Q3 2022 Flexsteel Industries Inc Earnings Call
Hello, and welcome to the Fox till industries third quarter FY 2022 earnings results conference call.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your touch on phone to start. Your question. Please press Star then two please note today's event is being recorded I now would like to teleconference over to Derek Schmidt. Mr. Schmidt. Please go ahead.
Thank you and welcome to today's call to discuss Flexile industries third quarter fiscal year 2022 financial results our earnings release, which we issued after market close yesterday Monday April 25th is available on the Investor Relations section of our website.
Www Dot flex steel dot com under news and events I am here today with Jerry Dittmer, President and Chief Executive Officer on today's call. We will provide prepared remarks, and then we will open the call to your questions before.
Before we begin I would like to remind you that today's comments will include forward looking statements, which can be identified using words, such as estimate anticipate expect and similar phrases.
Forward looking statements by their nature involve 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 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 as updated by our subsequent quarterly reports on Form 10-Q , and other 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 predictions of future events. Additionally, we may 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 and other quantitative information to be discussed today as well as the rec.
Insulation of GAAP to non-GAAP measures and with that I will turn the call over to Jerry Dittmer Jerry.
Good morning, and thank you for joining us today.
I'm encouraged by our execution in the third quarter.
We delivered solid results in line with our guidance on multiple fronts.
First we grew sales by double digits for the seventh consecutive quarter.
A strong indication that we are competing well.
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We restored profitability by dramatically, reducing ancillary charges from the second quarter, realizing additional pricing to offset inflationary pressures and prudently managing SG&A expenses, while uncertainty lingers about economic growth and the trajectory of inflation.
We are confident that we can sustain profitability in future periods.
Third we significantly reduce inventory without compromising service level and as a result generated attractive cash flow, which enabled us to strengthen our balance sheet and reduce our bank debt by a sizable amount.
These accomplishments were achieved despite navigating the supply chain and logistics challenges that continue to plague our industry.
Disruptions and constraints in the supply chain have become the new normal and we remain focused on mitigating our supply chain risk and building greater agility and resilience.
Investments in two additional manufacturing plants in Mexico will enable us to achieve a better balance of mix between globally source product and north American manufactured product.
At the same time, we are growing our global supplier base, both to expand capabilities and diversify our countries of origin.
This hybrid supply chain of mixed sourced and manufacturing capabilities.
Cross a multitude of countries provides us the ability to adjust more rapidly to changing market conditions than many of our competitors and allows us to serve our customers well even in times of disruption.
Furthermore, our investments in new or expanded distribution centers brings our product closer to customers with greater logistical efficiencies less handling damage and a better overall customer experience.
While we cannot anticipate every possible supply chain disruption or surprise the investments that we're making will serve the company and its customers well in the coming years.
Well I feel we're well positioned to continue profitably growing and gaining market share longer term, we are faced with two major headwinds in the near term.
The first significant issue is cost inflation as we continue to feel the cost pressures across all areas of our business, including material domestic and global wage rates in all forms of transportation.
We've been largely successful at offsetting these cost pressures through price increases to both our retail and E. Commerce channel. Although there is an inherent lag between the timing of cost and price realization that squeezes margins shorter term.
While we continue to evaluate additional pricing actions as needed to combat inflation. We are elevating the intensity of our efforts to drive cost savings to both improve margins and maintain our pricing competitiveness in the market.
Our goal is to continue providing customers with products of superior quality comfort and durability at attainable price.
The other headwind is slowing consumer demand for furniture, which is being driven by several factors first demand is reverting to more normalized levels. After an extraordinary period of pandemic induced consumer buying for everything related to the hull.
We are consistently hearing from our customers that both online and retail furniture traffic has shifted downward.
Although demand is slowing.
Our view, which is shared by many of the industry is that consumer demand can remain above pre pandemic conditions for the foreseeable future.
The second factor influence demand as macroeconomic uncertainty, especially regarding inflation, which has driven consumer sentiment to a decade low recently.
The surge in food and gasoline prices are clearly, taking a psychological toll on consumer spending habits.
Third.
The mix of consumer spending is shifting away from goods and back towards travel entertainment and services that we're largely abandoned during the peak of the pandemic.
This shift is likely to be evident in the coming months as summer travel picks up.
For furniture manufacturers like flex deal.
Slowing demand will be further exasperated by retailer inventories, which remains stubbornly high.
I had an opportunity to speak with dozens of retailers several weeks ago at our high point market event, who consistently told me that their warehouses were full of containers of product that they had ordered six to nine months ago, but just recently arrived due to supply chain delays.
