Q1 2023 Flexsteel Industries Inc Earnings Call
I will have to work Chief financial Officer for flat Steel industries. Please go ahead Sir.
Thank you and welcome to today's call to discuss Black steel industries first quarter fiscal year 2023 financial results our earnings release, which we issued after market close yesterday Monday October 24th is available on the Investor Relations section of our website at Www Dot flex steel.
<unk> com under news and events.
I'm here today, with Jerry Dittmer, President and CEO , and Eric Smith, Chief operating Officer.
On today's call, we will provide prepared remarks, and then we will open the call to your questions.
Before we begin I would like to remind you that comments on today's call 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.
Aercap 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 up.
David by our subsequent quarterly reports on Form 10-Q, and other S E 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.
Press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the 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.
Our performance in the first quarter were solid given the challenging conditions, we faced including slowing consumer demand.
Competitive pricing pressures attempting to relieve a lot of retail inventory as well as macroeconomic headwinds driving continuing inflationary pressures and challenges.
I am encouraged by the fact that we were well prepared for these challenges and we're able to deliver sales for the quarter of $95 $7 million, which was above the range of our guidance of $80 million to $90 million.
While we saw an unexpected slowdown in sales.
<unk> to prudently manage our spending and deliver on our cost efficiency initiatives and delivering operating income of $4 million for the quarter or 4% of revenue, which was also above our guidance range of negative three 5% to zero.
Percent.
Near term challenges will continue to create choppiness in our short term results. However, we remain committed to delivering long term profitability.
During our fourth quarter call I went into details on the challenges of our industry is facing and will not reiterate those today.
Organization is focused on navigating these challenges and deliberate on our strategic initiatives that will deliver long term success now.
Now I'll turn the call over to Derek to discuss our strategic initiatives and operational priorities before all our hydro. It takes you through further details of our financial results I'll be back at the end of the call with some closing comments on what we see ahead.
Thank you Jerry and good morning, everyone. We remain on offense.
Jerry noted business conditions are challenging and will likely remain that way for at least the next six to nine months, but we're committed to profitably growing by gaining share from competitors in existing markets and targeting new markets of growth, where we can deliver differentiated value to our customers.
As we discussed during the fourth quarter call our growth strategy for new business has three legs, new sales distribution, new product categories, and new consumer segments, we have well defined initiatives and plans for each of these areas and we are executing to those plants.
I'm encouraged by our progress to start the year and excited about the long term sales potential of these initiatives.
Let me share a few highlights.
Beginning with new sales distribution, we've made a breakthrough with a major big box retailer, who is or will sell a meaningful number of flex still branded products. This year that spanned all three of our major product categories motion furniture stationary furniture and case goods.
Our brand fits well with their consumers and given early sales success, we think they could become a top 10 customer this fiscal year.
We are investing in the relationship and new support capabilities to ensure this becomes a long term sustainable and profitable partnership.
Next is new consumer segment.
We recently launched our new brand charisma designed to serve customers, especially younger generations seeking good quality stylish furniture at affordable popular prices.
While these solutions are value oriented we've utilized our engineering prowess and manufacturing capabilities to reach these lower price points without making compromises in quality and comfort that we see and so many of our competitive offering.
Customer feedback has been great.
We have a healthy backlog of orders already the initial lineup started production last week at our Juarez facility and consists of larger scale comfortable sofa sectional that are popular with younger consumers right now.
We will continue to expand the charisma portfolio with new product every six months to 12 months, including diverse sizes and styles of furniture that are on trend for this targeted consumer demographic.
Last is new product categories, we remain on track for a third quarter launch of our new Decliner sleep solution recliner and flex our small parcel contemporary modular furniture solution built to flex with people with ever changing lives. We recently unveiled these products to customers and received excellent.
And feedback.
In summary, we're thrilled with our progress on these growth initiatives market conditions and sales results might be choppy near term, but we are making meaningful advancements in our strategic vision for the company.
Position us for long term success.
Lastly, we continued to deliver strong results from our cost savings initiatives.
In the near term. These savings are almost entirely being used to fund price reductions to respond to the pricing pressures as Jerry noted earlier and keep us competitive in the market and retain our retail placement.
These pricing pressures will eventually alleviate as inventory levels return to normal and transportation cost stabilize silver momentum. We are building on cost savings efforts should translate into higher gross margins.
