Q1 2025 Flexsteel Industries Inc Earnings Call
Jerald Dittmer, John Deysher,
Speaker Change: Good day and welcome to the Flex Steel Industries, first quarter fiscal year 2025 earnings results. All participants will be in listen-only mode. Should you need assistance please signally conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then one on your touchdown phone. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to Mike Reffler, CFO . Please go ahead.
Mike Ressler: Thank you and welcome to today's call to discuss flexible industries first quarter, fiscal year 2025 financial results.
Mike Ressler: Our earnings release, which we issued after Market Closed yesterday, Monday, October 21st, is available on the investor-relation section of our website at www.flexfield.com on our news and events.
Speaker Change: I'm here today with Derek Schmidt, President and Chief Executive Officer. On today's call, we will provide prepared remarks and we will then open the call dear questions.
Speaker Change: 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 word such as estimate, anticipate, expect, and similar phrases.
Speaker Change: Forward-looking statements by their nature involve estimates, projections, goals.
Speaker Change: Forecasts, and assumptions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Additionally, we may refer to non-gap measures, which are intended to supplement but not substitute for the most directly comparable gap measures.
Speaker Change: The press release available on our website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the gap to non-gap measures.
Speaker Change: and with that I'll turn the call over to Derek Schmidt, Derek.
Derek Schmidt: Good morning, and thank you for joining us today. I am pleased to share with you our first quarter results.
Derek Schmidt: We continue to execute well and deliver strong sales growth, sizable year over year profit improvement, and continued positive free cash flow in the quarter.
Derek Schmidt: While industry demand remains lackluster due to challenging macroeconomic conditions.
Derek Schmidt: We continue to build growth momentum and delivered roughly 10% sales growth in the quarter which represents our fourth consecutive quarter of mid-single to low-double digit year of a year growth.
Derek Schmidt: Encouragingly, the sources of our growth are numerous, which gives me increased confidence that our growth momentum is sustainable.
Derek Schmidt: Most important, we continue to drive growth both through shared games and our core markets in new growth and expanded markets.
Derek Schmidt: and largely attribute our gross success to the investments we've made in new product development, innovation, customer experience, and marketing.
Derek Schmidt: Given the attractive returns from these investments, we will continue to aggressively pursue new investment opportunities that both unleash incremental growth in our core markets and accelerate penetration in expanded markets with long-term profit potential.
Derek Schmidt: While I'm thrilled with the success of our consistent top-line growth over the past 12 months, particularly considering industry headwinds, I'm also especially pleased with our progress driving meaningful year-over-year profitability improvement.
Derek Schmidt: Operating margin was 5.8% in the quarter, up compared to 2% in the prior year quarter. And represents our fifth consecutive quarter of year over year adjusted operating margin improvement.
Derek Schmidt: The levers, driving our consistent profit improvement, are unchanged and working effectively and include sales growth leverage, strong operational execution and productivity, and product portfolio management.
Derek Schmidt: As we look forward to the remainder of our fiscal year 2025, our outlook for the industry and broader economy remains largely unchanged from what I shared last quarter.
Derek Schmidt: Well, there are certainly some bright spots to highlight.
Derek Schmidt: Namely, the start of the Fed's interest rate reductions, progress, timing, inflation, and continued strength in the labor markets.
Derek Schmidt: We expect that weak consumer demand will continue to be a headwind for the industry in the near-term. Given, the cumulative toll of inflation on consumer spending, the absence of a meaningful housing recovery and ongoing uncertainty over the U.S. presidential election and consequences on potential policy changes impacting the economy.
Derek Schmidt: Despite challenging industry conditions, we remain optimistic about our ability to continue growing properly in a difficult environment and remain committed to our strategies and investments to pursue new growth.
Derek Schmidt: The High Point furniture market kicks off this week and we will be showcasing another impressive round of new product instructions.
Derek Schmidt: In total, we're introducing 27 new product groups and 10 line extensions, comprising 237 unique skews.
