Q2 2024 Flexsteel Industries Inc Earnings Call
Good morning, and welcome to the Flex steel industries second quarter fiscal year 2024 earnings Conference call. All 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.
Operator: Good morning, and welcome to the Flexsteel Industries second quarter fiscal year 2024 earnings conference. All participants will be in a listen-only mode.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key, then 1 on your touch screen.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mike Ressler, Chief Financial Officer for <unk>.
Operator: To withdraw your question, please press start and 2. I would now like to turn the conference over to Mike Ressler, Chief Financial Officer of Flexsteel Industries. Thank you and welcome to today's call to discuss Flexsteel Industries' second quarter fiscal year 2024 financial results. Our earnings release, which we issued after the market closed yesterday, February 5th, is available on the investor relations section of our website at www.flexsteelindustries.com under news and events. I'm here today with Harry Dittmer, Chief Executive Officer, and Derek Schmidt, President.
Steel industries. Please go ahead.
Okay.
Thank you and welcome to today's call to discuss Black Stone industries second quarter fiscal year 2024 financial results our earnings release, which we issued after market close yesterday February 5th is available on the Investor Relations section of our website at <unk>.
E W. W. Dot flex steel industries Dot com under news and events.
I'm here today, with Jerry Dittmer, Chief Executive Officer, and Derek Schmidt precedent.
Mike Ressler: 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. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts, and assumptions, and are subject to risks and uncertainties that can cause actual results or outcomes to differ materially from those expressed in the forward-looking statement.
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.
Forward looking statements by their nature involve estimates projections goals forecasts and assumptions and are subject to risks and uncertainties that can cause actual results or outcomes to differ material from those expressed in the forward looking statements.
Mike Ressler: Such risks and uncertainties include, but are not limited to, those that are described in our most recent annual report on Form 10-K, as updated by our subsequent quarterly reports on Form 10-Q and other SEC filings, as applicable. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Additionally, we may refer to non-GAAP measures which are intended to supplement, but not substitute, for the most directly comparable GAAP measures.
Such risks and uncertainties include but are not limited to those that are described in our most recent annual report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q, and other SEC filings as applicable.
These forward looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Additionally, we may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
Press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of GAAP to non-GAAP measures.
Mike Ressler: The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of GAAP to non-GAAP measures. And with that, I'll turn the call over to Jerry Dittmer. Jerry?
With that I'll turn the call over to Jerry Dittmer Jerry.
Good morning, and thank you for joining us today I'd like to start by welcoming Mike Russell, our new Chief Financial Officer.
Jerald K. Dittmer: Good morning, and thank you for doing this today. I'd like to start by welcoming Mike Russworth, our new Chief Financial Officer. Mike has been with Flexsteel for 17 years in various accounting, finance, and other cross-functional roles, most recently as the Vice President of Manufacturing. His appointment as CFO reflects his leadership and contribution to the company's transformation over the past several years, and I am excited for Mike to further expand his positive impact on the company as CFO. I would also like to congratulate Gary Schmidt on his appointment as president and to the board of directors.
Mike has been with flex deal over 17 years in various accounting finance and other cross functional role most recently as the vice president of manufacturing.
His appointment as CFO reflects his leadership and contribution to the company's transformation over the past several years and I'm excited for Mike to further expand its positive impact on the company as CFO.
I would also like to congratulate Gary Smith on his employment to president and to the board of Directors Derek promotion reflects the leadership of the company's operation and growth strategy at all.
Jerald K. Dittmer: Derek's promotion reflects his leadership of the company's operations and growth strategy and aligns with his expanded responsibilities since joining the company nearly four years ago. With that, I am very pleased to share with you our second quarter fiscal year 2024 results. While headwinds from macroeconomic challenges and shifts in consumer spending towards experiences and away from things persist in our industry, we continue to execute on our strategic initiative and deliver sales growth of 7.5% when compared to the prior year quarter. In addition, our relentless focus on operational efficiency and cost savings propelled gross margin expansion and helped fund additional investment in growth initiatives while delivering significantly improved operating income when compared to both the same quarter of the prior year and our first quarter of fiscal 2024.
Lines with his expanded responsibility.
Joining the company nearly four years ago.
With that I am very pleased to share with you our second quarter fiscal year 'twenty 'twenty four result, well.
Well the headwind from macroeconomic challenges a shift in consumer spending toward experience.
And away from say persist in our industry.
We continue to execute on our strategic initiatives and delivered sales growth of seven 5% when compared to the prior year quarter.
In addition, our relentless focus on operational efficiency and cost savings propelled gross margin expansion and help fund additional investment in growth initiatives, while delivering significantly improved operating income when compared to both the same quarter of the <unk>.
Prior year, and our first quarter fiscal 2024.
Well, we expect the business environment in the near term to remain challenged our team isn't deterred and remain intensely focused on continuing to profitably grow our business throughout the remainder of fiscal year 'twenty 'twenty four and long term.
Jerald K. Dittmer: While we expect the business environment in the near term to remain challenged, our team isn't deterred and remains intensely focused on continuing to profitably grow our business throughout the remainder of fiscal year 2024 and beyond. We will continue our positive momentum going into the third quarter and are confident in our ability to grow sales both compared to last year and the second quarter. I'll now turn the call over to Gary to discuss our results and an update on our growth initiatives. 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 will continue our positive momentum going into the third quarter and are confident in our ability to grow sales both compared to last year and the second quarter I'll now turn the call over to Gerry to discuss our results and an update on our growth initiatives.