With that I'll turn it over to Alejandro to give you additional detail on our financial performance for the first quarter and outlook for the second quarter of fiscal year 'twenty three.
Thank you Derek good morning, everyone for the first quarter net sales were $95 $7 million down approximately $42 million or <unk> 35 per cent compared to $137 $7 million in the prior year period, while down from the prior year, our sales results were better than our $80 million to $90 million guidance range.
[noise] provided during our fourth quarter earnings call.
<unk> is a pre pandemic sales from the first quarter of fiscal 'twenty 'twenty home furnishing products sales were up $6 $5 million or seven 3%.
Our profit perspective in the first quarter. The company delivered operating income of $44 million or 4% of sales, which was better than our guidance range of negative 350% for the quarter. We recorded net income of $43 million and earnings per diluted share of five steps adjust.
Adjusted net income for the quarter, which excluded one time charges related to the unanimously rejected an unsolicited bid received in August was point $5 million and adjusted income per diluted share was nine cents.
Gross margin as a percent of net sales in the first quarter was 16%.
The decline from the prior year quarter was largely driven by volume declines are you leveraging our fixed cost competitive pricing pressures due to slowing demand and continued inflation in domestic transportation charges, partially offset by our cost saving initiatives and lower ancillary charges.
Operating income was supported by a $4 $2 million reduction of SG&A expense, mainly through reduced compensation expense and control of other SG&A spending.
Moving to the balance sheet and statement of cash flow. The company ended the quarter with a cash balance of $4 million and working capital of $116 1 million, which represents a reduction of $9 $3 million during the quarter, primarily driven by a $19 $8 million decrease in.
Sorry.
As a result of the strong working capital management was solid operating cash flow of $13.0 million during the quarter as previously.
We communicated that reduction is a key priority and in the quarter, we reduced our outstanding borrowings by approximately 20% or $7 $7 million.
Looking forward guidance for second quarter sales is between 87 and $97 million.
While our first quarter results were better than guidance, we feel that based on the glut of retail inventory our customers will continue to pull back on orders for in stock products, giving us reason to believe the second quarter will be at a similar or declining level to that of the first quarter.
That's our ongoing discussions with customers and distribution partners, we remain cautiously optimistic that retail inventories should normalize in the first half of calendar year 2023.
The result of this continued demand slowdown, though will be a near term drag on our Q2 sales.
However, we do expect demand to stabilize and our growth initiatives to begin to realize benefit leading to quarter over quarter growth in the second half of the year.
Regarding profitability competitive pricing pressures, along with continued slumping demand will adversely impact our profitability. Our near term focus will be to continue to pragmatically adjust our costs in line with lower sales levels. However, we continued we continued to ensure our ability to profitably grow long term as such.
<unk>, we are projecting operating income as a percentage of sales in the range of negative one 5% to one 5% for the second quarter with the largest drivers of variability in the range being consumer demand and competitive pricing pressures.
We expect gross margins in the range of $14 $516, 5% in the second quarter weighed down by fixed cost deleverage from lower sales and pricing pressures, partially offset by our cost savings initiatives.
If sales improve as expected during the fiscal year.
Margins should improve to the mid to upper teens in the second half.
We intend to prudently control SG&A costs, and expect SG&A costs between 14, five and $15 $5 million in the second quarter, which is slightly higher than the first quarter as we began to prudently invest in our growth initiatives discussed by Derek.
Regarding our cash flow outlook working capital is expected to be a source of cash flow in the second quarter and full year as we plan to steadily decline inventories throughout the year.
Near term priorities for cash remain reducing debt and pragmatically funding Hot high R. O Y capital expenditures Opportunistically, we may repurchase shares at a modest spending level at the stock price remains at a significant discount to our view of intrinsic value.
We continue to forecast our debt levels at the end of fiscal 2023 in the range of zero to $12 million.
For the second quarter, we expect capital expenditures between one five and $1 $5 million.
The effective tax rate for fiscal 2023 is expected to be in the range of 27% to 28%.
Excluding the impact of any revaluation of deferred tax asset valuation allowances.
Now I'll turn the call back over to Jerry to share his perspectives on our outlook.
Thanks.
We believe the remainder of fiscal year 'twenty 'twenty three will be challenging for our industry as previously discussed.
Slow down in the economy.
Can you didnt inflationary pressures and lower consumer demand will continue to put pressure on our profit margins in the near term. However.