Derek Schmidt: This magnitude of introductions, combined with a very successful new product launch this past spring at April Market, will make calendar 2024 a record year for new product activations for Flex still. It will be a key driver of continued growth both in fiscal year 2025 and beyond.
Speaker Change: We continue to pursue products with unique innovations informed by validated tumor insights.
Speaker Change: This approach is ensuring that we bring differentiated relevant products to market.
Speaker Change: Notably, with great collaboration between our marketing, product, and sourcing teams, we've developed a comprehensive new recliner program that offers consumers a very simple, personalized shopping experience that fits within 100 square feet of retail space.
Speaker Change: Branded Perfect Match, this program consists of five unique tiers of recliners with a logical, progressive feature set and pricing strategy.
Speaker Change: All the new recliners also feature our new thought closed mechanism, a notable value addition for consumers.
Speaker Change: The program has turned key for retailers and includes powerful consumer-oriented messaging and marketing through a point of sale materials, digital landing pages, and website content.
Speaker Change: We expect 90% of our retailers to place this program by the end of the calendar year, and for the program to be a key part of our continued core market growth in the second half of the fiscal year.
Speaker Change: I October High Point Market will also feature expansions to our charisma brand Z-cliner lineup in case good collections.
Speaker Change: All of which are important drivers in our expanded markets growth strategy.
Speaker Change: Another important growth element where we are making notable strides is expansion with our largest most strategic customers in the core independent retail channel.
Speaker Change: With individual count plans, tuned and tailored for each of these accounts.
Speaker Change: We believe we have a formula that significantly enhances our value proposition to these large growing retailers.
Speaker Change: What's leading to an increased placement in-store and online with these customers is a powerful combination.
Speaker Change: of Exclusive New Product Development, fabric and cover collections that elevate each retailer's unique merchandise in strategy.
Speaker Change: Co-investment and Demand Generation Initiatives.
Speaker Change: Prioritized production scheduling and a differentiated customer experience.
Speaker Change: and turn key marketing content.
Speaker Change: Demonstrated success with several existing customers is paving the way to expanded distribution with new customers.
Speaker Change: especially in a track of growing and under-penetrated geographical markets.
Speaker Change: At the same time, we are growing our independent furniture retail distribution. We also continue to make good progress in expanding our brands reach into the feedback and e-commerce channels.
Speaker Change: I'm proud of our teen strong start to fiscal year 2025 and encouraged by our trajectory and prospects for continued profitable growth. I'll be back momentarily to share my thoughts on our outlook.
Speaker Change: With that, I'll turn the call over to Mike who will give you some additional details on the financial performance for the first quarter and the financial outlook for the second quarter and full year fiscal 2025.
Mike Ressler: For the first quarter, net sales were $104 million, or growth of 9.9% compared to net sales of 94.6 million dollars in the prior year quarter.
Mike Ressler: As Derek mentioned, this marks our fourth consecutive quarter of year over year sales growth and near the high end of our guidance range of 100 to 105 million dollars.
Mike Ressler: Sales orders for the quarter were $100.8 million or $9.4% above prior year quarter orders of $92.1 million.
Mike Ressler: Stales Order Back Log at the end of the period was $60.5 million.
Mike Ressler: From a profit perspective, the company delivered gap operating income of $6 million or $5.8% of sales in the first quarter.
Mike Ressler: The 5.8% operating margin was near the top end of our guidance range of 5.0 to 6.0% and a 380 basis point increase from the prior year corridor.
Mike Ressler: From a balance sheet and cash flow perspective, the company generated 2.4 million of operating cash flow in the quarter, higher profit and effective working capital management, more than offset annual cash outflows for cash incentive and software and insurance renewables.
Mike Ressler: The company received 1.2 million in proceeds from a life insurance policy in the period and has invested 0.4 million in cap-ax, primarily for modernization of ERP systems.
Mike Ressler: We ended the quarter with 98.3 million of working capital, a cash balance of 5.7 million and a balance on our line of credit of 3.6 million.