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.
Derek Schmidt: Like Jerry, I am very pleased with our second quarter results. We are competing well in our core business and executing our market expansion initiatives, resulting in both sales and profit growth, even in a difficult business environment. As Jerry noted earlier, we grew our top line by 7.5% in the fiscal second quarter. However, this year-over-year sales comparison continues to be adversely impacted by the elimination of ocean freight surcharges, which reduced revenue by approximately $3.5 million compared to the prior year's quarter. As discussed in our first quarter call, in the prior year, we used this surcharge mechanism to pass through a higher cost of ocean container delivery, which was significantly inflated due to supply chain issues. However, container delivery costs normalized throughout the last fiscal year, and we subsequently eliminated this surcharge.
Jerry I am very pleased with our second quarter results, we are competing well in our core business and executing our market expansion initiatives, resulting in both sales and profit growth even in a difficult business environment.
As Jerry noted earlier, we grew our top line by seven 5% in the fiscal second quarter.
This year over year sales comparison continues to be adversely impacted by the elimination of ocean freight surcharges, which reduced revenue by approximately $3.5 million compared to the prior year quarter.
As discussed in our first quarter call in the prior year. We use this surcharge mechanism to pass through higher cost of ocean container delivery, which were significantly inflated due to supply chain issues.
Taner delivery cost normalized throughout the last fiscal year and we subsequently eliminated this surcharge.
Derek Schmidt: Excluding the $3.5 million impact from this ocean freight surcharge elimination, sales growth related to unit volume and product mix was a robust 11.7%, further reinforcing our strong sales execution. Despite challenging industry conditions, we remain confident in our ability to continue our growth momentum into the second half of fiscal 2024 from both continued share gains in our core business and increasing momentum in our market expansion initiatives. In our core business, we expect to continue outperforming the industry by continuously improving and providing a differentiated customer experience, aligning ourselves with the strongest, most capable distribution partners, and driving a constant stream of relevant and compelling new products. We define our core business based on where the majority of our current sales are derived from, which is a product designed for primary living spaces like the living room, which is sold through independent furniture retailers, and has a more traditional or transitional style that primarily appeals to Gen X and baby boomer consumers.
Excluding the $3 5 million dollar impact from this ocean freight surcharge elimination.
Sales growth related to unit volume and product mix was a robust 11.7%.
They're reinforcing our strong sales execution.
Despite challenging industry conditions, we remain confident in our ability to continue our growth momentum into the second half of fiscal 'twenty 'twenty four from both continued share gains in our core business and increasing momentum in our market expansion initiatives.
In our core business, we expect to continue outperforming the industry by continuously improving and providing a differentiated customer experience.
Aligning ourselves with the strongest most capable distribution partners and.
And driving a constant stream of relevant and compelling new product.
We define our core business based upon where the majority of our current sales are derived from.
Which is product design for primary living spaces like the living room.
Which are sold through independent furniture retailers.
And have a more traditional or transitional style that primarily appeals to Gen X and baby Boomer consumers.
Derek Schmidt: This core business is large and profitable, and we will continue to defend and expand our penetration in this market. At the same time, we are pursuing growth in markets outside of our core that we believe are relevant and growing and where we have a clear right to win. If you recall from prior calls...
This core business is large and profitable and we will continue to defend and expand our penetration in this market.
At the same time, we are pursuing growth in markets outside of our core that we believe are relevant and growing and where we have a clear right to win.
If you recall from prior calls.
Derek Schmidt: These market expansion initiatives take 3-4. First, the consumer segments, namely Gen Z and Millennials. Second, product categories outside of primary living spaces, and lastly, sales distribution outside of independent furniture retailers. I'm pleased with our solid progress in all three of these areas. First, to address younger consumers, we're repositioning our brand portfolio to a three-pronged approach. We are modernizing the Flexsteel brand, and last October, we launched a strong lineup of more contemporary products at lower price points with exceptional comfort and quality. We were encouraged by initial placement, and sales of these new products were ramping nightly. We also launched a new brand, Charisma, last year to reach younger consumers with even lower priced on-trend products.
These market expansion initiatives take three forms.
First consumer segments, namely Gen Z and millennials.
Second product categories outside of primary living spaces.
And lastly sales distribution outside of independent furniture retailers and.
I am pleased with our solid progress in all three of these areas.
First to address younger consumers, we're repositioning our brand portfolio through a three pronged approach.
We are modernizing the flex still brand and.
And last October we launched a strong lineup of more contemporary product at lower price points with exceptional comfort and quality.
We're encouraged by initial placements and sales of these new products are ramping nicely.
We also launched a new brand charisma last year to reach younger consumers with even lower price on trend product and this year, we've invested in new talent and product engineering to support charisma, and we'll be launching multiple exciting new products at April high point market to grow this new brand.
Derek Schmidt: And this year, we've invested in new talent and product engineering to support Charisma, and we'll be launching multiple exciting new products at April's High Point Market to grow this new brand. Additionally, we continue expanding our new Flex solution with broader accessories to further improve its modularity and appeal to younger consumers. Moving on to our second market expansion focus, which is to expand into newer product categories. We focused on health and wellness this year with our new Z-Kleiner Sleep Chair.
Additionally, we continue expanding our new flex solution with broader accessories to further improve its modularity and appeal to younger consumers.
Moving onto our second market expansion focus which is to expand into newer product categories.
We focused on health and wellness this year with our news Decliner sleep chair.