However, I am pleased with our well received new products presented during the fall 2022 a high point market and confident that our team and our long term priorities will allow us to build upon our solid foundation and deliver long term profitable growth.
In the near term, we remain focused on delivering on our strategic initiatives controlling cost and generating cash flow to pay down debt and preserve liquidity, while opportunistically investing in growth opportunities.
With that we will open the call to your questions operator.
Well begin the question and answer that's good question you May Press Star then one on your Touchtone phone.
You did a speakerphone please pick up your handset before pressing the keys.
Well draw your question. Please press Star then two.
Tom will pause momentarily to assemble the roster.
Yeah.
First question comes from Anthony <unk> with it.
Haven't seen problems so that what he <unk> company. Please go ahead.
Good morning, gentlemen, and thank you for taking the questions.
So you know first enel revenue was nicely above the top end of your guidance for the quarter can you talk about what led to the outperformance in the quarter.
Yeah. So Anthony this is Derek so we did see exceptional sales lift during labor day.
So I think you know broadly speaking our retailers performed really well I think we also saw some some improvement in retailer inventories during the quarter, which we got a little bit of a lift from <unk>.
But retailers still I mean, we were just at a high point market here, we've probably seen saw about 300 of our customers retail independent Tories are improving but we'd probably have another another 334 months to go before we get back to normal, but really strong labor day, and I think our again we saw.
Awesome improvement later in the quarter in terms of retail inventories, which helped US yeah. Anthony This is Jerry just going a little bit farther to as Derek said the labor day was really strong a few weeks after that of course, we did see it kind of moderate again and to slow down a little bit. So now we're really looking towards what November looked like it was really going on.
We'll really know what the quarter looks like then and a lot of folks thought their retail inventories would maybe be down by this time. We think are most folks still got a good 234 months of inventories left that they need to get through so a lot will depend on just on the consumer out there and the buyer.
Right Yeah, thanks, guys for that.
Do you think part of what's going on now is just a return to sort of more.
Normal seasonality of the business I mean before the pandemic typically consumer interests was heightened during.
Holiday periods like Labor day, My President's day. So do you think part of what's just going on I was just.
Consumers are just.
Going back to those pre pandemic.
Abbott.
Yeah, Anthony you're absolutely correct well, we've seen we saw at the fourth of July we saw it at Labor day. Our belief is those 68 big selling times, just like we used to see back in 2019 before we've definitely gone back into that pattern.
Got it okay. Thanks for that and then you guys talked about the competitive pricing pressures.
So can you just maybe elaborate on that maybe.
How much do you think that was.
How much that impacted the.
First quarter and I'm, just maybe just broadly speak about you know unit volume declines versus pricing for the quarter.
Yeah, I'll, just take a little bit and then I'll have Jerry come in a little bit I will tell you that we definitely saw and if you know an effect on our margins our margins were hit a few points because of that I think once we get through our inventories then we will see we're going to see the benefits of the lower Ocean freight were gonna see.
Lower a lower priced product, but we're gonna be able to you know to start shipping and taking to our consumers. So we definitely will see some margin improvement we've really just got to get through these inventories, which they've come down greatly I mean, our inventories are down you know 75 plus million dollars from their peak and are and we just.
Need to bring them bring them down here, a little bit more over the next several months.
Yeah, Hey, Anthony this is Alejandro good morning, and thanks for the question just answering your your unit versus sales mix decline no. We actually saw a pretty stable one to one with variance between volume and mix between units and mix.
Because I'm seeing a higher manufacturing in the quarter versus other categories. So it was actually pretty stable. There I don't know someone else asked no I was actually going to highlight the same thing I think what we're most encouraged by is the strength of our manufactured business. You know we've been talking about our ability to get down.
Two industry, leading lead times for several quarters now so we're consistently operating at three four week production lead times. If you look at our sales for our manufactured business were actually up year over year by 7%, So where we've seen the biggest sales hit.
In the near term is our imported products, which are warehoused, which have been you know adverse.
Adversely impacted not only by higher ocean freight, but more importantly, you know the glut of retail inventory, but I'm really encourage we're really encouraged by the strength of our manufactured business.
Okay, that's great to hear and then in terms of the the comment about the gross margin for the back half of the year.
You're guiding to.
So mid.
Mid to high teens so.
