had an impact on both this year and last year's quarterly results.
The approximate 390 basis point improvement in adjusted gross margin is composed of three large drivers.
First.
A 720 basis point benefit or $4.7 million from lower year over year inventory impairment related to the company's restructuring program.
Second a 440 basis point benefit or $2.9 million from a reduced valuation allowance on foreign value added tax and third a 770 basis point detriment related to fix cost deleverage from lower volume and operational inefficiencies related to clothing and.
Ramping up operations during cold weather related shutdowns.
Selling general and administrative or EFI, and <unk> expenses were 25.9% of sales compared with 18.8% of net sales in the prior year quarter.
Roughly 440 basis points of this increase were due to lease impairments.
200 basis points Workover 19 related costs.
In 110 basis points due to higher bad debt expense.
Regarding taxes.
During the quarter, we reported a tax benefit a $5.6 million or an effective tax rate of 17.8% during the fourth quarter.
Compared to a tax benefit of $6.5 million in the prior year quarter or an effective tax rate of 24.7%.
Now turning to the balance sheet.
As Gary noted, we took aggressive in decisive actions during the quarter to reduce cost and preserve cash and as a result, we ended the fourth quarter with a strong cash position of $48 million and no debt.
During fiscal year 2020, we generated $18.3 million cash from operations compared with $6.7 million at year end fiscal 2019.
As previously released we secured a commitment for a new $45 million line of credit prior to the end of fiscal year 2020.
Given our strong cash.
Cash position and confidence in future cash flows we have initiated a renegotiation of the new line to a lower amount of $25 million and with more favorable terms to the company, which better fit the businesses current needs and reduces unnecessary costs.
We anticipate finalizing the modified credit agreement within the next week or two.
Working capital defined as current assets find its current liabilities at June Thirtyth, 2020 was $128.4 million compared to $118.2 million at June Thirtyth 2019.
The 10.2 million dollar increase in working capital was due to an increase in cash of 26 million.
Primarily attributable to proceeds from the sale of Riverside, California facility up $20.5 million, an increase in assets held for sale up $12.3 million an increase in other current assets of $6.6 million and a decrease in restructuring liability of $4.2 million.
Partially offset by a 23.1 million dollar reduction in inventory as a result of inventory management and SKU rationalization activities a decrease in trade receivables of $5.9 million due to lower sales and an increase in accounts payable of $9.3 million.
Capital expenditures for the 12 month ended June Thirtyth 2020 were $3.7 million.
During fiscal 2021, we anticipate spending between 3 million and $4 million per capital expenditures and we believe we have adequate working capital to meet these requirements.
And finally, a quick update on restructuring expenses during the fiscal year ended June Thirtyth 2020, the company incurred $34.2 million of restructuring expense, primarily for the write down of assets due to impairment facility closures professional fees pension withdrawal liability and employee termination costs.
As part of Flexsteel as previously announced comprehensive transformation program.
The company expects to incur approximately $2 million of ongoing facility and transition restructuring expense in fiscal 2021.
While the company will remain steadfast in pursuing continuous improvement and business optimization opportunities activities related to the previously announced transformation program are expected to be fully completed by the end up the first half of fiscal year 2021.
Now I'll turn the call back to Jerry Jerry.
As noted earlier the demand outlook remains very cloudy.
But we are positioning the company to successfully operate under multiple sales scenarios.
While demand in June and July was encouraging.
We are conservatively planning for sales growth to recede somewhat later in the quarter and for the remainder of the calendar year 2020.
This outlook could change dramatically in either direction, depending on the unfolding situation with cobot 19, U.S. unemployment consumer confidence in future government stimulus programs.
Right now, we're not any position to provide any profit guidance in this environment not only due to sales uncertainty, but also several cost headwinds. We are currently encountering specifically ocean container surcharges. There was a significant amount of shipping container capacity taking out of the market.
At the onset of Cobot 19.
Which has not been brought back online this supply demand imbalance is driving a 30% to 60% cost premium on our ocean container spot rates from Asia with no line of sight on when additional container capacity will be added.
Wage rate increases despite record unemployment, we're fine increasingly difficult to recruit new applicants for jobs at our various facilities. In response, we increased wage rates at several blocks of our locations in order to attract the talent needed to ramp up our operations back up and support it.