Derek Schmidt: A recent third-party sleep study validated the superior sleep results from using Z-Cliner, which we are now leveraging in our marketing and demand generation initiatives. The product is now placed in over 960 retailers, and we are investing aggressively in additional innovation to protect our leadership position in this emerging market. Our third market expansion focus is to broaden our sales distribution to position our brands where and how consumers want to purchase furniture both now and into the future. For example, our Flex Modular Solution, which I mentioned earlier, can be purchased not only at leading retailers but also on Amazon, Wayfair, Costco.com, and our own online platform at FlexsteelStore.com.
A recent third party sleep study validated the superior sleep results from using decliner.
We are now leveraging in our marketing and demand generation initiatives.
The product has now placed in over 960 retailers and we are investing aggressively in additional innovation to protect our leadership position in this emerging market.
Our third market expansion focus is to broaden our sales distribution to business and our brands, where and how consumers want to purchase furniture, both now and into the future.
For example, our flex modular solution, which I mentioned earlier it can be purchased not only in leading retailers, but also on Amazon way fair Costco Dot com and our own online platform at flex deals store Dot com.
While I'm excited about our top line growth and future growth prospects I'm equally energized by our improved profitability, which is being propelled by four drivers.
Derek Schmidt: While I'm excited about our top-line growth and future growth prospects, I'm equally energized by our improved profitability, which is being propelled by four drivers. First, new products with higher margin profiles. We've raised the threshold for new product margins and expect product life cycle management will continue to improve our growth margin over time. Second, we're executing well operationally and delivering strong cost savings within our supply chain. Third, we've remained disciplined with pricing and pulled back promotions where needed to improve overall profitability. And fourth, we are achieving leverage on fixed costs through higher sales volume, which we believe will continue to be an important driver of operating margin improvement going forward as we grow the business. As I noted earlier, differentiated customer experience is an important element of share gains in our core market, as part of our ongoing commitment to improve the customer experience. The company announced the closure of its Dublin, Georgia, manufacturing plant.
First new products with higher margin profiles.
We've raised the threshold for new product margins and expect product lifecycle management will continue to improve our gross margin over time.
Second we are executing well operationally and delivering strong cost savings within our supply chain.
Third we've remained disciplined with pricing and pulled back promotions where needed to improve overall profitability.
And fourth we are achieving leverage on fixed costs through higher sales volume, which we believe will continue to be an important driver of operating margin improvement going forward as we grow the business.
As I noted earlier differentiated customer experience is an important element of share gains in our core markets.
As part of our ongoing commitment to improve the customer experience.
Company announced the closure of our Dublin, Georgia manufacturing plant.
Derek Schmidt: While this decision was very difficult, it enables us to reduce customer lead times and handling damage to improve the overall customer experience, while also decreasing inventory, simplifying logistics execution, and improving profitability. Currently, the Dublin facility supports less than 5% of the company's sales, and we expect to retain virtually all sales through this transition. Closure of the facility is expected to occur by the end of our fiscal fourth quarter. As part of this transition, the company expects to incur pre-tax restructuring and related expenses between $2.5 and $3.2 million. The one-time costs associated with employee separation are high.
While this decision was very difficult it enables us to reduce customer lead times and handling damage to improve the overall customer experience, while also decreasing inventory simplifying.
Logistics execution and improving profitability.
Currently the Dublin facility supports less than 5% of the company's sales and we expect to retain virtually all sales through this transition.
Closure of the facility is expected to occur by the end of our fiscal fourth quarter.
As part of this transition the company expects to incur pre tax restructuring and related expenses between two five and $3 $2 million.
The onetime costs are associated with employee separations.
Inventory and equipment transfers and other expenses directly related to the closure and are expected to be incurred primarily in our third and fourth quarters of fiscal year 2024.
Derek Schmidt: Inventory and equipment transfers and other expenses directly related to the closure are expected to be incurred primarily in our third and fourth quarters of fiscal year 2024. Once the closure is fully executed, the company expects annualized savings in the range of $4 to $4.5 million. The Dublin facility will be listed for sale upon closure, and the company anticipates a future one-time gain in excess of the carrying value of the asset. To summarize, we are growing and gaining share under challenging industry conditions. We have robust plans to continue that growth, both through our core markets and expansion into new markets. We are rapidly improving profitability, with more gains expected through Fiscal 2024 and into Fiscal 2025. We are generating strong free cash flow and strengthening our balance sheet, and we are investing to continuously improve our customer experience and to drive new innovation that will differentiate us and strengthen our market leadership in the long term. The future is bright, and I'm excited about what lies ahead for our organization.
Once the closure is fully executed the company expect annualized savings in the range of four to $4 $5 million.
The Dublin facility will be listed for sale upon closure.
And the company anticipates, a future one time gain in excess of the carrying value of the asset.
To summarize we are growing and gaining share under challenging industry conditions.
We have robust plans to continue that growth both through our core markets and expansion into new markets.
We are rapidly improving profitability with more gains expected through fiscal 2024 and into fiscal 2025.
We are generating strong free cash flow and strengthening our balance sheet.
And we are investing to continuously improve our customer experience and to drive new innovation that will differentiate us and strengthen our market leadership long term.
Future is bright and I'm excited about what lies ahead for our organization.
With that I'll turn the call over to Mike who will give you. Some additional details on our financial performance for the second quarter and the outlook for the third quarter of fiscal year 2024.
Thanks Derek.
For the quarter net sales were $100 $1 million slightly above our guidance of $94 million to $100 million provided during our first quarter fiscal 2024 earnings call.