Mike Ressler: Moving to our outlook, failed guidance for the second quarter is between 103 and $107 million, reflecting three to 7% growth compared to the prior year quarter.
Mike Ressler: Sales growth will be driven primarily by unit volume growth into a lesser extent pricing from ocean freight surcharges to offset higher ocean freight costs.
Mike Ressler: Regarding profitability, we expect gross margins between 21.5 and 22% in the second quarter, driven by sales gross leverage, partially offset by higher ocean freight costs.
Mike Ressler: We expect girl smartens to expand modestly throughout the fiscal year with sales growth leverage, cost savings initiatives, and profitability of new product mix more than offsetting supply chain inflation.
Mike Ressler: We will continue to prioritize investments that accelerate our growth strategy and generate the highest return on investment and expect SGA costs between 16.5 and 17.0 million dollars for the quarter.
Mike Ressler: We project operating income as a percentage of sales in the range of 5.5 to 6.5% for the second quarter and expect operating income margins to improve throughout the year in parallel with forecasted growth margin improvement.
Mike Ressler: The most significant driver of variability in the second quarter guidance range are consumer demand, competitive pricing conditions, and ocean freight rates, all of which will be shaped by macroeconomic factors.
Mike Ressler: Regarding our cash flow outlook, we expect free cash flow for the quarter in the range of five to ten million dollars and expect to be debt-free by the end of the quarter.
Mike Ressler: New York Film Priorities for Cash remain, resourcing new innovation and funding capital expenditures.
Mike Ressler: For the second quarter, we expect capital expenditures between 0.5 and $1.0 million, primarily for modernization of our ERP systems and supply chain maintenance.
Mike Ressler: Now, I'll turn the call back over to Derek to share his perspectives on our outlook.
Derek Schmidt: Thanks, Mike.
Derek Schmidt: While macro conditions will likely continue to suppress industry growth in the near-term, I believe that our exceptional talent combined with the foundational growth investments we've made have positioned us to successfully drive a attractive top line growth and even stronger earnings throughout fiscal year 2025.
Derek Schmidt: We have a balanced, diversified portfolio of growth initiatives supported by tight alignment of both financial and human resources that gives me confidence that our growth momentum is sustainable.
Derek Schmidt: Similarly, I'm excited about our prospects for continued profitability improvement throughout the remainder of fiscal year 2025 and beyond.
Derek Schmidt: We have ample manufacturing and distribution capacity to support continued growth with minimal fixed cost investment and as such, believe the earnings growth potential of the company is compelling with additional sales volume leverage.
Derek Schmidt: In summary, Flex Steel is financially strong, growing sales, improving profitability, generating cash, and aggressively investing for the future.
Derek Schmidt: We have confidence in our ability to continue delivering healthy results in fiscal year 2025 and as important to position the company for long-term, profitable, sustainable growth. With that, we will open the call to your questions. Operator?
Speaker Change: We will now begin the question and answer session to ask a question, you may press star then one on a touch cone phone. If you are using a speaker phone, 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 press star and then two.
Speaker Change: Our first question comes from Anthony Lebedinsky with Sedodian Company. Please go ahead.
Anthony Lebedinsky: Good morning, gentlemen. I'm certainly terrific performance in a tough environment. So first I just wanted to see if you guys can talk about the sales game that you saw. Maybe just separate the core business versus sales from your growth initiative. Can you speak to that please?
Mike Ressler: Dittmer, Michael Ressler,
Mike Ressler: Dittmer, Michael Ressler,
Mike Ressler: Dittmer, Michael Ressler,
Gaki: Hello, I'm Gaki.
Speaker Change: We're seeing really nice, I apologize them with her. I apologize there, the speaker line was muted.
Speaker Change: Kutt, go ahead with your question again there.
Speaker Change: Good morning. Good morning. Good morning. Let me repeat the question. I didn't hear your answer, Derek, so again, I just wanted to focus in on just kind of if we could separate the sales gains in your core business versus what you're seeing as far as sales growth from your growth initiatives.
