Q1 2024 Flexsteel Industries Inc Earnings Call

Good morning, and welcome to the Flexsteel industry first quarter of fiscal year 2024 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation that will be an opportunity to ask questions too.

Ask a question you May press Star then one on your Touchtone phone to withdraw from the question could you. Please press Star then too.

Please note disadvantage being recorded I would now like to turn the conference over to Derek Schmidt Chief Operating Officer, an interim Chief Financial Officer for Flexsteel Industries. Please go ahead.

Thank you and welcome to today's call to discuss what still industries first quarter fiscal year 2024 financial results.

Our earnings release, which we issued aftermarket closed yesterday Tuesday October 31st is available on the Investor Relations section of our website at Www Dot Flexsteel industries Dotcom under news and events I am here today, with Jerry Dittmer, President and Chief Executive Officer.

On today's call, we will provide for paired 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.

Forward looking statements by their nature involve estimates projections gold's forecast 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 her 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. It 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 web site contains the financial and other quantitative information be discussed today as well as the reconciliation of GAAP to non-GAAP measures and with that I will turn the call over to Jerry Detmar Jerry.

Good morning, and thank you for joining us today I am pleased to share with you our first quarter of fiscal year 2024 results.

While our industry faces challenging business conditions and several of our publicly traded peers have seen double digit sales decreases in the recent quarter.

We have leveraged our growth initiatives to offset these challenges and deliver sales within one per set of the prior year quarter.

This year over year sales comparison is adversely impacted by the elimination of ocean freight surcharges, which reduced revenue by approximately 7 million compared to the prior year quarter.

In the prior year, we use this surcharge mechanism to pass through a higher cost of ocean container delivery, which were significantly inflated due to supply chain issues <unk>.

Container delivery costs normalized throughout the last fiscal year and we subsequently eliminated this surcharge.

Excluding the 7 million impact from this ocean freight surcharge elimination sales growth related to unit volume and product mix was a robust 6.8%, reflecting are strong sales execution and the momentum of our growth initiatives.

Our ability to drive growth in a difficult industry environment reinforces that we are competing well and gaining share.

In addition.

We continue our focus on operational efficiency and cost savings, which propelled a gross margin of 19.5% in the first quarter compared to 16% in the same quarter of the prior year.

This margin expansion help fund additional investment and growth initiatives, while still delivering improved operating income of 1.9 billion compared to point 4 million in the same quarter of the prior year.

We expect the business environment in the near term to remain challenge. The industry is arguably already in a recession as consumers have shifted discretionary spending two experienced based expenditures like traveling entertainment and away from higher price hard goods like appliances electronics.

And home furnishings.

List of headwinds working against the economy and consumer spending continues to grow high interest rates and mortgage rates rising fuel prices geopolitical concerns U S government uncertainty student loan payment restart shrinking pandemic savings and rising credit card.

<unk>.

Despite these external challenges our team isn't deterred and remains intensely focused on profitably growing our business in fiscal year 2024.

We enter the second quarter with positive momentum and are confident in our ability to gross sales both compared to last year and the first quarter, while also improving.

Roasted operating margins over the first quarter, our strategies are working well.

Continue to innovate drive expedient and relevant new product development and build strong brands.

Cardless of demand uncertainties, we remain aggressive and identifying new growth opportunities, while prudently managing cost and investing for future growth and profit enhancement.

Now turn the call over to Derek to discuss our strategic initiatives and financial results as well as our outlook for quarter to 2024.

I'll be back at the end of the call with some closing comments and what we see ahead.

Thank you Gerry and good morning, everyone liked.

Like Jerry Uncompensate and the outlook for our business, while cognizant of the near term headwinds we may face at the recent October market in high point, North Carolina, we held numerous encouraging conversations with customers suppliers and others in the industry.

Oh sure a few highlights of the quarter, what we took away from high point market and how they shape our view of the remainder of the fiscal year.

First we debuted our new showroom at the October market, along with 36, new product groups.

Our sales team was energized and excited to take customers and suppliers through the new showroom, which provided an excellent showcase for both our current and new product lines. The feedback from customers was extremely positive.

Many noted that the traffic and energy levels were exceptionally strong in our showroom compared to others. They visited which gives us encouragement that we are competing well and differentiating through our focus on innovation and new products.

Second on past calls I have mentioned that Z Kleiner, our new sleep solution recliner has been a big success.

The first quarter, we have over 760 retailer's that replaced the product on their floors with even more committing to initial placement orders at the October market.

Notably we have seen repeat orders in excess of 60% from retailers, who initially placed the product.

Constraining strong adoption by consumers.

We also recently engaged an independent third party to conduct a sleep study of individuals who don't regularly sleep in a bed.

The study compared their experience sleeping in the regular recliner chair or sofa over a four week period, just sleeping in a Z coyner over the same time period.

Analyzing over 700 nights of sleep. This study found that Z Klein are significantly improved perceive sleep among people, who originally slept at least part of the night on a different recliner chair or sofa.

Study results also showed that 95% of individuals spelled Z Kleiner was a better solution than other products. They used in the past and 84% felt Z Kleiner helped improve their sleep. These.

These results show the strength and potential of our product in this category and we plan to expand our marketing using these study results.

In addition at the October market, we introduced an extension to our line with Sofa asleep solutions Alpha.

We plan to continue to innovate and expand offerings in the sleep solution space.

Third we continue to expand the distribution of flex are modular seeding line to traditional brick and mortar retailers word is placing well we.

