Q4 2023 Flexsteel Industries Inc Earnings Call

Speaker 1: you

Good morning and welcome to the Flexible Industries fourth quarter and fiscal year 2023 earnings call-time call. All participants will be in it and I am in the sit-only mode.

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I would now like to turn the conference over to Derek Schmidt, Chief Operating Officer and Interim Chief Financial Officer for Flexible Industries. Please go ahead.

Thank you and welcome to today's call to discuss Flex Steel Industries' fourth quarter

Our earnings release, which we issued after market closed yesterday, Monday, August 21st, is available on the investor relations section of our website at www.flexsteel.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 we begin, I would like to remind you that the comments on today's call will include forward-looking statements, which can be identified using words such as estimate, anticipate, expect, and similar phrases.

I am pleased to share with you our fourth quarter and fiscal year 2023 results. We continued our strong momentum in the fourth quarter, delivering sales of $105.8 million, which was within our guidance range and represents sequential quarter-over-quarter growth of 6.8% compared to the third quarter. While we continue to face market headwinds in the form of pricing pressure and slowing consumer demand, we are executing well and are continuing to continue to continue to

and our growth initiatives are adding meaningful revenue to offset these challenges. Our growth initiatives, along with a continued focus on operational efficiency and controlling costs, are adding meaningful revenue to offset these challenges.

enabled us to expand our gross margins and deliver operating income for the quarter of $4.2 million, or 4%.

which was in the upper range of our guidance.

While economic uncertainty and market headwinds will remain a challenge in fiscal year 2024, I am encouraged by the positive impact of our strategic priorities and excited to continue our momentum in fiscal year 2024.

Looking back on fiscal year 2023, it was a very challenging yet exciting year.

Coming off a year in 2022 of record high sales due to post-COVID demand, we were faced with slowing consumer demand, which was compounded by a glut of retail inventory that was ordered to meet expected post-COVID demand.

but backlogged due to supply chain disruptions. At the same time, the industry experienced pervasive price reductions as many manufacturers and retailers quickly dropped prices in response to lower ocean freight and other cost inputs.

forcing others to follow suit.

The imbalance between supply and demand further intensified pressure to lower prices in order to remain competitive, and while ocean container rates began to return to normal levels, fuel prices surged.

Despite the significant decline in year-over-year sales caused by these challenges, our strong team of dedicated employees identified the obstacles early and executed plans to navigate them.

which resulted in higher full-year operating income of $10.5 million compared to $6.6 million in the prior year.

It was exciting to see the advancement of our strategic growth initiative, which included expanding our big box distribution channel, launching our ZKliner sleep solutions recliner, and our Flex contemporary modular furniture solution, and launching the new Karisma brand.

The impact of these growth initiatives created sequential, quarter-over-quarter sales growth in the second half of the fiscal year, despite the challenges already mentioned. We continue to see near-term challenges due to competitive pricing pressure and a return of demand to pre-pandemic levels amid macroeconomic uncertainty. However, we are maintaining our commitment to our strategic priorities and delivering long-term profitable growth. With that in mind, we will continue to invest pragmatically in growth initiatives.

to drive sales and focus on operational excellence to drive margin expansion. I'll now turn the call over to Derek to discuss our strategic initiatives and financial results, as well as our outlook for Q1 2024.

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. Like Jerry, I'm optimistic about the trajectory of our business and feel great about the momentum we've built with our growth initiatives.

A few noteworthy highlights to share.

With respect to new sales distribution, we continue to execute well and gain momentum with big box customers, most notably Costco.

BigBox represented approximately 5% of our total sales in the fourth quarter and is expected to grow faster than our other channels in fiscal year 2024 as we expand the breadth of product offering and optimize our marketing and demand generation efforts within this channel.

As important, we are building FlexSteel brand awareness with a different consumer audience through BigBox, which we feel will have positive long-term growth benefits across all our channels.

in new product categories.

We have good early success with FLEX, which is our small parcel contemporary modular furniture solution.