Speaker Change: Yeah, um, encouragingly Anthony, we're seeing growth across all aspects of our growth initiatives.
Speaker Change: So we saw a really nice growth in our core business.
Speaker Change: I won't give you a specific number but from a dollar perspective on the majority of our year-over-year sales dollar growth was from our poor business and we've got really nice traction and momentum especially with our growth initiatives with strategic accounts.
Speaker Change: But then in terms of expanded markets, we're seeing positive year of year growth across the vast majority of our initiatives in that bucket. So Z-cliner case goods are lower kind of price and more modern kind of flex steel. So I feel really good about just again how we're performing over the entire breadth of our growth initiatives.
Speaker Change: Let's great to hear. And just wondering if you could comment on what you're seeing as far as the actual cell through to consumers from your retailers. Are you seeing similar trends as this cell in to the retailers? Just wondering if you could speak to that.
Speaker Change: Yeah, actually it's been dumb
Speaker Change: You know, a good personal last three or four weeks actually visiting retailers across the cross-unite states, and the vast majority of them are in really good inventory positions.
Speaker Change: So we're seeing a pretty balanced view of incoming orders and our ongoing shipments.
Speaker Change: So in terms of our book of business, the two are moving in parallel. All that said, I mean, what we're still consistently hearing from retailers is that traffic levels are down, businesses down, and most retailers are cautiously optimistic that once we move past the uncertainty of the presidential election, we'll see our normal kind of seasonal kind of pickup going into the holiday season.
Speaker Change: Patrick, and then you talked about your sales to e-commerce retailers still week, which has been a continuation of recent trends. I mean, do you have a time-frame as to when you think that could potentially reverse? How do you think about that?
Speaker Change: Fizzle.
Speaker Change: When we talk about kind of e-commerce, we almost need to buy for K, the different portions of our business.
Speaker Change: So, actually, our big box in Flexfield e-commerce business was up 10% year over year. If you look at your Art e-commerce business for our home sales brand, that was down 26%.
Speaker Change: So, that course of our business Anthony, you understand that's ready to assemble furniture, lower priority points and that part of the market has become extremely competitive.
Speaker Change: It's also, I think, um, um...
Speaker Change: The conditions for that.
Speaker Change: Those price points have probably been worse than the higher price points, so it's a tougher category, more competition, and so it's really that part of our business that's a drag, but I'm still continue to be very pleased with how we're performing in big box and e-commerce for a less still brand.
Speaker Change: Gotcha, okay. And looking at the SGMA, it was actually down in dollars, actually versus last year. So what drove that? I know you spoke to structural cost savings and your press release. So maybe if you could just provide some more details of what you're doing there and how should we think about it? You know, SGMA going forward.
Speaker Change: Anthony, I'll take that one. So the savings were realizing this year is really a result of kind of actions we took last year. So, you know, we've got a smaller executive leadership team in place and we've also, you know, just...
Speaker Change: Like we do in our operations, we reviewed all of our SG&A spending and looked for areas to remove some costs that was in generating a high ROI. So on a go-forward basis, we expect to try to manage SG&A spending in that 15 and a half to 16% range because we want to continue to reinvest back in the business, but also going to be thoughtful not to add too much structural costs, just given kind of the dynamic environment.
Speaker Change: and that makes sense. Okay, and in my last question here, so I guess looking at your comment about having ample manufacturing and distribution capacity, so assuming that pricing doesn't change much, I mean, how much do you think you guys can do in terms of annual revenue before you need to think about expanding that manufacturing and or distribution capacity?
Speaker Change: Yeah, what we said Anthony is that our current network can support 20 plus percent growth, both within our manufacturing as well as kind of within our distribution network.
Anthony Lebedinsky: Gotcha. All right, well, thank you very much, gentlemen. Look forward to seeing you and the new products at High Point later this week.
Speaker Change: Great, thanks for everything, Anthony.
Speaker Change: This concludes our question in the answer session. I would like to turn the conference back over to Derek Schmidt for any closing remarks.