We also launched several differentiated functional pieces to the flex line at October market, including a technology hub storage center.

Pet bed and asleep cat.

We will continue innovating the expanding this platform to drive future growth as well.

Finally, we continue to grow our big box distributions, notably with Costco through Costco Dot com.

Revenue generated through this customer contributed to the 10.7% growth and e-commerce sales in the quarter.

In addition, we recently expanded our marketing effort through our first Costco in store Roadshow event to showcase our flex modular furniture collection.

Operator: Good morning and welcome to the Flexsteel Industries' first quarter fiscal year, 2024 earnings conference call. Our participants will be in a listen-only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero.

We have several more of these events scheduled throughout the remainder of the fiscal year and look forward to using needs in store events to further our brand awareness and customer reach.

The positive energy from our interactions at market and the success of our strategic initiatives provides us confidence that we're well positioned to navigate the choppy near term industry conditions and deliver sales and profit growth for the fiscal year.

Operator: After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on your touch tone phone. To withdraw from the question queue please press star then two. Please note this event is being recorded.

With that I'll know I'll give you some additional details on the financial performance for the first quarter and the outlook for the second quarter of fiscal year 2024.

Derek Schmidt: I would now like to turn the conference over to Derek Schmidt, Chief Operating Officer and Interim Chief Financial Officer for Flexsteel Industries. Please go ahead. Thank you and welcome to today's call to discuss Flexsteel Industries' first quarter fiscal year 2024 financial results. Our earnings release which we issued after market closed yesterday Tuesday October 31st is available on the Investor Relations section of our website at www.flexsteelindustries.com under news and events.

For the quarter net sales were $94.6 million within our guidance of $92 million to $100 million provided during our fourth quarter of fiscal 2023 earnings call.

Jerry noted earlier sales growth related to unit volume and mix, which excludes ocean freight surcharges was a strong 6.8% in the quarter and we feel we have a sustainable growth momentum and both the retail and e-commerce channels.

Derek Schmidt: 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 four looking statements which can be identified using words such as estimate and dissipate expect in similar phrases. Four looking statements by their nature involve estimates, projections, goals, forecast and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the four looking statements.

From a profit perspective, the company delivered operating income of $1.9 million or two per cent of sales in the first quarter, which was within our guidance range of 1% to 3%.

Derek Schmidt: Such risks and uncertainties include but are not limited to those that are described in our most recent annual report on form 10k. As updated by our subsequent quarterly reports on form 10Q and other SEC filings as applicable. These four 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-gap measures which are intended to supplement but not substitute for the most directly comparable gap measures.

Moving to the balance sheet and statement of cash flows the company ended the quarter with a cash balance of $3 million.

Working capital of $118.3 million.

And the balance on a revolving line of credit of $33 million.

Working capital and our debt balance did increase from the fourth quarter due to a reduction in payables and the normal timing of several large annual payments occurring at the beginning of our fiscal year.

Going forward, we expect inventory reduction and profit improvement to be meaningful sources of cash and fiscal year 2024 to aggressively pay down debt.

Looking forward sales guidance for the second quarter is between 94 and $100 million, which represents sales growth of 1% to 7%.

Similar to the first quarter year over year net sales comparisons will be unfavorably impacted by the elimination of ocean freight surcharge revenue of approximately $4 million.

Derek Schmidt: The press release available on the website contains the financial and other quantitative information be discussed today as well as the reconciliation of gap to non-gap measures.

Excluding the ocean freight surcharge impact.

Both related to unit volume and mixes then forecasted between five and 12% <unk>.

Jerry Dittmer: And with that, I will turn the call over to Jerry Dittmer. Jerry?

Jerry Dittmer: Good morning and thank you for joining us today. I am pleased to share with you our first quarter fiscal year 2024 results. While our industry faces challenging business conditions and several of our publicly traded peers have seen double-digit sales decreases in the recent quarter, we have leveraged our growth initiatives to offset these challenges and deliver sales within 1% of the prior year quarter. This year-over-year sales comparison is adversely impacted by the elimination of ocean freight surcharges which reduce revenue by approximately 7 million compared to the prior year quarter.

Collecting the strong momentum of our growth initiatives and continued share gains.

Regarding profitability, we expect second quarter gross margin to improve from the first quarter with a forecasted range of 19.6% to 20.6%.

We expect gross margins to growth Ralph the fiscal year with expected sales growth and continued realisation of our cost savings in operational efficiency initiatives.

We.

<unk> to prudently managed SG&A spending while investing their growth initiatives and expect SG&A cost between 16 and $17 million for the quarter similar to the first quarter.

Jerry Dittmer: In the prior year, we used this surcharge mechanism to pass through a higher cost of ocean container delivery which were significantly inflated due to supply chain issues. Container delivery costs normalized throughout the last fiscal year, and we subsequently eliminated this surcharge, excluding the 7 million impact from this ocean freight surcharge elimination, sales growth related to unit volume and product mix was a robust 6.8 percent, reflecting our strong sales execution and the momentum of our growth initiatives.

We are projecting operating income as a percent of sales in the range of 2% to 4% for the second 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 second quarter guidance range continued to be consumer demand and competitive pricing conditions, both of which will be shaped by macro economic factors.