Flex was initially launched in the BigBots channel last quarter, and we've accelerated distribution expansion to make Flex available across a wide variety of selling platforms, including e-commerce partners like Amazon.

Wayfair, Overstock, which recently rebranded itself as Bed Bath & Beyond.

homedepot.com, and our own direct-to-consumer site, www.flexsteelstore.com.

In addition, we are aggressively expanding FLEX into brick-and-mortar retail with our strongest independent retail partners.

New product additions will be released in October with additional plans developed to meaningfully expand the line over the next 18 months.

Decliner, our new Sleep Solutions Recliner, has become a home run.

Over 500 retailers have placed the product with strong initial sales.

We've also signed up multiple regional sleep store chains with more anticipated in fiscal year 2024.

We expanded the line in April and have more innovation planned for release in October .

This is an exciting category, and our plan is to stay ahead of any competition by constantly innovating.

To expand our customer base, last year we launched our new Charisma brand, targeting the style and price preferences of younger consumers.

With a major competitor in the sub $1,000 SOFA market recently closing their operations,

We have an opportunity near term to gain additional retail penetration with Charisma. In the mid-term, we are also pursuing cost-efficient innovations to bolster Charisma's brand position of differentiated quality and comfort at affordable prices.

The success of these new growth outlets, coupled with our continued investments in our core business, give us confidence to profitably grow the company in fiscal year 2024 and beyond.

We are also proud to have published our first annual ESG report, which can be found on our website at www.FlexSteelIndustries.com. This report lays out the foundation of our approach to environmental, social, and governance matters…

and formalizes our ongoing commitment to sustainable and responsible business practices. We are dedicated to making a positive difference wherever we can.

guided by the belief that not only is it the right thing to do,

but it's also the right thing for our business long term. We are already combining sustainable business practices with product innovation to bring differentiated valued solutions to the market as exemplified by our new Skye Seating line which utilizes cloud flux to create sustainable business practices.

A cushion fill made from recycled plastic bottles.

Not only does Cloudless provide exceptional comfort, but every three-piece sky sofa helps prevent 730 plastic water bottles from entering waterways and landfills.

We're excited about our ESG journey and convinced that we can possibly impact people, communities and our planet while also supporting and accelerating our growth strategies through these efforts. With that, I'll now give you some additional details on the financial performance for the fourth quarter. For more information, visit ESG.org

and the outlook for the first quarter of fiscal year 2024. For the fourth quarter, net sales were $105.8 million within our guidance of $100 to $110 provided during our third quarter earnings call.

More importantly, our sales results represent a sequential increase of 6.8% from the third quarter, which is our second consecutive quarter of sequential sales growth and reflects the strong sales momentum driven by our growth initiatives.

From a profit perspective, the company delivered operating income of $4.2 million, or 4% of sales in the fourth quarter, which was at the high end of our guidance range and represents a continuation of sequential quarter-over-quarter operating margin improvement.

throughout fiscal year 2023, even with increased strategic investments to support long-term growth.

Moving to the balance sheet and statement of cash flows. The company ended the quarter with a cash balance of $3.4 million.

working capital of $115.5 million.

and a balance on our revolving line credit of $28.3 million, a 25% decrease from the prior year.

Working capital and our debt balance did increase from the third quarter due to the timing of inventory receipts, which were heavier in the fourth quarter as we bring in new products and additional inventory to support our growth initiatives.

However, compared to prior year, we have executed our plan to reduce inventory levels and pay down debt and our balance sheet remains strong.

We continue to prioritize debt reduction and expect inventory to be a meaningful source of cash in fiscal year 2024 to further pay down debt.

Looking forward, sales guidance for the first quarter is between $92 and $100 million.

The first quarter is historically our slowest quarter of the year as furniture purchases are often deferred by consumers in favor of travel and entertainment during the summer months.

That said, we are anticipating year-over-year unit volume growth in the low to mid single digits as a result of our growth initiatives.