Until they can move some of this product they won't have room to replenish their flexible inventories in the short term.
While the near term demand scenario depicted may seem pessimistic, we remain bullish on the long term prospects for the industry.
The next six to nine months, maybe a bit choppy for the reasons I cited but the longer term horizon outlook is optimistic due to the structural factors like the purchasing power growth in millennials strong household formation projections and the robustness of housing demand.
More encouragingly I feel great about flex fuels positioned to compete effectively and outgrow the industry longer term.
The transformation the company has undergone in the past three years combined with investments in talent products and processes has positioned us to expand our addressable market and grow through new customers, new markets and new product categories in the years to come.
Now I will turn the call over to Derek to discuss our financial and operational results and I'll be back with some closing comments on what we see ahead.
Thank you Jerry and good morning, everyone.
Third quarter, net sales were $144 million up $22 million or 18, 6% compared to $118 $4 million in the prior year period.
Our sales results were at the midpoint of our $135 million to $145 million guidance range, despite ongoing supply chain challenges.
Sales performance in our retail channel continued to be strong as sales increased $22 9 million or 22, 1% versus prior year with.
With the addition of our third manufacturing plant in Juarez, Mexico, we've been able to aggressively worked down the large pandemic induced backlog that was built last year and expect lead times on our manufactured product to be reduced to pre pandemic levels of four to six weeks by early June .
Many of our competitors continue to quote significantly longer lead times. So we feel that we will be advantage in the market near term. Additionally.
Additionally, we continued to benefit from the gains in retail product placements made over the past year as well as our healthy inventory position and service levels of in stock products.
On the e-commerce side of our business sales performance was modestly lower than prior year by $900000, while we're competing well several of our large E. Commerce customers are reporting sizable declines in online traffic compared to last year's robust results that were spurred by a pandemic driven buying.
Although the downward shift in traffic is expected to remain a near term headwind we remain positive on the long term prospects for growth in our E. Commerce business as we are pursuing aggressive plans to gain share through new customers, new product launches and improved content and advertising effectiveness.
From a profit perspective, we returned the company to profitable growth in the third quarter delivering operating income of four 1% as a percentage of sales net income of $5 8 million and earnings per diluted share of <unk> 82.
Gross margin as a percent of net sales in the third quarter was 15, 7%.
Which was a notable improvement over second quarter's results of six 7%.
The sequential improvement from prior quarter was largely driven by a reduction in ancillary costs associated with eight ocean containers of over $10 million as well as the realization of additional pricing taken in February .
Profit performance was also supported by strong SG&A spending controls.
Third quarter SG&A expense dropped to 11, 6% as a percentage of sales the lowest quarter of the fiscal year.
Moving to the balance sheet and cash flows.
The company ended the quarter with a cash balance of $3 $4 million and working capital of $138 $4 million, which.
Presents a reduction of $32 $7 million during the quarter, largely driven by a $24 $9 million decrease in inventory.
As a result of the strong working capital management.
Operating cash flow during the quarter was $37 $1 million.
As previously communicated.
Debt reduction is a priority and we reduced our outstanding borrowings by approximately 30% or $18 $1 million in the quarter.
The strong cash flow also enabled us to fund $18 $3 million of share repurchases in the period, which reduced our outstanding share count by 13, 7% versus the prior quarter.
Looking forward guidance for the fourth quarter sales is between 120 and $135 million.
As Jerry noted earlier, while we are competing well consumer traffic for furniture, both online and in store has recently slowed, albeit still above pre pandemic levels.
Many of our large retailers also have warehouses full of sourced product, which finally showed up after months of supply chain delays.
And they're heavy inventory positions will further dampen demand for our in stock inventory in the near term.
We do expect demand for our North American manufactured products to accelerate given how competitive our lead times currently compare to other manufacturers.
But the increase in this part of our business will still be overshadowed by headwinds and source product.
Lastly, our sales guidance range, a slightly larger this quarter than in past quarters. As we are expecting a large amount of incoming containers of product in June that is currently in our backlog, which may either shipped to customers in June or July depending on supply chain conditions and the timing of one.
We received the product.
Regarding profitability.
While there is still much uncertainty on cost inflation near term, we are projecting operating income as a percent of sales in the range of three 5% to four 5%, which is relatively consistent with third quarter results.
Compared to the third quarter, we expect gross margins to improve to 16% to 17% in the fourth quarter driven by continued reductions in ancillary charges as well as additional price realization come.
Combined these items will deliver approximately $4 million of additional gross profit, which will help offset the anticipated profit reduction from lower sales.
However, the improvement in gross margins is expected to be masked by deleverage of SG&A costs due to lower sales.