Mike Ressler: With that, I'll turn the call over to Mike, who will give you some additional details on the financial performance for the second quarter and the outlook for the third quarter of fiscal year 2021. www.jeralddittmer.com. For the quarter, net sales were $100.1 million, slightly above our guidance of $94 to $100 million provided during our first quarter fiscal 2024 earnings call. As Eric noted earlier, sales growth related to unit volume and NICS, which included prior year quarter ocean trade surcharges, was a strong 11.7% in the quarter. And we feel we have sustainable growth momentum throughout the rest of fiscal 2024 and into fiscal 2025. From a profit perspective, the company delivered operating income of $4.6 million for 4.6% of sales in the second quarter, which exceeded our operating guidance range of 2 to 4%.
As Derek noted earlier sales growth related to unit volume and mix, which when excluding prior year quarter Ocean freight surcharges was a strong 11, 7% in the quarter and we feel we have sustainable growth momentum throughout the rest of fiscal 'twenty 'twenty four and into fiscal 2025.
From a profit perspective, the company delivered operating income of $4 $6 million for four 6% of sales in the second quarter.
Which exceeded our operating guidance range of 2% to 4%.
A meaningful increase in our operating income was driven by an expansion of our gross margin to 21, 9% in the quarter compared to 17% in the prior year quarter.
Moving to the balance sheet and statement of cash flows.
<unk> ended the quarter with $3 $3 million in cash.
Working capital of $105 million and the balance on our revolving line of credit of $17 $9 million.
Our increased profit combined with improved working capital levels allowed us to pay down our debt by 46% when compared to the fiscal first quarter.
Looking forward, we reiterate our sales guidance released with our preliminary results announcement on January 11th 2024.
Mike Ressler: The meaningful increase in our operating income was driven by an expansion of our growth margin to 21.9% in the quarter compared to 17% in the prior year quarter. Moving to the balance sheet and statement of cash flows, the company entered the quarter with $3.3 million in cash, working capital of $100.5 million, and a balance on its revolving line of credit of $17.9 million.
And while we expect onetime costs related to the closure of our Dublin facility will adversely impact GAAP operating income, we still expect to achieve our fiscal 2020 for operating income guidance on an adjusted non-GAAP basis.
When backing out the one time costs associated with the facility closure.
Specifically for the fiscal third quarter, we expect sales between 101 and $106 million, which represents sales growth of 2% to 7%.
Mike Ressler: Our increased profit, combined with improved working capital levels, allowed us to pay down our debt by 46% when compared to the fiscal first quarter. Looking forward, we reiterate the sales guidance released with our preliminary results announcement on January 11, 2024, and while we expect one-time costs related to the closure of our Dublin facility will adversely impact GAAP operating income, we still expect to achieve our fiscal 2024 operating income guidance on an adjusted non-GAAP basis when backing out the one-time costs associated with the facility closure. Specifically, for the fiscal third quarter, we expect sales between $101 and $106 million, which represents sales growth of 2 to 7 percent. Regarding profitability, we expect a growth margin in the range of 21 to 22 percent.
Regarding profitability, we expect gross margin in the range of 21% to 22%.
We expect gross margin to grow modestly throughout the remainder of the fiscal year and into fiscal 2025, driven by sales growth and continued realization of our cost savings initiatives.
We will continue to prudently manage SG&A spending with a focus on investing in our growth initiatives and expect SG&A costs between 17 and $17 $5 million for the third quarter.
Due to onetime costs related to the closure of our Dublin facility, we expect to incur restructuring costs in the third quarter between 2.0 and $2 $5 million.
Primarily related to employee separation costs, and the transfer of equipment and materials to other facilities.
Yeah.
We are projecting GAAP operating income as a percentage of sales in the range of two five to three 5% for the third quarter.
Excluding one time charges related to the closure of our Dublin facility, we expect adjusted non-GAAP operating income of $4 five to five 5%.
Mike Ressler: We expect Growth Margin to grow modestly throughout the remainder of the fiscal year and in fiscal 2025 driven by sales growth and the continued realization of our cost savings initiative. We will continue to prudently manage SG&A spending with a focus on investing in our growth initiatives and expect SG&A costs between $17 and $17.5 million for the third quarter. Due to one-time costs related to the closure of our Dublin facility, we expect to incur restructuring costs in the third quarter between $2.0 and $2.5 million, primarily related to employee separation costs and the transfer of equipment and materials to other facilities.
Consistent with our previously disclosed guidance.
The most significant driver of variability in our forecasted guidance ranges, our consumer demand changes.
Increases to ocean container rates, resulting from the disruption in the Red Sea and competitive pricing conditions, all of which will be largely influenced by external factors.
Regarding our cash flow outlook in the second half of fiscal 'twenty 'twenty four we expect improved profit and further inventory reduction to be a meaningful source of cash.
Near term priorities for cash remain reducing debt resourcing, new innovation and funding modest capital expenditures, mainly related to cost savings initiatives and continued modernization of our it systems.
The third quarter, we expect capital expenditures to be between 1.0 and $1.5 million.
Mike Ressler: We are projecting GAAP operating income as a percentage of sales in the range of 2.5% to 3.5% for the third quarter. Excluding one-time charges related to the closure of our Dublin facility, we expect adjusted non-GAAP operating income of 4.5 to 5.5 percent, consistent with our previously disclosed guidance. The most significant driver of variability in our forecasted guidance ranges are consumer demand changes, increases in ocean container rates resulting from the disruption in the Red Sea and competitive pricing conditions, all of which will be largely influenced by external factors.