But the elimination of ocean freight surcharges, which occurred in the most recent quarter, will reduce revenue by approximately $5 million compared to the prior year first quarter.

and ultimately keep your over your total sales dollars relatively flat.

This revenue drag from the prior year ocean freight surcharges will lessen throughout the year.

and we expect our growth initiatives, which have begun to drive meaningful revenue, to more than offset this.

and result in subsequent quarter over quarter and year over year sales growth.

Regarding profitability, we expect gross margins between 18% and 19.5% in the first quarter. We expect gross margins to grow modestly throughout the fiscal year with expected sales growth and continued operational productivity.

Near term, the recent strength of the Mexican peso versus the US dollar is having an adverse impact on our margins given our large manufacturing presence in Mexico and is masking the favorable benefits of our operational efficiency gains.

We will continue to prudently manage SG&A spend while investing in our growth initiatives and expect SG&A costs between $15.5 and $16.5 million for the quarter.

We are projecting operating income as a percent of sales in the range of 1 to 3 percent in the first quarter and expect operating income margins to improve throughout the year in parallel with forecasted gross margin improvement.

The most significant drivers of variability in the first quarter guidance range continue to be consumer demand and competitive pricing conditions.

both of which will be shaped by macroeconomic factors.

Regarding our cash flow outlook, working capital is expected to be a source of cash flow in the first quarter and full year as we anticipate inventories to steadily decline throughout the year.

Near-term priorities for cash remain reducing debt.

resourcing new innovation, and funding capital expenditures.

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.

We expect debt levels at the end of fiscal 2024 in the range of zero to $15 million.

And for the first quarter, we expect capital expenditures between $1.5 and $2.5 million.

The effective tax rate for fiscal 2024 is expected to be in the range of 27 to 29%.

Now, I'll turn the call back over to Jerry to share his perspectives on our outlook.

to share his perspectives on our outlook. Thanks.

While economic uncertainty remains, I am confident that our long-term growth outlook remains promising.

Our team's commitment to profitable growth and the foundations we have put in place have positioned us to successfully deliver improved earnings and an even stronger balance sheet in fiscal year 2024.

We are focused on our strategic growth initiative, investing in future innovation, and delivering sustainable profit through operational efficiencies while continuing to reduce inventory levels and pay down debt.

In summary, we're enthusiastic about fiscal year 2024 and the long-term growth opportunities for the company while being mindful that we still face near-term economic uncertainty.

With that, we will open up the call to your questions. Operator.

We will now begin the question and answer session. To ask a question, you may press store, then 1 on your telephone keypad.

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At this time, we will pause momentarily to assemble our roster.

And our first question will come from Bud Bugach of Water Tower Research. Please go ahead. …

Thank you. Good morning, Jerry. Good morning, Derek. Thank you for taking my questions.

Yeah, good morning, Brad. Yeah. Just can you talk a little bit about the revenue pattern and the way it materialized during the quarter? How did it look?

year over year and maybe talk about units versus price as it came out for the fourth quarter.

Actually, if you were to look at the quarter, bud, we started probably the quarter a little bit slow in April and then saw a really nice pickup in May and June kind of around Memorial Day holiday. So, I feel like we finished the quarter strong. It's interesting, you know, year over year, total net sales were down 15%. 4% high sales. Okay? Great.

Unit growth was actually up 2% year over year. So all the decline in the net sales number was related to pricing, of which a large amount of that price and decline was related to ocean freight surcharges.

So if you remember, if you go back 12 months ago, in Q4 of fiscal year 22 is when we had peak ocean freight rates, probably our surcharges were at their peak, and then we virtually... We eliminated those ocean surcharges here in our most recent fourth quarter. So...

there was a big revenue decline related to that, but we feel good about our momentum in the market, the fact that we had positive year-over-year unit growth, and then we're anticipating carrying that momentum into Q1 and expect to have mid-single digit unit growth in the upcoming corner as well.