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

Jerry Dittmer: Our ability to drive growth in a difficult industry environment reinforces that we are competing well and gaining share. In addition, we continue our focus on operational efficiency and cost savings, which propelled a gross margin of 19.5 percent in the first quarter compared to 16 percent in the same quarter of the prior year. This margin expansion helped fund additional investment and growth initiatives while still delivering improved operating income of 1.9 million compared to 0.4 million in the same quarter of the prior year.

Near term priorities for cash remain reducing debt resourcing, new innovation and funding modest capital expenditures, mainly related to cost savings projects and continued modernization of ITU systems. We.

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

For the second quarter, we expect capital expenditures between one and a half and $2 million.

The effective tax rate for fiscal 2024 is expected to be in the range of 29% to 32%.

Jerry Dittmer: We expect the business environment in the near term to remain challenged. The industry is arguably already in a recession as consumers have shifted discretionary spending to experience based expenditures like traveling entertainment and away from higher priced hard goods like appliances, electronics, and home furnishings. The list of headwinds working against the economy and consumer spending continues to grow. High interest rates and mortgage rates, rising fuel prices, geopolitical concerns, US government uncertainty, student loan payment restart, shrinking pandemic savings, and rising credit card debt.

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

Thanks.

While we expect business conditions to be choppy in the near term.

I am confident that we are taking the right steps to secure profitable growth and our long term growth outlook remains promising we are well positioned to successfully deliver improved earnings and an even stronger balance sheet over the remainder of fiscal year 2024 was that will <unk>.

And the call to your questions operator.

We will now begin my question and answer session to ask a question you May press, Taiwan, one on your touch downtown well, if you're using a speaker phone. Please pick up your handset before pressing the keys to withdrawal from that question. Please press Star then too.

Jerry Dittmer: Despite these external challenges, our team isn't deterred and remained intensely focused on profitably growing our business in fiscal year 2024. We enter the second quarter with positive momentum and our confidence in our ability of growth sales both compared to last year and the first quarter, while also improving growth and operating margins over the first quarter. Our strategies are working. We'll continue to innovate, try to expedient and relevant new product development and build strong brands. Regardless of demand uncertainties, we remain aggressive in identifying new growth opportunities while prudently managing costs and investing for future growth and profit enhancement.

Question is Anthony <unk>.

Please go ahead.

Good morning, and thank you for taking the questions. So yeah <unk> just a quick comment that I I thought it was helpful that you guys provided the impact of fright surcharges for.

First quarter of last year, and you gave an indication about the second quarter. So as we look.

The second quarter as far as the second half of last year was there anything meaningful us the call out as far as.

Great surcharges or was it less of an issue.

If you could just remind us about that.

Yeah, Hey, Anthony it's Derek so it dissipates throughout the throughout the year. So for the third quarter of the impact of the surcharges would be a little less than $3 million and in the fourth quarter, it's a little less than a million dollars.

Derek Schmidt: I'll now turn the call over to Derek to discuss our strategic initiatives and financial results as well as our outlook for quarter to 2024.

Derek Schmidt: I'll be back at the end of the call with some closing comments on what we see ahead.

So we <unk> those ocean freight surcharges gradually throughout the year, Hence why you see a decrease in the year over your impact of revenue.

Derek Schmidt: Thank you, Jerry, and good morning, everyone. Like Jerry, I'm confident in the outlook for our business while cognizant of the near-term headwinds we may face. At the recent October market in High Point, North Carolina, we held numerous encouraging conversations with customers, suppliers, and others in the industry.

Got it thanks to Eric and then you know in terms of the growth initiatives.

Could you, perhaps maybe quantify how much that impacted your first quarter sales results and.

Derek Schmidt: I'll share a few highlights of the quarter, what we took away from High Point Market and how they shape our view of the remainder of the fiscal year. First, we debuted our new showroom at the October market along with 36 new product groups. Our sales team was energized and excited to take customers and suppliers through the new showroom which provided an excellent showcase for both our current and new product line. The feedback from customers was extremely positive.

As far as your outlook for the balance of the year to just you know looking to get more clarity about how much is you know flex a Z Klein or big box expansion, helping you guys.

Yeah no it.

The caller I can provide anthony is.

I prefer not to give you exact numbers, but the growth initiatives were a substantial.

Factor in terms of our growth. If you were take those out I mean, our business would probably be down not not not as large as certainly are external kind of peers, but it would be down probably in in the high single digit low double digit range. So.

Derek Schmidt: Many noted that the traffic and energy levels were exceptionally strong in our showroom compared to others they visited, which gives us encouragement that we are competing well and differentiating through our focus on innovation and new products.

Derek Schmidt: Second, on past calls, I have mentioned that Z-Cliner, our new Sleep Solution Recliner has been a big success. Through the first quarter, we have over 760 retailers that have placed the product on their floors with even more committing to initial placement orders at the October market. Notably, we have seen repeat orders in excess of 60 percent from retailers who initially placed the product, demonstrating strong adoption by consumers. We also recently engaged an independent third party to conduct a sleep study of individuals who don't regularly sleep in a bed.

Really the growth initial the good thing is the growth initiatives are working we're building momentum and we believe again, there's room for for the revenue from those growth initiatives to continue to expand which we believe at this time will allow us to grow every single corner here year over year for the.

<unk> remainder of the year.

Other piece of that too Anthony as we continue to come out with more line extensions and more of these growth initiatives. They're gonna also help us in the future.