We expect that levels at the end of the third quarter to be in the range of $12 million to $17 million and by the end of fiscal 'twenty 'twenty four we expect that levels in the range of zero to $10 million.
The effective tax rate for fiscal 'twenty 'twenty four is expected to be in the range of 30% to 32%.
Now I'll turn the call back over to Jerry to share his perspective on our outlook.
Thanks, Mike.
While we remain cognizant of macroeconomic factors, which could impact our current outlook I am optimistic about our ability to continue to gain share and confident we can maintain our profitable growth trajectory both in the near and long term.
Mike Ressler: Regarding our cash flow outlook, in the second half of Fiscal 2024, we expect improved profit and further inventory reduction to be a meaningful source of cash. Near-term priorities for CAF remain reducing debt, resourcing new innovation, and funding modest capital expenditures, mainly related to cost savings initiatives and continued modernization of our IT system. In the third quarter, we expect capital expenditures to be between $1.0 and $1.5 million. We expect debt levels at the end of the third quarter to be in the range of $12 to $17 million. And by the end of fiscal 2024, we expect debt levels in the range of $0 to $10 million. The effective tax rate for fiscal 2024 is expected to be in the range of 30 to 32%.
We have great momentum and are well.
Well positioned.
To successfully deliver improved earnings and an even stronger balance sheet over the remainder of fiscal year, 'twenty 'twenty four and into fiscal year 2025.
With that we will open the call to your questions operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please breasts.
Darden to at this time, we will pause momentarily to assemble our roster.
The first question is from Anthony <unk> with Sidoti <unk> Co LLC. Please go ahead.
Jerald K. Dittmer: Now, I'll turn the call back over to Jerry to share his perspective on our outlook. Thanks, Mike. While we remain cognizant of macroeconomic factors which could impact our current outlook, I am optimistic about our ability to continue to gain share and confident we can maintain our profitable growth trajectory both in the near and long term. We have great momentum and are well positioned to successfully deliver improved earnings and an even stronger balance sheet over the remainder of fiscal year 2024 and into fiscal year 2025. With that, we will open the call to your questions. You will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing star.
Yes, good morning, and thank you for taking the questions. So first the nice job in a tough environment for sure. So you guys talked about a lot about the market share gains are in your core business.
Just broadly speaking is it are you doing more business with your existing clients or.
Are you signing up new accounts I mean, it just wanted to get a better sense as to where those share gains are coming from.
Yeah, Anthony Thanks for the question. This is Jerry Yeah, a lot of our growth is in our core strategic accounts and in our in our core business. Obviously, we're still out signing up new folks at all times, but most of it has come from us going deeper and getting more placements with our core accounts.
That's very helpful. So yeah.
The Union the unit volume increase you know surely is even more impressive than your total sales gains are so I guess in terms of your guidance going forward, how should we think about the split between unit volumes versus pricing.
Yes, I think Anthony it's Derek going forward.
Operator: Any time your question has been addressed, and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble a rollout. The first question is from Antony Libyansky with Sidoti and Co., LLC. Yes, good morning, and thank you for taking the questions.
So in the third quarter as we you know let's.
Let's break pricing out between the surcharge impact and then just kind of normal pricing.
So in the third quarter, there was about $2 million of impact of the ocean freight surcharge elimination and then that comparison goes away in the fourth quarter. What we're assuming in terms of pricing is status quo likely for the remainder of the calendar year, the only caveat to that is.
Antony Libyansky: So first, nice job in a tough environment for sure. So you guys talked a lot about the market share gains in your core business. Just broadly speaking, are you doing more business with your existing clients or are you signing up new accounts? I mean, I just wanted to get a better sense as to where those market gains are coming from. Yeah, Anthony, thanks for the question. This is Jerry.
As youre likely aware.
Ocean freight container rates have gone up substantially they've actually almost doubled since the beginning of December so if they stay at that at that rate. We will have to consider certainly turning back on some type of surcharge mechanism.
But all that aside we would expect that the majority.
40 of the go forward growth is related to the unit volume and mix and not not a not pricing.
Jerald K. Dittmer: Yeah, a lot of our growth has come from our core strategic accounts in our core business. Obviously, we're still out signing up new folks at all times, but most of it has come from us going deeper and getting more placements with our core accounts. That's very helpful.
Understood Yeah. So thanks, Derek out and I was going to ask about the ocean freight costs. So those have.
Gone up or at least from the bottom here, okay, but at this point you have not passed along any higher.
Surcharges because of the Red seems to conflict. So okay understood Alright, and then I guess it just Justin.
Antony Libyansky: So, you know, the unit volume increase is certainly even more impressive than your total sales gains. So I guess in terms of your guidance going forward, you know, how should we think about the split between unit volumes versus pricing? Yeah, I think Anthony and Derek, um, going forward, um, so in the third quarter, as you know, we're going to break pricing out between the surcharge impact and then just kind of normal pricing. So in the third quarter, there's about $2 million in impact of the ocean freight surcharge elimination, and then that comparison goes away in the fourth quarter.
Just wanted to dig into a little bit deeper in terms of the gross margin improvement. Obviously, you know a very strong year over year.
Maybe if you could just kind of parse out maybe could go over the kind of the puts and takes as to what drove that.
<unk> talked about some cost savings initiatives, obviously you have.
Fixed cost leverage is there as well so maybe if you could just go over some of the details behind the gross margin improvement there and your confidence level about being able to sustain that.