This team sales to man.
Vietnam supplier constraints after the new China tariffs were put into effect, we aggressively reset our global supply chain to reduce our exposure with a large part of that capacity shift moving to Vietnam. The.
The ability of our Vietnam suppliers to quickly increased production capacity was highly dependent on bringing in workers from China and other countries outside of Vietnam.
District country border restrictions now in place to to coordinate team or Vietnam suppliers can no longer leverage workers from outside of Vietnam and are facing production constraints as a result.
Is unclear when these border restrictions may be lifted.
The hard work, we did to limit our exposure to China is being somewhat reversed by circumstances beyond our control.
Now we have to revert back to China for production capacity to avoid potential out of stock inventory situations.
Additional costs of tariffs on increase China production will be a drag on gross margins at least through the calendar year 2020.
Despite the near term sales uncertainty and profit headwinds, we remain confident in our ability to continue to preserve cash and effectively navigate a multitude of various economic scenarios.
We also remain confident that the moves we've made to refocus the organization on core businesses reduce complexity upgrade talent.
Reset our cost structure and position ourselves as an omni channel leader in the furniture industry will accelerate our returned to profitability and generate sustainable shareholder value over the long term.
With that we'll open the call to your questions operator.
Sneakers. Your line is now open.
We will now begin a question answer session to ask your question, let plus Star then one on your Touchtone phone.
Serious speakerphone, please pick up their handset before passing the teams to withdraw your question. Please press Star then too.
This time, we'll pause momentarily to assemble our roster.
Our first question will come from David Rold bus following.
Please go ahead.
Hey, guys. Thanks for taking the question Oh, we do talk about August trends, so far in the same.
They're going to matter you discussed the July a June at April commentary.
Relative gather Gerry yeah, we've seen kind of the same trend in August the trends have been encouraging real questions are the same things we put out there you know until we know that everything is it safe save lives, we're not sure what's sustainable out there.
Just because of other was a lot of pent up demand and are those trends have continued.
So like I said, we just have to wait and see what happens as we go forward here, there's a lot of movement here with the elections coming up and and a lot of other things. So we've been encouraged but we're gonna have just wait and see if how much that was pent up demand and how much of that was stimulus related versus a true demand that will continue on.
Okay. So I guess was obviously versus last year's August up.
[noise] August is it's up from last year.
Okay.
Great. Thank you.
Our next question will come from my Kids split SGS capital. Please go.
Good morning, Thanks for taking my questions just one follow up on the previous question.
Given the supply chain issues and the labor issues is it fair to say the revenues constrained by those factors, meaning July was even but if those issues weren't in place you could had a more robust number maybe maybe asked a different way.
I I'm, assuming that order growth is exceeding revenue growth significantly. This point is that is that correct.
That is correct.
Okay second question for you on the RV line and Dubuque is that completely shut down at this point or is that wrapping up a right now.
No that's completely shut down.
Okay.
And I know there was an inventory provision in the quarter what was that related just to to book.
Yes, it was.
Okay.
Hi, just kind of on a plant level basis to Q, putting inventory charge decided to buccal lose money in the quarter.
No it actually I'm, even though sales were relatively low it was breakeven in so if you think about that you know when when we wrapped up shipments in kind of June we were shipping a lot of finished goods that were already produced and even the finished goods that are we had to produce a lot of the.
Though the raw materials were already fabricated so we didn't really expand that much labor I'm kind of relative the outcome. It oh outgoing shipments for the for that though I would have expected yeah that business to be in the right.
Okay and then he asked she and I number as reported was 16.8 million.
I saw 2.9 million dollar lease impairment is that included in a 16.8 million dollar number.
It is.
Okay and the other thing that are noteworthy I mean, if you wanted to normalize that she M&A. We also had $1.3 million of cold weather related charges and that actually in a number as well as I'm, an additional $900 dollars for provision of bad debt. So those three items I would consider as.
Non recurring or extraordinary.
Okay. So if I normalize from what you just.
One over the that'd be quarterly as she in a.
$12 million is all right roughly.
Yeah, I know, we had a couple of kind of onetime gains to that or amounted to a little less than a million dollars. So add those back as well, okay. So $13 million. So as we see sales picked back up how do we think about the SGN, a coming back and from the $13 million level.