Derek Schmidt: The study compared their experience sleeping in the regular Recliner Chair or SOFA over a week period to sleeping in the Z-Cliner over the same time period. Analyzing over 700 nights of sleep, this study found that Z-Cliner significantly improved perceived sleep among people who originally slept at least part of the night on a different Recliner Chair or SOFA. The study results also showed that 95 percent of individuals felt Z-Cliner was a better solution than other products they used in the past and 84 percent felt Z-Cliner helped improve their sleep.

I remember it market, both flexing decliner, there additional excuse and products that we brought out to enhance it was even more.

Got it yeah, yeah sort of thing you know the the the new showroom looked pretty good as well so as far as the gross margin improvements. We also really nice job there as well.

Yeah. It sounds like you you expect you know continue.

Improvement there so I mean, I'm you know given the overall improvements to the business I mean as.

As we look out beyond fiscal 24, but you know <unk> can we get to you know.

I mean, what's your <unk> like <unk> gross margins could go too is assuming of course, a normalized demand environment.

Derek Schmidt: These results show the strength and potential of our product in this category. We plan to expand our marketing using these study results. In addition, at the October market, we introduce an extension to our line with Z-Cliner, a sleep solution Z-Cliner Z-Cliner. We plan to continue to innovate and expand offerings in the sleep solution space.

Yeah I think.

Certainly our our target to end the year would be closer to 21%. So exit this you're closer to a 21% gross margin and then continue to kind of grow the top line and leveraged fixed costs to expand that into fiscal year 25.

Derek Schmidt: Third, we continue to expand the distribution of flex, our modular seating line, to traditional brick and mortar retailers where it is placing well. We also want several differentiated functional pieces to the flex line at October market, including a technology hub, storage center, pet bed and a sleep kit. We will continue innovating and expanding this platform to drive future growth as well.

Alright, well, that's very helpful. And then in terms of SG&A dollars. So those were up around 13 per cent looks like for this quarter here. So and I know you gave guidance for Q2 as well, but then you know what kind of you know.

Looking beyond that I mean, I know you guys are investing in your growth initiatives, but I guess that's.

Longer term I mean, you know how.

Derek Schmidt: Finally, we continue to grow our big box distribution, notably with Costco through Costco.com. Revenue generated through this customer contributed to the 10.7 percent growth in e-commerce sales in the quarter. In addition, we recently expanded our marketing effort through our first Costco in-store road show event to showcase our flex modular furniture collection. We have several more of these events scheduled throughout the remainder of the fiscal year and look forward to using these in-store events to further our brand awareness and customer reach.

Oh, how fast the will <unk>.

Those expenses grow <unk>, what is your outlook for that.

Yeah, I would I would expect Anthony for the remainder of the year for SG&A quarterly SG&A to kind of be within that 16 to 17 million dollar range per quarter I think as we think about fiscal year 25, I would expect SG&A to grow.

At a lower rate than the overall top line. So we would expect to leverage you know fixed costs, including SG&A investments kind of going forward. So there is more investment there to be had to continue to propel the top line, but it would grow at a rate lower than.

Derek Schmidt: The positive energy from our interactions at market and the success of our strategic initiatives provides us confidence that we are well-positioned and navigate the choppy near-term industry conditions and deliver sales and profit growth for the fiscal year.

Our overall top line and.

In future years.

Derek Schmidt: With that, I'll now give you some additional details on the financial performance for the first quarter and the outlook for the second quarter of fiscal year 2024. For the quarter, net sales were $94.6 million within our guidance of $92 to $100 million provided during our fourth quarter fiscal 2023 earnings call. As Jerry noted earlier, sales growth related to unit volume and mix, which excludes ocean freight surcharges, was a strong 6.8% in the quarter, and we feel we have sustainable growth momentum in both the retail and e-commerce channels.

Alright, well sounds good that's that's all I have I'll pass that onto others well. Thank you very much and best of luck.

Anthony.

The next question is from <unk>, while the camera research. Please go ahead.

Good morning, Carrie and Derek and congratulations one.

<unk>.

Couple of questions I know that it's the sales growth and dollars were 6.8%, excluding the freight surcharge on an apples to apples basis, but on a unit space that you can talk to about units mix can you give us an idea on units how that gross was like for example, the upholstery seats had.

Derek Schmidt: From a profit perspective, the company delivered operating income of $1.9 million or 2% of sales in the first quarter, which was within our guidance range of 1 to 3%. Moving to the balance sheet and statement of cash flows, the company ended the quarter with a cash balance of $3 million, working capital of $118.3 million, and a balance on our revolving line of credit of $33 million. Working capital and our debt balance did increase from the fourth quarter due to our reduction in payables and the normal timing of several large annual payments occurring at the beginning of our fiscal year. Going forward, we expect inventory reduction and profit improvement to be meaningful sources of cash in fiscal year 2024 to aggressively pay down debt.

<unk> grow year over year.

Yeah, the the way, we think about the product categories Bud.

Manufactured kind of stationary and sore soft seating are probably the our our largest categories. They encompass almost about 90 per cent of our sales. So to give you. Some perspective on units are sore soft seating business and units was up 13.7% year over year and manufactured.

[noise] stationary it was up 3.7 per cent. So we feel good about both of those numbers and I think they're reflective of the fact that we're competing while in the market and gaining sure.

And the manufacturer groceries, where you would get leverage on cost of goods. So does that the way to think about that <unk>.