So, Bud, most of that pricing is behind us. We will see some of that as the year goes on. There will be probably, oh, four or five million of it we'll see here in this first quarter from the pricing actions. And that's because we, in May is when we took the last of our ocean freight charges away. So it'd be pretty encouraging.

Probably the most encouraging thing we really saw in the fourth quarter was our unit volume being up a year over here. That was very encouraging.

I agree. I'm painfully aware of what happened to ocean freight during the post-pandemic timeframe.

Historically, much of your sales were retailer-based and special orders. Now with the big box strategy, I take it that there's a lot more placed on stock. How did that balance unfold during the quarter and what do you see going forward on that?

Yeah, in terms of, again, unit volume, we feel good about, you know, really performance in both traditional retail as well as kind of our e-commerce pursuits, including big box. So I think we're competing well in kind of both channels. Obviously, as we alluded to in our opening remarks, we expect that big box.

for us, but beyond that, we're not seeing, really, any material kind of changes in mix.

And are you seeing better reports from your retailers? You have a wide swath of retailers throughout the country.

I mean, how is their demand looking? What can you see from that, from your incoming order book?

What can you see from that from your incoming order book?

Yeah, but so our retailers are not panicking at all. They're actually, it's pretty strong, especially year over year. And as Derek said, both the retail and the big box are both up year over year, especially on the order side, which is very encouraging. So obviously we.

are worried like everybody about what's going to happen if there's going to be an economic slowdown, but right now we really haven't seen that. So we're pretty encouraged where we're at right now. Yeah, orders for the fourth quarter actually total company. We're up 20% year over year. So again, we feel like we're competing well. As Jerry alluded to, we're up 20% year over year. We're up 20% year over year.

Most retailers will tell us that traffic is a bit slow. So the fact that we're seeing pretty robust year-over-year order growth would suggest certainly that we're gaining some share and we have good momentum.

I'll add just a couple more, but let some others have added. The gross margin progress was...

notable. Can you give us a little bit of color on that? You called it from operational efficiencies. How does it look like?

With the material labor and overhead which where were those? efficiencies and and that and the reduced inventory track Right down

Give us some color on that and maybe it walk from quarter to quarter or year to year. Yeah So from a productivity and operational efficiency standpoint, but we made really good gains across all the aspects of our supply chain, so that's Manufacturing that's global sourcing. That's logistics. So

We have three strong leaders in each of those areas, and they're doing a great job executing from my viewpoint in terms of just constantly driving cost savings. They've been doing that all fiscal year 23. Unfortunately, a lot of that got...

used to fund some price concessions in the market. So good momentum on that front.

And I'm sorry, but the second part of your question...

So, operational efficiencies. Right.

Oh, yeah. What do you see going forward on that? How far can you take the...

the gross margin level.

Yeah, again, we've talked about near-term, mid-term, certainly our goal is to get our gross margins at or above 20%. Huge operational efficiency will be a really important part of that.

The other piece that you noted, which was in the press releases, you know, year-over-year reduction in inventory kind of write-downs. If you remember in fiscal year 24 Q4,

You know, we had a lot of inventory. We put reserves against, you know, some of that because demand was slowing. So that comment as it relates to fiscal year 23-24 was simply, you know, there was a negative kind of comparison in fiscal year 22. So...

Overall, we feel good about our inventory levels, the quality of inventory, so no concerns on that front. So I think, you know, as we go forward, we feel pretty confident around our ability to continue to expand overall margins throughout fiscal year 24, and the big levers there are twofold. The first one is continued operational efficiencies.

and then second volume leverage. The other thing too, Bud, in there, the two things is the inventory will continue to come down. We don't see that there will be growth during this fiscal year in inventories, even as our revenue goes up. And probably the only thing that's kind of an uncontrollable in there right now is obviously the peso versus the...

So probably a good $400,000 this year in this first quarter as the peso and the dollar aren't really moving in the best direction for us.

I see, and you did talk about inventory as a source of cash and –

Is it what 122 at the end of the year? Do you think, is it, what's the goal for the end of fiscal 24? Is it a hundred million back to where it was maybe before pandemic timeframe?