Yeah, I wouldn't so so we've been very aggressive in terms of taking structural cost out I'm not knowing you know what the what the.
Economic prospects look like in this type of environment as I think sales stabilize and become more sustainable I think we'll have to reinvest back some money NFC DNA, but I think an appropriate kind of run rate would be in the kind of $15 million range, maybe plus or minus familiar.
Okay.
And what are your thoughts on what's the revenue breakeven point now.
At about.
60% to 70% of our sales historical sales.
I'm not sure I follow so.
I'm I'm, just asking what would kind of be a revenue number that would result in breakeven for for the company. Sorry are you, saying if historically are doing a 100 million on a quarter now it's 70 millions breakeven I apologize.
I would say on an annualized basis around 350 million.
350 would be breakeven.
Yes, Okay, and then just two more questions for you what is contained in the the 12.3 million dollar assets held for sale and how quickly can you monetize that number.
Yeah, we have we have for a low properties right now for sale Lancaster, Pennsylvania, a plant in Harrison, Arkansas, Our Dubuque facility and then the Starkville, Mississippi facility Lancaster right now is under contract the other three all have.
A potential interested parties, we're gonna be patient with those sales and make sure do we get fair market value. What I would tell you that you know what would be reasonable when it's all said and done we'd expect somewhere between 18 and $23 million a cash in aggregate from those four locations.
Okay. So there.
Assets held for sale at $12 million, you're saying to potentially worth 18 is that just an accounting issue.
Correct, Okay again, if it depends on market dynamics, but given where we've got them price right now I am I'm I'm hopeful that Oh, we can sell them for more than what's on the books. That's terrific last one for you. The other asset line was 18 and a half million versus 11, nine a year ago.
Is there a tax receivable number in there related to the tax changes.
Can be off because of Cowen.
Yeah. Good wanted to 'em given the care cares Act, we were able to apply the loss back to previous years I'm. When we paid a 35% tax rate what is the tax receivable amount.
Roughly 9 million.
9 million, so 48 million in cash assets held for sale at 12 kids be 60, plus minus 70.
Okay, So just to that.
What are the working capital needs for the next couple of quarters.
Yeah, right right now frankly, if if our supplier capacity wasn't a healthier position.
I'd want to invest about $20 million in more inventory.
So I I again, I think one once the global supply chain gets healthier we're gonna take a deeper position in inventory I'm, so that won't be a use of working capital and then.
Again, when we feel that the topline sustainable we have other investments to drive longer term kind of profitable growth as well.
Okay. Thank you for your time <unk>.
Thank you.
Our next question will come from John Deysher with clinical please go ahead.
Good morning, everyone.
It looks like you've made.
Solid progress this past fiscal year and I'm. Just curious are you suggest that through restructuring is going to be complete by the end of this year calendar year December transformation.
What needs to be done between now and and where are the priorities between now and then to be or.
As it relates to the restructuring.
Yes, I'm in general, Yes, that's a good point.
Yeah. So if it relates to the restructuring so we spent about $55 million over the last year and a half on the restructuring and we've been able to take out close to $20 million and a fixed structural cost.
And generate about 40 million and it kind of a restructuring that from our sale of assets.
Right now that restructuring for the most part is complete there's about $2 million, we think we'll need to spend.
Over the next year for just ongoing facilities and clean up and things like that but the restructuring that we put in place. It's our belief is pretty well behind us and we've put our cost structure now where we wanted to be and now we just really working through the various parts of a different initiatives.
We can go after two to grow our sales in our topline again.
Okay. So the heavy lifting has been done up to this point.
Correct, Okay. Good.
Back to the the sales front.
Oh.
What percentage of your retail customer base.
Is open at this point in other words as everyone. All the stores open, but maybe have limited hours or are there still stores that are closed at this point I'm just looking for a rough percentage.
Yeah. So front so in essence, everybody is for the most parts back open the limited hours that we think maybe could become the new norm.
But for the most part almost all of our customers are back up and now.
Okay, all right that that's good news.
And I guess kind of a just a quick follow up the Lancaster plant is under contract.
When do you anticipate having that sold and what do you anticipate as the proceeds.
Right now we're targeting close by the end of September until we close out I don't want to.