Derek Schmidt: Looking forward, sales guidance for the second quarter is between $94 and $100 million, which represents sales growth of 1 to 7%. Similar to the first quarter, year-over-year net sales comparisons will be unfavorably impacted by the elimination of ocean freight surcharge revenue of approximately $4 million. Excluding the ocean freight surcharge impact, growth related to unit volume and mix is then forecasted between 5 and 12%, reflecting the strong momentum of our growth initiatives and continued share gains.

<unk> product is primarily variable cause <unk>.

Primarily I mean, there's two ways to think about it manufactured <unk> certainly we'd be leveraging our fixed cost structure related or plants.

But we also have three distribution centers and so the way I think about growing our source business that does leveraged the fixed cost of our distribution network as well.

<unk>. Okay. Thank you that that gets me into the cost of goods sold in the composition of it I think if I remember right and you correct me if I'm wrong, because my memory is like.

<unk> and.

And failing.

You you had talked about a couple of years ago, maybe getting gross margins into that 20 per cent range and that kind of was the target and if I look back historically I think the larger the highest gross margin percentage that I see going back five or six years ago, particularly for that second quarter. What would you think about 22.6 per cent for the.

Derek Schmidt: Regarding profitability, we expect second quarter growth margin to improve from the first quarter with a forecasted range of 19.6 to 20.6%. We expect growth margins to growth throughout the fiscal year with expected sales growth and continued realization of our cost savings and operational efficiency initiatives. We continue to prudently manage SGNA spending while investing in our growth initiatives and expect SGNA cost between $16 and $17 million for the quarter similar to the first quarter.

The end of the year, maybe close to 23.

Is is that the the high watermark, where are you looking to.

And how do you get there.

So first of all when you when you look back four five years ago, you have to remember that the composition of our business was much different than than it is today recall that we exited hospitality health care commercial office R. V seating those businesses any of those businesses had a higher.

Derek Schmidt: We are projecting operating income as a percent of sales in the range of 2 to 4% for the second quarter and expect operating income margins to improve throughout the year and parallel with forecasted growth margin improvement. The most significant drivers, the variability and the second quarter guidance range, continue to be consumer demand and competitive pricing conditions, both of which will be shaped by macroeconomic factors.

Gross margin, but they also had a significant SG&A load and so the the split between gross margin and SG&A as a percent of sales has changed because of that mix. So one the historical comparisons aren't the best benchmark that said going forward.

Derek Schmidt: Regarding our cash flow outlook, working capital is expected to be a major source of cash flow in the second quarter and full year as we anticipate inventories to steadily Near-term priorities for cash remain, reducing debt, resourcing new innovation, and funding modest capital expenditures, mainly related to cost savings projects, and continued modernization of IT systems. We expect debt levels at the end of fiscal 2024 in the range of zero to $15 million. For the second quarter, we expect capital expenditures between one and a half and $2 million. The effective tax rate for fiscal 2024 is expected to be in the range of 29 to 32%.

We've talked about you know our aspiration does get gross margins up in that 22 to 23 per cent range and I think with with continued top line growth with prudent management of our fixed cost structure and continued cost savings we have a path to get there you know.

Over the next several years.

Okay and M L O or the the components of cost of goods sold how how should we think about that materials, particularly in the manufactured somewhere around 50% labor 10, and the balance between overhead and distribution or transportation, how do you how do you get there.

Yeah, you're you're not probably too far off but you know materials, it's a little bit difficult because on on the on the sore side, we're buying finished goods.

Jerry Dittmer: Now I'll turn the call back over to Jerry to share his perspectives on our outlook. Thanks. While we expect business conditions to be choppy in the near term, I am confident that we are taking the right steps to secure profitable growth, and our long-term growth outlook remains promising. We are well positioned to successfully deliver improved earnings, and an even stronger balance sheet over the remainder of fiscal year 2024.

So I don't have visibility in terms of the break out between materials labor overhead for our source business, but in general you know materials, 50% to 60% you right labor and overhead kind of in that in that 20 to 25 per cent range and then.

Logistics about 15%.

Operator: With that, we'll open the call to your questions. Operator? We will now begin the question and answer session. To ask a question you may press star one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two.

And and the logistics would impact primarily the <unk> I mean, not primarily but with the short goods would be primarily a logistics hate to costa. Good. So do you bring your inventory and then you add the logistics call up to the inventory and it works its way through as it shows that the way to think about that and that's where you get to learn all the the inbound calls.

Anthony Liebitzinski: The first question is from Anthony Liebitzinski of Sedoti. Please go ahead. Good morning, and thank you for taking the questions. I guess first, just a quick comment, I thought it was helpful that you guys provided the impact of freight surges for first quarter of last year, and that you gave an indication about the second quarter. As we look beyond the second quarter as far as the second half of last year, was there anything meaningful to the call out as far as freight surges, or was it less of an issue?

Cost so container Cos and then drage for source goods into our D. C. Those are all capitalized parts of the finished cost so when I talked about logistics that 15% that is the cost of outbound shipments to our customers as well as our distribution centers and then any inner inner.

<unk> plan in our D C kind of transfer costs as well.

Gotcha, Okay, that's very helpful.

And other for me on on the <unk>, you talked about Costco in the sales lifted 6.8 per cent uhm.

Anthony Liebitzinski: You could just remind us about that. Yeah, Anthony is Derek. It dissipates throughout the year. For the third quarter, the impact of the surges would be a little less than $3 million, and in the fourth quarter, it's a little less than a million dollars. So we unwound those ocean freight surges gradually throughout the year, hence why you see a decrease in the year of your impact revenue.