Anthony This is Mike Yeah, So I think as as Derek highlighted.
Kind of four key drivers of the gross margin improvement one cost savings. So we've taken some actions to reduce structural costs in the prior year. We did we took a distribution center offline, which lowered our structural costs.
Derek Schmidt: What we are assuming in terms of pricing is the status quo for the remainder of the calendar year. The only caveat to that is, as you're likely aware, Ocean Freight container rates have gone up substantially. They've actually almost doubled since the beginning of December.
In addition on the cost savings side, we have pretty strong operations team that are executing save initiatives. Both in our sourcing manufacturing and then also in our logistics and distribution network, we feel like those processes are sustainable here going forward.
Derek Schmidt: So if they stay at that rate, we will have to consider certainly turning back on some type of surcharge mechanism. But all that aside, we would expect that the majority of the Gulf War growth is related to the unit volume and mix, and not just a not quite.
The second thing Derek mentioned was the introduction of new products and use them product lifecycle management too.
<unk> profit kind of on a go forward basis. So we're leveraging our cost savings initiatives as well as kind of our value engineering activities to continue to bring out new products.
John Eric Deysher: I was going to ask about the ocean freight costs, so those of... John Deysher, Flexsteel Industries Inc., www.FlexsteelIndustriesInc.com, Anthony, this is Mike. Yeah, so I think, as Derek highlighted, we have kind of four key drivers of the growth margin improvement. One is cost savings. So we've taken some actions to reduce structural costs. In the prior year, we took a distribution center offline, which lowered our structural costs.
That would have a better margin profile than the legacy products. We have that are weird we're discontinuing.
And then kind of the third piece would be you know the volume leverage.
You know were real thoughtful about reinvesting back into our structural costs. So that way, we get the leverage on our sales growth initiatives and then lastly, we've just been able to be more.
<unk> around our promotional activities as it relates to moving forward moving inventory and things like that.
Mike Ressler: In addition, on the cost savings side, we have a pretty strong operations team that is executing savings initiatives, both in our sourcing, manufacturing, and then also in our logistics and distribution network. We feel like those processes are sustainable here going forward. The second thing Derek mentioned was the introduction of new products and using product life cycle management to improve profit on a go-forward basis. So we're leveraging our cost savings initiatives as well as our value engineering activities to continue to bring out new products that have a better margin profile than the legacy products we have that we're discontinuing. And then the third piece would be the volume leverage. We're really thoughtful about reinvesting back into our structural costs so that way we get leverage on our sales growth initiatives, and then lastly, we've just been able to be more flexible. www. FlexsteelIndustries.com. The one thing I'll add, Anthony, is that I think, you know, the magnitude of impact from those four levers will change over time.
The one thing I'll add Anthony is I think you know the the magnitude of impact from those four levers will change over time I think in the near term as Mike alluded to you know operationally, we're executing really well lots of cost savings from from that and I think the pricing.
There's been a really big profit lever in the near term as we look at.
The quarters ahead in the years ahead.
We're going to be the main drivers of gross margin improvement going forward are going to be the product lifecycle management. So as we've explained again, we've raised the hurdle rates on new product as that becomes a larger and larger amount of our portfolio that is going to raise the overall margin profile.
And then I think the the operating leverage from growth. So so again I think the the mix of drivers will kind of evolve here over the coming quarters in coming years, but we still feel feel confident in terms of our ability to continue to expand margins.
Understood Yeah, that's fine thank you for that and then.
I guess you know so.
As far as the Dublin, Georgia facility closure here.
You mentioned that it's going to result in annualized cost savings of the.
Derek Schmidt: I think in the near term, as Mike alluded to, you know, operationally, we're executing really well, lots of profit savings from that, and I think the pricing discipline has been a really big profit lever in the near term. As we look at, you know, the quarters ahead and the years ahead, where are going to be the main drivers of growth margin improvement going forward? I think product life cycle management, so as we've explained, again, we've raised the hurdle rates on new products, and that becomes a larger and larger amount of our portfolio that's going to raise the overall margin profile, and then I think operating leverage from growth. So, again, I think the mix of drivers will kind of evolve here over the coming quarters and coming years, but we still feel confident in terms of our ability to continue to expand margins on this video. Thank you for that. I guess, you know, so... As far as the Dublin-Georgia facility closure here is concerned, you mentioned that it's going to result in annualized cost savings. At the bottom end of that scale is $4 million.
The bottom end of that is $4 million, but noticed that you didn't change your guidance for fiscal 'twenty. Five is this just the.
Function of you guys try and be conservative or just wondering if your will be reinvesting those savings elsewhere, how should we think about that.
Anthony This is Mike. So you know when we built our fiscal 2025 guidance range as we modeled out several.
Aren't you know structural cost change scenarios and we still feel good about what we've put out there for fiscal 2025 guidance range on both topline as well as from an operating income perspective.
So we had we had we had several scenarios even though we had not made a decision in terms of closing doubling at the time. We provided 25 guidance. There was multiple options to drive manufacturing efficiency, which as Mike said, we built into that fiscal year 'twenty five guidance I think we'll be in a better position.
Here at the end of this fiscal year early next to determine if there's potentially additional savings beyond what we have estimated that would meaningfully change our fiscal year 'twenty guidance.
Antony Libyansky: But notice that you didn't change your guidance for fiscal 25. Is this just a function of you guys trying to be conservative or just wondering if you will be reinvesting those savings elsewhere? How should we think about that? Anthony, this is Mike.
Yeah.