But what are the main factors that will drive that improvement if you could just go over that that'd be great.
Well Anthony there's a few things that are going to you would be driven into that one is the deleveraging of our fixed costs, so capacity and volume we need to grow volume. So as that grows with our initiatives that Eric spoke about which are manufactured products that were focusing on that should help our gross margin. The other thing that's going to impact us is getting through that.
Ocean freight drop in rate and having pricing stabilized. So those are going to be the two key factors, we see as impacting our margin and allowing us to get to a more stable mid to high teens.
Yes definitely.
Glenn.
Anthony I was just going to reiterate I mean.
As Jerry alluded to you know.
We think retailers, it's going to take another 234 months for them to work through their inventories once the industry is back to normalized inventory levels. We believe that's going to take significant pricing pressure, a way, which will help us normalize our margin structure.
Alright, Thank you for that and then the.
The last question here so.
Very nice progress with your own inventory reductions so given kind of what you know now would it be reasonable to assume for inventories by the end of your fiscal year.
Yeah. So again, Anthony I don't I don't ever want to talk in absolute terms or dollars because what we're focused on is is velocity in terms. So it's really going to depend on where demand goes and what our Q1 outlook is going to look like for next fiscal year, So, but we're targeting a reduction of over all our working capital for the year.
Of somewhere between 25 and $35 million.
Versus year end.
2022.
Alright, Thank you very much and best of luck.
Great. Thanks, Anthony I appreciate it thank you Anthony.
Thank you.
Do you have a question. Please press Star then one.
Alright.
Yeah.
Next question is from cascading.
Global investors Corey go ahead.
Hey, good morning, gentlemen, thank you for taking my questions and start with a little bit around your logistics and shipping and you mentioned that a few times can you give us an absolute dollar sense of where youre seeing container rates and the impact on your other shipping cost.
Yeah, it's really two big Bucks it buckets, Jeff So we have seen what I would call port.
Port to port So from Vietnam, China, too you know L. A houston wherever you're going is very close to where it was pre pandemic. So those costs have really normalize the good and the bad of that as were excited they've come down and they've come down really fast I mean literally just in the last several months the cost from going from.
The port inbound to our distribution centers into our customers is still really really high theres still obviously ancillary charges labor is still high fuel diesel has not come down. So those costs are very very high and so the two together I'm still make our total logistics costs higher but we've definitely seen a.
A big decrease in the port to port charges.
Great. That's helpful would you speak a little bit about your Ma.
Labor availability and labor cost and how that's impacting your P&L.
Yeah, I think labor availability in terms of our war as facilities continues to be strong. So we're confident that you know as we grow our manufactured business, we can ramp up but we'll find the labor to ramp up accordingly, so no issues whatsoever.
And then our Dublin facility, we got a we have a strong workforce strong stable workforce. There. So no labor concerns at this point.
Labor cost still some pressures and in Mexico, We do see a statutory increase every year in the neighborhood of you know, 20% plus we expect that to continue butter labor costs are are still very competitive in that region.
Of the continent.
Yes, great with that type of a statutory acceleration in labor cost you must focus a fair amount on productivity.
What can you share with us about that.
Yes actually despite the fact that we've seen you know some slowdown in volume all of our plants are actually hitting.
You know really really good productivity numbers, we measure labor hours per unit and I'm pleased to say that you know all of our facilities are hitting you know high as over the last 18 months here in the most recent quarter. So as I alluded to earlier cost savings, we're doing a good job across the board.
Manufacturing logistics sourcing in terms of delivering savings.
And that's really what's allowing us to take some of these necessary price reductions in the market to make sure that we're competitive and that we're keeping the placements that we worked so hard during the pandemic the gain.
Yes, great to hear what are you seeing in terms of raw material price increases.
Hi.
What type of strategies are you doing to mitigate those.
Yeah. So we've seen interesting with are raw materials, a lot of the raw materials have really started to come back down.
And they're not back down to where they were you know before the pandemic, but the big Spike in increases we have not seen that recently and a lot of our suppliers, obviously everybody's working together with us and we've actually seen those moderate in a good way, it's really the the labor costs, we talked about a little bit definitely you know the logistics in the.
The fuel everything else has moderated some.
Great.
How should we think about your sensitivity in terms of gross margin with respect to increasing sales in other words.
What level of sales.
Okay.
Would we expect GM to exceed 20% again.