How much of that was due to costco for the quarter and what's the how much is due to maybe getting <unk>, you're competing well Sir I'll be telling me, you're you're gaining new account. So could you look at sales that way.

Yeah, if if I D compose the 6.8% growth toss still probably made up about two and a half per cent of that so tack to take that away. We still feel like we're competing really well in our core business within within in our traditional retailers.

Derek Schmidt: God, thanks, Derek. And then in terms of the growth initiatives, can you perhaps maybe quantify how much that impacted your first quarter sales results and as far as your outlook for the balance of the year, or just looking to get more clarity about how much is flex as Z-cliner and big box expansion helping you guys? Yeah, I know the color I can provide Anthony is, I prefer not to give you exact numbers, but the growth initiatives were a substantial factor in terms of our growth.

Derek Schmidt: If you were to take those out, I mean, our business would probably be down, not as large as certainly our external kind of peers, but it would be down probably in the high single digit, low double digit range. So really the growth initiatives, the good thing is the growth initiatives are working, we're building momentum, and we believe again, there's room for the revenue from those growth initiatives to continue to expand, which we believe at this time will allow us to grow every single quarter here, year over year for the remainder of the year.

So is that for three how much the same location of your same customer and how much would be new customer.

There's there's not a lot of new customers.

Okay for the for the most part I mean, we're we're driving penetration is with our largest small strategic retailers, who we believe are gonna be the winters in the future within the business and that's really where we're we're we're gaining share. The other planes that were game. This year is obviously with a Z quieter and.

<unk> and other things like that and those enhanced product lines <unk>. Those are the other things that are drive it a lot of that.

Sure that's new floor space in existing retailer's, but many of those retailers dedicated to Ya right correct.

Correct.

Good way to look at it.

<unk> <unk> <unk>.

The other coral areas I mean, we we track the number of placements with that we have for every single one of our products and the number of placements is growing and we know retail spaces and growing so again that will give us another encouraging indication that we're gaining chair in retail <unk> that that's a great a great man.

Derek Schmidt: The other piece of that too, Anthony, is we continue to come out with more line extensions and more of these growth initiatives are going to also help us in the future. You might remember at Market, both Flex and Z-cliner, there are additional SKUs and products that we brought out to enhance those even more.

Do you have a percentage that you're willing to share on percentage replacement gross.

Yeah, It's been me and over the last couple of years between five and 10% kind of high single digit.

That's great and last for me the receivables look like you're looking like <unk> My methods right somewhere around 32 days virtually something closer to 40 days at the end of the year.

Derek Schmidt: The new showroom looked pretty good as well. As far as the gross margin improvement, a really nice job there as well. It sounds like you expect a continued improvement there. Given the overall improvements to the business, as we look at beyond fiscal 24, can we get through? I mean, what's your sense as to where gross margins could go to and assuming, of course, the normalized demand environment? Yeah, I think certainly our target to end the year would be closer to 21%. So exit this year closer to a 21% gross margin and then continue to kind of grow the top line and leverage fixed costs to expand that into fiscal year 25.

The health of your retail base can you talk a little bit about that is there are those the right numbers.

No I mean, we typically run around you know that 30 to kind of 33 day range. So that doesn't typically change. The only thing is you know depend on if we have heavy sales in the last month at the corner that will that will be what skews okay.

Once you receive will either up or down so overall, we're feeling good about.

The overall quality of credit and they are obviously in this uncertain economic time or were you know watching watching credit concerns closely but feel good about the quality they are no concerns or issues there.

Derek Schmidt: All right, that's where you help. And then in terms of SGNA dollars, those were up around 13% looks like a for this quarter here. And then I know you gave guidance for Q2 as well. But then, you know, looking beyond that, I mean, I know you guys are investing in your growth initiatives, but I guess it's longer term. I mean, you know, how fast will, you know, those expenses grow? I mean, what is your outlook for that?

Okay, and so the delinquencies were not particularly significant.

<unk>.

Okay, Great I'm 30 is the normal terms exactly normal that'd be your normal term.

30 to 33.

Okay, Yeah in terms of days.

Alright, but thank you very much congratulations and good luck on the balance of.

This calendar year in the fiscal year.

Thanks, but but.

I don't know if you have a question. Please press start on one.

Next question is from John <unk>. Please go ahead.

Derek Schmidt: Yeah, I would expect Anthony for the remainder of the year for SGNA, quarterly SGNA to kind of be within that $16 to $17 million range per quarter. I think as we think about fiscal year 25. I would expect SGNA to grow at a lower rate than the overall top line. So we would expect to leverage, you know, fixed costs, including SGNA investments kind of going forward. So there is more investment there to be had to continue to propel the top line, but it would grow at a rate lower than our overall top line in future years.

Good morning, Thanks for taking my questions.

It looks like a solid quarter.

Just have a couple of quick questions first.

First of all it was the the backlog at the end of the corridor.

12 48 million Yep.

<unk> relatively unchanged from where it was at the beginning of the year.

Okay great.

Another balance your question I noticed the other assets other current assets are up to 9.2 million.

It's been growing and I'm, just curious <unk> other assets bucket and why is that increasing yeah. The the the two things John every year in the first quarter, we prepay our annual insurance and we also prepay our annual S. A P software license so those two things.

Derek Schmidt: All right. Well, sounds good.

Derek Schmidt: That's all I have. I'll pass it on to others. Well, thank you very much. And best of luck. Thanks Anthony.