Give you specific sales price, but we had at lifted for a if I remember $2.4 million. So I'll give you a directional indication.
Okay.
Excellent.
Okay, I think that does it from me.
Good luck.
Okay. Thank you.
Again, if you might ask your question that as Star then one Star then one last quick question.
Our next question will come from Jeff Kagan with global value Investment Corp. Please go ahead.
Yes. Thank you good morning, guys.
Good morning range up.
Very interesting quarter, you had lots of information here regarding the tax receivable from the carriers active roughly 9 million I believe is not decided when do you anticipate collecting that.
Well I'm, giving given the shutdown it's been difficult for us to get all the IRS.
I think wishful thinking would be the ended this quarter, but more more likely than not maybe early Q2.
Yeah, Let me give me a second here well with into the Heather.
Well look in a number up do you have another question lower well, we're looking that up.
Of course.
Cash flow statement, you showed for the year 1.5 million of stock purchases.
My recollection is all of that occurred in your fiscal Q4, you cite a buyback approval by the board of $8 million is that in addition, or inclusive of the 1.5 million.
That would be in addition to the the the previous authorization of 6 million to 6 million authorization is still active so we're still working through that but the 8 million what really wasn't intended to give us a an additional option to return excess cash to share.
Holders, if and when appropriate.
So we just want to drill we really wanted that option and our back pocket and Jeff the math. So it's really six plus eight it's really 14 million in total.
That's a and how much of that.
Existing six had been.
Drawn down or are you, saying it was six net of the prior plan.
No the 6 million again, it's still active but.
We've we've used up they.
A majority of it.
All right. So so really we're looking at 8 million of new plus some diminimus amount from the prior plan.
Correct correct on the go back to your question on E. Commerce. So in the quarter was absolutely sales were 20, and a half million and for the full year about 61 million.
Yeah, great. Thanks, that's very encouraging.
You gave us a number of fresh DNA of roughly 15 million, which I think is a very encouraging number.
What's.
Ratio of revenue for that number.
Yeah, our what all what I'll tell you I guess I'll give you a contextual perspective on our long term target, which is an EBIT in the you know.
Seven maybe 8% range and the components of that would be a gross margin, 23% or higher and SG any of 16% or lower.
Oh Fabulous okay. Good appreciate it.
Do you think that 23% for your gross margin is right number even after your transformation plan.
Jeff Jerry I think that's the next place we want to go historically, that's for the Corporation ran within that 23% range. A we're kinda stair step in this so as Derek said, yes, yes, DNA piece is kind of that you know 14 15, 16% and.
The the margins next big step would be to get to that 23, 24%, There's no way or me there weren't a stop there we believe that can be higher but Ah. We just are kind of sitting there looking out where we think we need to be because you remember we put out there that we thought we'd be in that up.
7%, even on a run rate basis in 2021 and that we really feel we're still on trend and on track to do that once where they ever we obviously try to do better than that absolutely.
Great appreciate the color and last question regarding your transformation plan that included the divesture of certain assets, which you've highlighted.
Balance sheet today, 12 million, you're suggesting fair market could be 18 million, maybe a little bit higher.
Just at a high level.
Plan versus expectation how has the transformation plan unfolded versus I think it was mid year 2019 that you rolled that out.
Yeah. So basically it's interesting, though we originally were behind some on a Jeff drink covered we've really been able to kind of catch back up so all in I think I've mentioned earlier to one the other earlier question, we will expand about $55 million <unk> in the last year and a half on the restructuring.
About we've been able to take our structural a fixed cost down over 20 million a will have generated 40, probably maybe closer to 50 plus million dollars in cash. So the net net of it we're feeling really good about of course as you know there's lot of hard decisions in there, but we've really reset the business and our.
From a strategic standpoint really we've got a couple of core business is now that our belief is will generate you know both the sales right now and and higher than we were in the combined corporations, who actually feeling really go to buy we've taken a lot of complexity out and really simplify a lot a lot of the back end of our business.
Alright, I appreciate it guys. Congratulations good luck and I would just my comments I think you've done an exceptional job under the circumstances, you've been excellent stewards of our capital. So thank you.
Thank you thanks, Jeff.
Again that you might ask the question that starts on one our next question will come from David Bowie Portland. Please go ahead.