Yeah. So I'll take the first piece and then the only other guys take the other one I think the first piece is we will see the increase it's really going to have more to do with what we have in inventory, but we have all the you know a lot of the freight costs and stuff in our inventory as we get through that.
You know a bump there and then I think on the other part.
As sales go up and with a lot of our new product and new customers and stuff, we should see that start to come up fairly rapidly, but I'm talking about a point or two it's not going to all of a sudden skyrocket.
This fiscal year, but we see it go above the 20, probably not but I think we can definitely get up into that high teens and for next year, obviously, the plan would be to jump over that.
And then Derek can comment on that as well.
Yeah, maybe.
Your question regarding kind of sales volume I think Jerry answered it well.
We will see a nice margin improvement here as the pricing pressure starts to alleviate.
We're feeling really good about our growth initiatives. So we'd been at high point market here in North Carolina. The last seven days, we've gotten extraordinary feedback on our new products.
Which I'm, which I mentioned earlier in the call that is really going to be our lever to continue to grow our sales sequentially quarter over quarter. So.
So my beliefs as we head into the second half and in absence.
Significant economic slowdown, we're really well positioned I think to continue to kind of grow the business into fiscal year 'twenty four and if we do that I think we'll get the sales leverage and be able to deliver that.
20% plus gross margin that you that you inquired about.
Great I appreciate it congrats.
And what has arguably been a very very challenging time. It sounds like you took that as an opportunity to really grab market share and introduce new products, new channels et cetera. So from our perspective, it seems like you're doing all the right things good luck.
Great. Thank you.
Thank you.
Next question from John I'm sure a critical please go ahead.
Oh good morning, Thanks for taking my question.
Just curious about the new Mexicali.
I think that was set to open.
In this quarter and I was just wondering how that's going and where there any learning curve type costs that were embedded in the third quarter results in the first quarter results.
Yeah.
Yeah, John we've actually delayed the opening of the Mexicali facility given the slowdown in demand, we still view that facility as a long term strategic asset you know as we've talked about we have ambitious long term growth goals. We believe we have the initiatives and the plans in place to do.
Liver on those.
And having the capacity and Mexicali long term is going to be instrumental in terms of achieving that growth. However, given the recent slowdown in demand we have ample capacity in our war is facility and in Dublin facility to adequately support growth. So.
It's really the timing of when we start up in Mexicali is gonna be dependent on.
Just the acceleration of our growth initiatives and when we get we get closer to needing that capacity.
Okay. Thanks.
Do you own the land there.
Or someone else is on medical leave and as any construction even started on that plant.
It is a leased facility the building is completely done and ready for occupation. Once we feel that we need to ramp up the capacity.
Okay, So you're not depreciating it since it's not operating correct.
We are we are recognizing lease costs on a monthly basis.
Lease costs, okay, but not depreciation on the building itself no we have not installed any equipment.
And the other question is what is the backlog at the end of the third quarter, our first first quarter. Please.
Yeah, we've seen backlog go back to historic norms, and we're sitting at $56 million of backlog at the end of the quarter. Okay.
And our expectation would be that by the end of the year, we'd be sitting somewhere in the mid fifteens does low sixties, which again is back to pre pandemic norms.
I mean, the good thing about our backlog word is that it.
Is that we are consistently delivering on three to four week production lead times for our manufactured business, which we still feel is probably the most competitive in the industry as a key catalyst for why we continue to grow our I mean, the the manufacturing portion of our business.
Okay.
Sounds good.
Best of luck going forward.
Thank you John .
Okay.
Okay.
Thank you. This concludes our question and answer session I would like to turn the call back over to Mr. Jerry Dittmer for closing remarks. Please go ahead.
Great. Thanks, Nick in closing I would again like to thank all our flex fuel employees for their outstanding performance in service during the first quarter, we're just wrapping up here.
Derek mentioned, we were still in high point.
Really really good highpoint market here this fall our showroom it looks spectacular it was really set up great for or selling all our.
Our new charisma flex the client or sleep solutions, our latitude South Haven products, all just looks fantastic and we're really excited about you know getting back out into the market with all these new things. We've made a lot of good investments and these are pretty excited about about where we think it can take the company.
I also would like to thank you all for participating in today's calls if you have more questions, obviously feel free to reach out and we look forward to updating you all on our next call. Thanks, everybody have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.