Bob Bugatch: The next question is from Bob Bugatch of Water Tower research. Please go ahead. Good morning, Jerry and Derek.

Things combined are.

Worth about two and a half million dollars. So that was the increase in Q1.

Okay. So that's eight going forward.

Correct, Yep and and that's our that's our normal normal cadence typically we pay those in full at the beginning of each fiscal year. Okay that makes sense, what's the status of the Mexicali plan I know you haven't opened it.

Derek Schmidt: Congratulations on on a good quarter. I had a couple of questions. I know that it's sales growth in dollars were 6.8% excluding the freight surcharge on an apples, apples, bases. But on a unit space, as you talked about units and mix. Can you give us an idea on units? How that growth was like, for example, a post receipts. How did that grow year over year? Yeah, the way we think about the product categories, but manufactured kind of stationary and sore soft seating are probably our largest categories.

It's a relatively new plan I think built within the last couple of years.

What's the status of that at this point.

Yeah, John Yeah. The status right now is with the current environment, we didn't see a need that we'd be move it in there in the short term. So we basically have at least out at this point in time.

And it's something will come back and visit every six to 12 months for the next year. It's we basically have at least out about 95 per cent.

Derek Schmidt: They encompass almost about 90% of our sales. So to give you some perspective on units, our source soft seating, business and units was up 13.7% year over year. And manufactured stationary was up 3.7%. So we feel good about both of those numbers. And I think they're reflective of the fact that we're competing well in the market and gaining share. And the manufacturer growth is where you would get leverage on cost of goods sold.

Okay, and what the leases month to month or a year to year.

They're they're they're year to year with obviously with us with options and there's two different parties in there and we'll just really continue to look at our demand it when will need it and continue to work with these folks that are or at least it right now.

Okay. That's good news what when does it rollover at the end of the year.

Different times, one of 'em rolls out in the fourth quarter of the other one a rollout first quarter next year.

Derek Schmidt: Is that the way to think about that? The source product is primarily variable-caused. Primarily, I mean there's two ways to think about it. Manufactured, certainly we'd be leveraging our fixed cost structure related to our plants. But we also have three distribution centers and so the way I think about growing our source business, that does leverage the fixed cost of our distribution network as well. So thank you. Thank you.

Alright, I guess I'm finally, the availability I think the press release said.

27.6 million that's down.

Substantially from the 45.8 million.

After a year.

What was the reason for the decline in available.

[noise] it's.

Largely due to inventory reduction.

Derek Schmidt: That gets me into the cost of goods sold and the composition. But I think if I remember right and correct me if I'm wrong because my memory is old like I am and failing. You had talked about a couple of years ago, maybe getting growth margins into that 20% range and that kind of was the target. And if I look back historically, I think the largest, the highest growth margin percentage that I see going back five or six years ago, particularly for that second quarter was like about 22.6% for the end of the year, maybe close to 23.

So I mean at its peak, our our inventory was over 190 million today, It's 120 million the light line of credit as an as an asset back facility.

Alright, I've I've got that put you know inventory was.

You know pretty steady looking at it over the last four quarters or so between 110 and 122.

And your availability was up.

Or were you just above 40 million so.

It's not clear to me.

[noise] towards has been about the same it's not drop significantly from what why is the availability down so low.

Derek Schmidt: Is that the high watermark where are you looking to and how do you get there? So first of all, when you look back four or five years ago, you have to remember that the composition of our business was much different than it is today. We call that we exited hospital, the health care commercial office RV seating, those businesses, many of those businesses had a higher gross margin, but they also had a significant SGNA load.

I'll have to I'll have to look at the specific periods and get back to you, which I'm, which I'm glad to do.

Okay that would be helpful. Thank you.

Let's conclude that question and answer session I would like to turn the conference back over to Jerry getting off my closing remarks.

In closing I would like to thank all of our Flexsteel employees for their dedication an outstanding performance during the quarter.

Derek Schmidt: And so the split between gross margin in SGNA as a percent of sales has changed because of that mix. So one, the historical comparisons aren't the best benchmark that said going forward, you know, we've talked about, you know, our aspiration is get gross margins up in that 22 to 23% range. And I think with continued top line growth with prudent management of our fixed cost structure and continued cost savings, we have a path to get there, you know, over the next several years.

Thanks to all of you for participating in today's call. Please contact us if you have any additional questions. We look forward to update you in our next call.

Do you have a great day. Thanks.

The conference has now concluded. Thank you for attending to both presentation you may now disconnect.

Derek Schmidt: Okay, and MLO or the components of cost of goods sold, how should we think about that materials, particularly in the manufacturers, some more around 50% labor 10 and the balance between overhead and distribution and transportation. How do you, how do you get there? Yeah, you're not probably too far off, but you know materials, it's a little bit difficult because on the on the source side we're buying finished goods. So I don't have visibility in terms of the breakout between materials labor overhead for our source business.

Derek Schmidt: But in general, you know, materials 50 to 60% you're right labor and overhead kind of in that in that 20 to 25% range and then logistics about 15%, and the logistics would impact primarily the, I mean, not primarily, but the source goods would be primarily a logistics hit to cost a good sold. You bring the inventory in and you add the logistics cost to the inventory and it works its way through as it's sold.