Just following up on the obvious demand commentary is your expectation that demand will recede is that based on the linearity of the August quarters, So far or is that just an abundance of caution on your part.
It is I find its of caution.
Okay. Okay.
And last one be bad debt expense in SGN a is that.
Should we expect that to be lasted is that how is the financial health of your you're kinda parties.
Yeah, right now knock on wood, we haven't had any a major bankruptcies beyond kind of hard van So I think were properly kind of reserve for any issues that will that could arise now that said if the economy starts to unravel then.
Thats kind of a new ball game, but as a run rate stands right now we feel pretty good about the accounts receivable.
Okay, great. Thank you guys.
Thank you.
I got in South your question Star than the one our next question will come from might choose US Yeah capital. Please go ahead.
Thanks for taking my follow up questions.
First on the July and August revenue trends is basically flat with a year ago at least July.
You're not pro forming out the contract business are you.
No. Okay now that is that as largely largely gone what we have left right now as you know minuscule.
So if I did pro forma that you're showing in the month of July for example, roughly.
10% plus growth right, because I'm, removing at least $10 million in revenue presumably from last.
On a quarterly basis from a lot last september's quarters out right.
You're correct, our organic growth excluding those discontinued businesses was 11% in July Okay. And then just follow up you indicated around 350 million wouldn't be breakeven.
So even if you're at a 20% gross margin at 359, that's 70 million in gross profit as she in a 15 million annualized be 60 million, that's that's $10 million and operating income even if you bring back some SGN <unk>. It seems like a 350 million you should be more profitable.
Where's my math off there.
It's not I gave it the 350 was really a directional okay.
And then you're not.
Go ahead I'm sorry.
No no police finished your thought.
Just I I just wanted to a follow up the 7% to 8%. When did you say you could achieve the goal by at this point.
We've put out last year, we said that we would do that in a run rate in 2020 <unk> fiscal year 2021.
Okay. So yes, you use still think by the third or fourth quarter of the current fiscal year, meaning March for June 21, you could be at 78% even margins.
At this point in time.
We've not seen all the things that could happen to yes, that's still a plan to try to do that Okay. Last question for you. You know you talked about the higher shipping costs higher labor costs, I think that's kind of industry wide issue. One do you agree with Dod, meaning you're you're not at a competitive disadvantage because of that and to given everyone.
Faces those costs have you pushed on on pricing.
Yeah. So in terms of 'em, whether we're at advantage. The answer is no. This the container issue is universal across multiple industries, not just furniture and with regard to pushing through the pricing. We have started to do that obviously.
Lee there's been some resistance and push back from the channel, but we're trying to pass through as a as much of that as we effectively Ken and we're doing it as a surcharge knowing that hopefully it's going to go up and down and if it eliminates will bring it back out we've not done it as a true price increase we've done it as a surcharge.
Okay terrific. Thank you very much.
Thanks.
Our next question will come from Jeff Kagan Global value Investment Corp. Please go ahead.
Yes. Thanks, one quick follow up as long as you're talking about the shipping its on a there was a move out of China to Vietnam, Another southeast Asian countries I'm not sure what beyond Vietnam, but what ratio of that of your business today is coming from offshore, albeit Asia or otherwise.
How much of that is actually coming out of China.
Yeah, I would say it in terms of our total sales roughly about 60% is sourced and what I'd tell you before you know last month, our China exposure was down below 15%.
So as Jerry kind of alluded to we're gonna have to revert back to China production at least for the remainder of the calendar year, but then we expect our our suppliers in Vietnam to be in a better positioned to ramp up their capacity. So that we can quickly shift that back to Vietnam.
And we are looking at HM. Other we're looking we do have a plan to do more broadly diversified global supply chain, whether that be with eastern Europe or Mexico. So that we can reduce our overall exposure to Asia as well.
And the product you're bringing in from China continues to have a 25% import tariff.
Correct. So it will be that move back to China will be a short term drag on margins.
Thanks.
This will conclude our question answer session I would like to turn it back to Jerry for any closing remarks.
Thank you for participating on today's call throughout the duration of this pandemic.
We will continue to work hard to transform our company and achieve its full potential.
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I appreciate your questions today. Please reach out if you have any additional ones. We're grateful for your continued support and until next quarter. Please stay safe healthy insane again, thanks for every time today.
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