Understood well, thank you very much and best of luck and I'll pass it onto others.
Thanks, Anthony Thanks Anthony.
The next question is from Bob.
With water Tower research. Please go ahead.
Good morning, Jerry Good morning, Derek.
Derek and Doug Congratulations to you, Mike Andrew you Derek as well a couple of questions on the order book if I could.
Mike Ressler: So, you know, when we built our fiscal 2025 guidance range, we modeled out several different, you know, structural cost change scenarios, and we still feel good about what we put out there for fiscal 2025 guidance range on both the top line as well as from an operating income perspective. We had several scenarios, even though we had not made a decision in terms of closing Dublin at the time we provided fiscal year 25 guidance, there were multiple options to drive manufacturing efficiency, which, as Mike said, we built into that fiscal year 25 guidance. I think we'll be in a better position here at the end of this fiscal year and early next to determine if there are potentially additional savings beyond what we've estimated that would meaningfully change our fiscal year 25 guidance. Understandable, well, thank you very much and best of luck, and I'll pass it on to others.
Can you talk a little bit about that.
Quality of orders in terms of the product vitality, how much of that is new business. I know you said most of it's coming from existing strategic accounts, but I'm just curious as to what Youre seeing in terms of new placements are increased penetration in those accounts and.
With the new product versus old product.
Yeah, so at the highest level.
But a lot of them are getting new placements on the floor. We do have obviously, our flex and <unk> products are doing very well and those obviously are also driving a big piece of that.
The other color that I'll add Budd is that we actually measure internally, what our sales, but the percent of our overall sales from new products.
And we measure new products over the last kind of three years and that's that's close to 25%. So we feel good that we are driving relevant new product that's resonating with the market.
Antony Libyansky: Thanks Anthony. Thanks Kathleen. The next question is from Bud Bugatch with Water Tower Research. Good morning, Jerry. Good morning, Derek, and congratulations to you, Mike, and to you, Derek, as well.
And we would expect going forward that new product would make up at least 25% of our overall sales if not more going forward.
And that's pretty much the classic definition of product vitality. There. So when you look at that on a weird or a core of continuing moving average how has that changed over the last 12 to 18 months.
Beryl Bugatch: A couple of questions on the order book, if I could. Can you talk a little bit about the quality of orders in terms of product vitality and how much of that's new business? I know you said most of it's coming from existing strategic accounts, but I was curious as to what you're seeing in terms of new placements, increased penetration in those accounts, and new product versus old product. Yeah, so it's the highest level, but a lot of them are getting new placements on the floor.
It's definitely increased we've been we've been more aggressive around launching new products and that trajectory will continue.
Okay. So yeah. So if you looked at it basically on just doing a one instead of a one year basis instead of a three would be higher than 25% would be though.
The weighted average was that the way to read that answer.
Well, it's difficult to compare one I mean, one year versus three year, because you've got a lot more product in the three year, but if you look at the three year percentage what it is today and if you were to rewind and go back 12 months ago, It was lower than the 25%.
Jerald K. Dittmer: We do have, obviously, our Flex and ZClan products are doing very well, and those obviously are also driving a big piece of that. Yeah, the other thing that I'll add to it is that we actually measure internally the percent of our overall sales from new products, and we measure new products over the last kind of three years, and that's close to 25%. So we feel good that we are driving relevant new products that are responding with the market, and we would expect going forward that new products would make up at least 25% of our overall sales, if not more going forward. That's pretty much the classic definition of product vitality there. So when you look at that on a weighted or continuing moving average, how has that changed over the last 12 to 18 years?
So again, and we do expect going for that number to increase throat throughout time.
Does that help.
I think so I always try to put numbers to the things I know you the color as well as qualitative and the numbers are quantitative and.
That's a that's a that's a definitely a weakness of the analytical community.
It could be more quantitative and wanting numbers.
I'm also curious as to the change in the composition of costs and how to look at maybe something like a contribution margin going forward with taking Dublin out and.
So these are left what's the variable cost structure look like the M <unk> and D N T.
Derek Schmidt: This is definitely increased. We've been more aggressive around launching new products, and that trajectory will continue. And okay, so if you looked at it basically on just one, instead of a one-year basis, instead of three, it would be higher than 25%. It would be, that's through the average.
Components of of cost on a normalized basis.
And what is the fixed cost component looks like.
Yeah, It doesn't change, meaning that mean that meaningfully from what we what we've shared previously with you Budd.
If you look at the composition of the four to four and a half million dollar savings from Dublin.
Derek Schmidt: Is that the way to read that answer? Well, it's difficult to compare a one-year versus a three-year because we've got a lot more product in the three-year. But if you look at that three-year percentage, what it is today, and if you were to rewind and go back 12 months ago, it was lower than 25%.
You know a little less than $2 million of that is from structural cost reduction.
So looking at the <unk> you had I think and correct me if I'm wrong My memory is I'm old and my Memory's faulty.
Beryl Bugatch: So again, and we do expect going forward that number to increase throughout time. I think so. I always try to put numbers to things. I know color is qualitative, and the numbers are quantitative. That's definitely a weakness of the analytical community, to be more quantitative and wanting numbers.
But I do believe you you told US show a couple of years ago that I think that.
The target gross margin was in the low twenties, we seem to be there what's the what's that look like going forward.
Yeah from a gross margin perspective, certainly we're striving we're aspiring to 23% you know or more kind of in the mid long term.