For the fourth quarter, we expect SG&A dollars to be in the range of 16 $5 million to $17 million, which is slightly higher than the third quarter.
Returning to ancillary charges, we are confident that we have these costs under control as we realigned with a select group of freight forwarders, who are performing more effectively and managing the physical flow of our containers and reducing ancillary fees.
And we've implemented sustainable processes to track and monitor fees on a daily basis.
Regarding our cash flow outlook working capital is expected to be a source of cash flow in the fourth quarter as we anticipate inventories to decline another $10 million to $15 million in the period.
Near term priorities for cash remain funding capital expenditures and reducing debt.
For the fourth quarter, we expect capital expenditures between four and $6 million or.
Or 7% to $9 million for the full fiscal year.
The larger spend in the fourth quarter relates to equipment for our new production facility in Mexicali, Mexico.
While not a priority we may continue to be opportunistic with share repurchases at modest spending levels. If the stock price remains at a significant discount to our view of intrinsic value.
Lastly, the effective tax rate for fiscal 2022 is still expected to be in the range of 26% to 27% and restructuring.
<unk> expenses are estimated at $1 million for the full year.
I'll turn the call back over to Gerry to share his perspectives on our outlook.
Thanks, Derrick I remain energized by our prospects for long term profitable growth.
Even though consumer demand for furniture is expected to moderate near term compared to the extraordinary high levels from a year ago, we will continue to pursue new sources of growth, including new customers and products.
Our recent investments to expand North American capacity will both support growth and build supply chain resilience.
Production at our third and newest manufacturing plant in Juarez, Mexico has accelerated the reduction of our backlog and we expect our lead times for manufacturing products to be four to six weeks by early June .
Construction of our new facility in Mexicali, Mexico remains on target for completion in late summer and we are aggressively selling the incremental capacity to generate new business.
Our new distribution center in Greencastle, Pennsylvania started up this past quarter and are supporting an improved service levels and growth in the east coast.
These initiatives combined with ongoing investments in talent brand product innovation and digital capabilities position us well to achieve our longer term growth ambitions.
That we will open the call to your questions operator.
Yes. Thank you at this time, we will begin the question and answer session.
A question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Matthew <unk> from Sidoti <unk> Company.
Good morning, and thank you for taking the questions. So first so just a couple of housekeeping items here. If I may just I was just wondering as far as if you could comment on the level of price increases taken in the quarter.
Quarter that you just reported and the do you have the backlog also at the end of the quarter.
Yes in terms of the pricing, we actually push through a price increase increased Anthony in February February one.
And so given kind of a normal lag. We are just now starting to realize a good majority of that in the fourth quarter.
And that increase was 8% across most aspects of our line.
In terms of the backlog, we finished the quarter at $99 million.
So versus prior year at the same time, we were at were at $140 million per retail so.
It's come down a good amount on hence why we're really confident that from a manufacturing standpoint, we're going to be at 4% to six week lead times here very shortly.
Which we believe is going to be a competitive advantage in the marketplace.
Got it okay. Thanks for that and then.
In terms of the guidance on you guys talked about.
Just overall slower.
Retail traffic.
You're saying are you seeing that across the board in all your markets or any of your markets doing better than others.
So it's pretty well this is Jerry Anthony so it was pretty well across the whole country, it's not certain markets.
<unk> seen the slowdown both in our home furnishings.
And in our home styles in our online business, we've actually seen it in both and really we really started to see it really probably in the last 75 days from from February through now we've seen a pretty drastic slowdown.
But like I said, there's really not any part of the country. There is pockets all over.
Got you, Okay and then.
Terms of the sequential improvement in gross margin that you expect in the June quarter.
What are the primary drivers of that.
But if you could just.
Share more details about that that'd be great.
Yes, Theres really two primary drivers Anthony one is continued improvement and ancillary charges.
So we were able to get ancillary charges in total down below $4 million in the most recent quarter and we believe that we can take out another $2 million sequentially going into the fourth quarter. So that's one driver.
And then also we started to realize a little bit of the price increase that I just alluded to earlier in the third quarter, but we'll fully realize that in the fourth quarter. So those are the two drivers.
Got you, Okay, and then longer term.
You guys talked about new product.
New customer opportunities can you just expand on that and whether it.
Do you expect to achieve that.
Organically or do you need to make some acquisitions.
Order to to have more new products and new sales channels.
Yes, so organically is where we'll see most of that over the next several quarters acquisitions is something that we've always got out there is a possibility, but theres really nothing teed up at this time that we would see in the short term.