Derek Schmidt: Is that the way to think about that? And that's where you get the limit? No, the inbound costs, so container costs and then rage for source goods into our DC. Those are all capitalized parts of the finished costs. So when I talk about logistics at 15%, that is the cost of outbound shipments to our customers as well as our distribution centers and then any inner inner plant, inner DC kind of transfer costs as well.

Derek Schmidt: Gotcha. Okay. That's very helpful. And other for me on the sales, you talked about Costco and the sales list of 6.8%. How much of that was due to Costco for the quarter and what's the, how much is due to maybe gaining your competing well, so I would tell me you're gaining new accounts. So can you look at sales that way? Yeah, if I decompose the 6.8% growth, Costco probably made up about 2.5% of that.

Derek Schmidt: So tech take that away. We still feel like we're competing really well in our core business within within in our traditional retailers. So that for three, how much is same location or same customer and how much would be new customer? There's not a lot of new customers, but for the most part, I mean, where we're driving penetration is with our largest, most strategic retailers, who we believe are going to be the winners in the future within the business.

Derek Schmidt: And that's really where we're gaining share. The other place that we're gaining the share is obviously with the decliner and the flex and other things like that, and those enhanced product lines, those other things that are driving a lot of that. So that's new floor space and existing retailers, but many of those retailers are dedicated to you, right? Correct. That's a good way to look at it. Yeah, I mean, the other corollary is, I mean, we track the number of placements that we have for every single one of our products and the number of placements is growing, and we know retail spaces and growing.

Derek Schmidt: So again, that would give us another encouraging indication that we're gaining share in retail. That's a great, great method. Do you have a percentage that you're willing to share on percentage placement growth? Yeah, I spend, I mean, over the last couple of years between five and 10% kind of high single digits. That's great. And last for me, the receivables look like you're looking like my math is right somewhere around 32 days versus something closer to 40 days at the end of the year.

Derek Schmidt: Is the health of your retail base? Can you talk a little bit about that? Are those the right numbers? No, we typically run around, you know, that 30 to kind of 33 day range, so that doesn't typically change. The only thing is, you know, depending on if we have heavy sales in the last month of the quarter, that will be what skews accounts receivables either up or down. So overall, we're feeling good about.

Derek Schmidt: The overall quality of credit, and they are obviously in this uncertain economic time. We're watching credit concerns closely, but feel good about the quality they are. No concerns or issues there. Okay, and so the delinquencies are not particularly significant. No, 30. Okay, great. And 30 is the normal terms. Is that the normal terms? 30 to 33. Yeah, in terms of the days.

Derek Schmidt: But thank you very much and congratulations and good luck on the balance of this calendar year and the fiscal year. Thanks, buddy. But again, if you have a question, please press star then one.

John Deysher: The next question is from John Deysher of Pinnacle. Please go ahead. Good morning. Thanks for taking my questions. Looks like a solid quarter. I just have a couple of quick questions.

Derek Schmidt: First, what was the backlog at the end of the quarter? About 48 million. Yeah. Relatively unchanged from where it was at the beginning of the year.

Derek Schmidt: Okay, great. Another balance question. I noticed other assets, other current assets are up to 9.2 million. It's been growing and I'm just curious what's in that other assets bucket and why is that increasing? Yeah, the two things, John, every year in the first quarter, we prepay our annual insurance and we also prepay our annual SAP software license, though those two things combined are worth about $2.5 million. So that was the increase in Q1. Okay. So that's going forward. Correct. Yeah. And that's our that's our normal normal cadence. Typically, we pay those in full at the beginning of each fiscal year.

Derek Schmidt: Okay. That makes sense.

Derek Schmidt: What's the status of the Mexican Cali plant? I know you haven't opened it. It's a relatively new plan. I think built within the last couple of years. What's the status of that at this point? Yeah, John, the status right now is with the current environment, we didn't see a need that we'd be moving in there in the short term. So we basically have it leased out at this point in time. And it's something we'll come back and visit every six to 12 months.

Derek Schmidt: But for the next year, it's we basically have it leased out about 95%. Okay. And what leases month to month or year to year? They're there year to year with obviously with options and there's two different parties in there. And we'll just really continue to look at our demand when we'll need it and continue to work with these folks that are leasing it right now. Okay. That's good. There's what when does it roll over at the end of the year?

Derek Schmidt: Different times, one of them rolls out in the fourth quarter, the other one roll out first quarter next year. Great. I guess, and finally, the availability, I think the press release said 27.6 million. That's down, and pretty substantially from the $45.8 million at the end of the year. What was the reason for that decline in availability? It's largely due to inventory reduction. So I mean at its peak, our inventory was over $190 million, today it's $120 million.

Derek Schmidt: So line of credit is an asset at that facility. All right, I've got that, but you know inventory was pretty steady looking at it over the last four quarters or so, between $110 and $122, and your availability was up always above $40 million. So it's not clear to me, I mean the inventory has been about the same to not drop significantly. So why is the availability down so low? I'll have to look at the specific periods and get back to you, which I'm glad to do. Okay, that would be helpful. Thank you.

Operator: This concludes our question and answer session.

Jerry Dittmer: I would like to turn the conference back over to Jerry Ditmer for closing remarks. In closing, I would like to thank all of our Flexsteel employees for their dedication and outstanding performance during the quarter. Thanks to all of you for participating today's call.

Derek Schmidt: Please contact us if you have any additional questions. We look forward to updating you on our next call. Everybody have a great day. Thanks.

Operator: The conference has now concluded.

Operator: Thank you for attending today's presentation.

Operator: You may now