Yeah, I think in that range, our goal would even be a little bit better than that, but that would definitely be definitely our goal.

And so that would get your funded debt down to just about zero, if not at zero.

Correct. I mean, we stated it's 0 to 15, but our ultimate goal, obviously, is to get that down to 0.

Thank you very much. I'll let others ask questions and come back in the queue if possible.

Thanks, Bud.

Once again, if you would like to ask a question, please press star then 1.

And the next question comes from Anthony of the Dodian Co. Please go ahead.

Good morning and thank you for taking the questions.

Good morning. So just curious as far as the revenue impact from the growth initiatives, I know Derek you talked about the big box impact for the quarter, but just overall when we look at collectively

big box expansion as well as ZKliner and the Flex and others. So how much of that do you think contributed to the fourth quarter sales and then kind of, how should we think about that as far as outlook for fiscal 24?

Yeah, in terms of the fourth quarter, a little less than $10 million was derived from kind of growth initiatives. So... I'll stop there...

Going into certainly fiscal year 24, we feel good about the momentum there. As it relates to fiscal year 24, we would estimate that our growth initiatives would contribute probably another, on an annual basis, another at least $30 to $40 million over and above what we delivered here in fiscal year 23.

We're hoping, Anthony, that the plan is for that to be maybe the rise up somewhere in that 15% range going forward on an annual basis.

Got it. Yeah. Thanks for that.

Certainly, terrific job with gross margin expansion. I know for the upcoming quarter here, looks like there will be a little bit of a sequential decrease because of, I guess, lower revenue. But overall, do you think...

can get above 20% at some point later this fiscal year or is that probably not doable just yet?

If we do it sequentially, I think the answer would be yes. I mean, obviously, our revenue will be down, you know, in that 10 million type range. So that does have an effect here in the first quarter. But historically, our second, third, fourth quarters are stronger quarters. And so the plan will be to continue to take that upward. And.

and maybe for the year it'll average close to that 20%, but hopefully by the end of the fiscal year we will be above that 20%. Okay, very good. And then, as far as inventories at retail, we'd like to hear your perspective. I know you talked about

last year having a glut of inventory at the retail level. What's your sense now as far as inventory levels to your customers?

Mark, from where we're at or where our retailers are at, as far as where the retailers are at, last year obviously there was this big glut of inventory just as demand started to slow down. Fast forward a year later, do you feel like your retail customers have in general appropriate inventory levels or maybe too much or just wanted to get a better perspective from you? Yeah, that's a good question. Our retailers for the most part, especially our strong retailers, are in a good place.

Of course, everyone's a little bit cautious, not sure what's going to happen from an economic standpoint. But most of our retailers are in a decent place. A lot of their caution comes from store traffic is what's really down. Sales are hanging in there pretty well, and most of the folks coming in are coming in to buy. You need to keep the hint.

and we're seeing a lot of good, they sell through, there's orders come back our way, which is good.

Okay, that's good to hear. And then, so by the end of fiscal 24, you could potentially be debt-free. So as you move beyond that, what would you say would be your capital priorities?

as you look to be, you know, how it looks like, you know, death free, but, you know, by the end of that F24. Yeah, the main one, of course, would be to continue with our growth initiatives because we plan on taking a lot of our growth initiatives and doing more with each one of them, coming out with new products and enhancements.

Things like that obviously will continue to look at acquisitions if there's things that are favorable there, but those are really the main two.

Got it. Well, thank you very much and best of luck.

Well, thank you very much and best of luck. Thanks, Anthony.

This concludes our question and answer session. I would like to turn the conference back over to Jerry Gitmer for any closing remarks.

Great, thanks. In closing, I want to thank all of our Flexible employees for their dedication and outstanding performance during the fiscal year.

I'm also thankful to all of you, Bud and Anthony, for participating in today's call. We really appreciate that. Obviously, you can please contact us if you have any additional questions, and we look forward to updating you on our next call. Thanks everyone for listening and participating today.

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