So a lot of these new products are getting us into new markets and new channels that we haven't been in before and as you know it takes 369 months sometime to see some of those.
But we're working those very hard at this time.
Gotcha, Okay and then.
Go ahead.
Anthony and the only thing I was going to add so.
We've got many pursuits around.
New customers.
As we've kind of shared in the past, we're looking to expand our footprint in retail specifically with our big box customers.
So we're actively.
Working relationships.
With a multitude of new customers on that front and then we continue to look to expand our portfolio of ecommerce partners as well.
Uh-huh.
Gotcha, Okay and then.
Lastly, as far as.
Longer term, obviously I know there is some short term headwinds here with all the cost pressures and so on but the longer term can you share with us how you guys think about operating margins.
What's your goal I know previously you had believed talk about 67% op margins if you could just.
Discuss that that'd be great.
Yes, Anthony we Havent come off come off of that target again, we still aspire to get operating margins.
North of 7%.
I think I think that will be a bit challenging to accomplish in fiscal year 'twenty three.
Given some of the headwinds in the demand environment.
But as we look at fiscal year, 'twenty, four and kind of beyond we still feel that's very attainable.
And so the composition of how we get there is a gross margin above 20% and maintaining SG&A as a percent of sales below 14%.
Okay very helpful. Thank you very much and best of luck.
Alright, Thanks Anthony.
Sure.
Thank you and the next question comes from Jeff Gagan with global value investment Corp.
Hey, good morning, guys. Thanks for taking my call.
Hey, Jeff Jeff.
Just a couple of open items you mentioned your global supplier base is expanding what else can you say about that.
So we've talked I think fairly openly about our intended kind of desire to diversify diversify our supply base certainly with the amount and magnitude of global supply chain disruption that we've experienced in the last 18 months I mean, we are looking for.
Partners that are that are closer to United States. So we're actively developing relationships with new partners in Mexico, South America, we're actively looking in.
In Europe specifically.
Central Europe .
So again this is a long term strategy to make sure again, we've got.
Our resilient and diversified supply base.
Feel good about the inroads that we're making on that front.
Yes glad to hear thank you with respect to your signing China sourced product what percentage of your production comes from China today, and how does that compare to pre tariff say 2017.
Yes, Jeff it's below 10% at this point I think if you were to rewind and go all the way back to pre tariff it was as high of $60 to 70% and so we've largely transitioned away from China. The only exception is our metal based outdoor furniture.
That is largely that.
China base for the entire industry.
Now that said, we still have exposure to China in terms of some raw materials. So the mechanical parts. The switches fabrics. So we're constantly working the supply chain on the raw material slide side to diversify that as well.
Thank you.
Adding container liner cited a reduction in container demand earlier today, what are you currently seeing with availability and pricing.
Yes, so from an availability standpoint.
<unk> improved its obviously not where it was a few years ago, but it's improved some the costs have moderated so the costs have come down a few thousand dollars, but we're still running.
<unk> hundred $15000 are higher than we were.
Back before the pandemic.
Okay, Alright, and final question, you mentioned Youre Homestyle online business is declining modestly what do you attribute that to and how does that sync up with your expectation to gain market share.
So a couple of things there one is different than our home furnishings business. There is not a backlog there. So we see immediately what's going on and as we mentioned we have some customers that have slowed up there.
We obviously took some price increases and have got those in and then just overall demand has slowed and if you go out and look at it as just kind of an e-commerce market and generally youll see that especially for big ticket items in furniture, especially.
I mean, anecdotally, Jeff I mean, our customers tell us that relative to our peers, we're performing well in the categories, but as Jerry alluded to I mean, we are starting to see not only a downward shift in overall consumer spending, but I think there is a sizable mix shifts that people are spending more of their.
Elizabeth incomes on travel entertainment those things that they largely avoided during the pandemic.
I think we're going to see that continue at least here throughout the summer.
So I think I think conditions are going to be choppy here for the next six months and.
Depending again, how the how the fed handles kind of inflation.
Maybe we can get back to a more nor more normalized environment here later in the calendar year.
I appreciate you have challenges ahead, but congrats to you progressively go into the market to buy a new shares I think retrospectively.
That will accrue very favorably to us as equity holders. So thanks and good luck.
Thanks, Jeff Thanks, Jeff.
Thank you once again please press Star then one if you would like to ask a question.
Alright is there something else at the present time I would like to return the photo management for any closing comments.
Great. Thanks.
Closing I would like to thank all our flexible employees for their outstanding performance in service during the third quarter I would also like to thank you for participating in today's call.
Thank you for your questions today, and please reach out with any additional ones and we look forward to updating you on our next call everybody have a great day. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.