Beryl Bugatch: I'm also curious as to the change in the composition of costs and how to look at maybe something like a contribution margin going forward with taking government out and the facilities are left with a variable cost structure look like the MLO and D&T kind of components of costs on a normalized basis, and what does the fixed cost component look like? Yeah, it doesn't change me, I mean, that uniquely from what we've shared previously with you, bud. If you look at the composition of the, you know, four to four and a half million dollars savings from Dublin, you know, a little less than 2 million of that is from structural cost reduction. The rest of it is, you know, efficiencies around variable costs.
And then we ran some basic long term theres.
Mid long term have a hub.
Uh huh.
Five years three to five years three to five years do you have to get.
Alright, and if I do I read the guidance right.
For 25 years, Youre, saying that youre going to have no no that is that the way to read that was.
I was trying to make sure I understood.
The table.
Yes that is correct.
So you do want that down to zero in and once that zero, what's the what's the use of cash look like what is your what's your thought process.
Yeah in terms of capital allocation, but.
Laid out earlier in the call.
These these pursuits to expand our penetration in new markets, we would look for value enhancing acquisitions that would accelerate our penetration into one of one of those three areas either help us address the needs of younger consumers.
Beryl Bugatch: So looking at the, I think, and correct me if I'm wrong, my memory is, I'm old, and my memory is faulty. But I do believe you told us a couple of years ago that I think that the target close margin was in the low 20s. We seem to be there. What does that look like going forward? Yeah, from a growth margin perspective, certainly we're thriving, you know, we're expiring to 23%, you know, or more kind of in the mid-long term, and the New Growth subdivision his mid-long term have a have three to five years. Alright, and do I read the guidance right that for 25, you're saying that you're going to have no debt?
Expand our product category penetration beyond the living room or expand our sales distribution beyond the independent retailer.
The areas that we've kind of talked about in terms of acquisition priorities would be potential.
Potential outdoor company, a direct to consumer company or a company with a modern mid priced lifestyle brand.
So we would expect to start to potentially accumulate some cash on the balance sheet and and and more.
More proactively look for value enhancing acquisitions.
And does that take you out of manufacturing or into retail or into or out of furniture.
Beryl Bugatch: Is that the way to read that? www. FlexsteelIndustries.com www.flexsteel.com. Yes, that would be correct. So you do want that down to zero. And once that's gone to zero, what does the use of cash look like?
No no.
We're squarely focused on residential furniture.
Certainly in the midterm, we do not desire to to be in retail ourselves.
So this is again, it's this is leveraging our core competence.
Derek Schmidt: What's your thought process? Yeah, in terms of capital allocation, Bud, you know, so I laid out earlier in the call these pursuits to expand our penetration in new markets. We would look for value-enhancing acquisitions that would accelerate our penetration into one of those three areas.
And bringing in new capabilities.
Within you know.
Furniture wholesaling of for lack of a better term.
Okay, Alright, thank you very much congratulations during the quarter and best of luck for the balance of the fiscal year and beyond.
Derek Schmidt: Either help us address the needs of younger consumers, expand our product category penetration beyond the living room, or expand our sales distribution beyond the independent retailer. So the areas that we've kind of talked about in terms of acquisition priorities would be a potential outdoor company, a direct-to-consumer company, or a company with a modern mid-priced lifestyle kind of brand. So we would expect them to potentially accumulate some cash on the balance sheet and more proactively look for value-enhancing acquisitions.
Thank you Budd.
Yeah.
Again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to Jerry Dittmer for any closing remarks.
Great. Thank you in closing I'd like to thank all of our flex fuel employees for their dedication and outstanding performance during the quarter and thanks to all of you for participating in today's call.
Derek Schmidt: And does that take you out of manufacturing or into retail or into, or out of furniture or out of... No, no. You know, we're squarely focused on residential furniture. Certainly, in the midterm, we do not desire to be in retail ourselves.
These contact us with any additional questions and we look forward to updating you on our next call everybody have a great day. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Beryl Bugatch: So this is again, this is leveraging our core competence and bringing in new capabilities within, you know. Furniture wholesaling, for lack of a better term. Alright, thank you very much, congratulations on the quarter, and best of luck for the balance of the fiscal year and beyond. Thank you, Martin, and if you have a question, please press start. This concludes our question and answer session. I'd like to turn the conference back over to Jerald Dittmer for. Great, thank you. In closing, I'd like to thank all our Flexsteel employees for their dedication and outstanding performance during the quarter and thank all of you for participating in today's call. Please contact us with any additional questions, and we look forward to updating you on our next call.
Okay.
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Jerald K. Dittmer: Everybody have a great day. Thanks, the conference has now concluded and thank you for attending today's presentation you may now Subscribe, please, www.jeralddittmer.com © Beryl Bugatch, Jerald Dittmer, John Deysher, Flexsteel Industries Inc, Produced by the U.S. Embassy in the Philippines Produced by the U.S. Embassy in the Philippines With the support of the U.S. Embassy in the Philippines With the support of the U.S. Embassy in the Philippines With the support of the U.S. Embassy in the Philippines, © The Ultimate Parody Site! www. FlexsteelIndustries.com, J.W.
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Operator: Bermudez, F.E. Mead, J.T. Brown, B.C. Hal. S.L. C.F. Centerville, J.T.
Operator: Brown. V.P. B.C.
Operator: Barker, J.T. Brown, V.P. Barker, J.T. Brown. V.P. C.F.
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Operator: Barker. J.T. Brown. V.P.
Operator: Barker, J.T. Brown. V.P. Barker, J.T. Brown. V.P. Barker, J.T. Brown.