Q2 2025 Flexsteel Industries Inc Earnings Call
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.
Speaker Change: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: Please note. This event is being recorded I would now like to turn the conference over to Mike Ressler, Chief Financial Officer for Flex still industries. Please go ahead.
Speaker Change: Thank you and welcome to today's call to discuss Flagstone industries second quarter fiscal year 2025 financial results our earnings release, which we issued after market close yesterday Monday February 3rd is available on the Investor Relations section of our website.
Speaker Change: <unk> at Www Dot flex the old Dot com under news and events.
Speaker Change: I'm here today with Derek Schmidt.
Speaker Change: President and Chief Executive Officer on today's call. We will provide prepared remarks, and then we will open the call to your 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 words, such as estimate anticipate expect and similar phrases.
Speaker Change: I'm here today with Derek Smith.
Derek Smith: President and Chief Executive Officer on today's call. We will provide prepared remarks, and then we will open the call to your questions.
Derek Smith: 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.
Speaker Change: Forward looking statements by their nature involve estimates projections goals 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.
Derek Smith: Forward looking statements by their nature involve estimates projections goals 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.
Such risks and uncertainties include but are not limited to those that are described in our most recent annual report on Form 10-K and updated by our subsequent quarterly reports on Form 10-Q, and other SEC filings as applicable.
Derek Smith: Such risks and uncertainties include but are not limited to those that are described in our most recent annual report on Form 10-K and updated by our subsequent quarterly reports on Form 10-Q, 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. Additionally, we may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
Derek Smith: 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.
Speaker Change: The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures and with that I will turn the call over to Derek Schmidt there.
Speaker Change: The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures and with that I will turn the call over to Derek Schmidt they're.
Derek Schmidt: Good morning, and thank you for joining us today to discuss our second quarter results.
Derek Schmidt: We continued our strong momentum from the first quarter delivering sales growth of eight 4% compared to the prior year quarter, which exceeded the top end of our guidance range and represents our fifth consecutive quarter of mid single to low double digit year over year growth.
Speaker Change: Good morning, and thank you for joining us today to discuss our second quarter results.
Speaker Change: We continued our strong momentum from the first quarter delivering sales growth of eight 4% compared to the prior year quarter, which exceeded the top end of our guidance range and represents our fifth consecutive quarter of mid single to low double digit year over year growth.
Derek Schmidt: In addition, we continue to expand our operating margin and deliver strong positive free cash flow, which allowed us to pay off our remaining bank debt and begin accumulating cash.
Speaker Change: In addition, we continue to expand our operating margin and deliver strong positive free cash flow, which allowed us to pay off our remaining bank debt and begin accumulating cash.
Derek Schmidt: While overall industry demand remained soft many of our retail partners were encouraged by improved traffic trends and sales close rates. During the recent holiday season, which provides optimism that demand declines may have bottomed and the industry could be positioned to start growing again.
Speaker Change: While overall industry demand remains thought many of our retail partners were encouraged by improved traffic trends and sales close rates. During the recent holiday season, which provides optimism that demand declines may a bottom in the industry could be positioned to start growing again.
Derek Schmidt: Albeit modestly in calendar 2025.
Derek Schmidt: Feedback from our recent participation at the Las Vegas market last week further reinforced my confidence in our ability to continue growing.
Speaker Change: Albeit modestly in calendar 2025.
Derek Schmidt: Retailer appointments were up 18% versus the prior year market.
Speaker Change: Feedback from our recent participation at the Las Vegas market last week further reinforced my confidence in our ability to continue growing.
Derek Schmidt: Engagement with top 100 retailers was especially strong.
Derek Schmidt: And overall retailer response on new products, we launched last October continued to be very positive and new placements for those new products continues to ramp.
Speaker Change: Retailer appointments were up 18% versus the prior year market.
Speaker Change: Engagement with top 100 retailers was especially strong.
Derek Schmidt: As we've demonstrated over the past 15 months, we can deliver attractive profitable growth and gain share even in challenging industry conditions.
Speaker Change: And overall retailer response on new products, we launched last October continued to be very positive and new placements for those new products continues to ramp.
As it relates to our sales growth.
Speaker Change: As we've demonstrated over the past 15 months, we can deliver attractive profitable growth and gained share even in challenging industry conditions.
Derek Schmidt: Especially encouraged because our growth was broad based.
Derek Schmidt: We solidly grew in our core markets, while simultaneously delivering growth in all our new and expanded market initiatives, which include the decliner flex charisma Big box sales distribution and case goods product, it's the breadth of our growth drivers in our.
Speaker Change: As it relates to our sales growth.
Speaker Change: Especially encouraged because our growth was broad based we.
We solidly grew in our core markets, while simultaneously delivering growth in all our new and expanded marketing initiatives, which include the decliner flex charisma Big box sales distribution and case goods product, it's the breadth of our growth drivers in our.
Derek Schmidt: Business that gives me strong confidence in our ability to continue our growth trajectory, despite lackluster industry growth prospects near term.
Derek Schmidt: Largely attribute our continued success to our exceptional talent and continued investments in product development innovation customer experience and marketing.
Speaker Change: Business that gives me strong confidence in our ability to continue our growth trajectory, despite lackluster industry growth prospects near term.
Speaker Change: Largely attribute our continued success to our exceptional talent and continued investments in product development innovation customer experience and marketing.
Derek Schmidt: I am also especially pleased with our progress driving meaningful year over year profitability improvement.
Derek Schmidt: Operating margin was six 1% in the quarter up compared to four 6% in the prior year quarter and represents our sixth consecutive quarter of year over year adjusted operating margin improvement.
Speaker Change: I'm also especially pleased with our progress driving meaningful year over year profitability improvement.
Speaker Change: Operating margin was six 1% in the quarter compared to four 6% in the prior year quarter and represents our sixth 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.
Speaker Change: 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 current outlook for the industry and broader economy remains moderately positive.
Derek Schmidt: Although any major policy changes from the new Trump administration could have a meaningful and potentially adverse impact on our industry and company and could materially change our outlook.
Speaker Change: As we look forward to the remainder of our fiscal year 2025, our current outlook for the industry and broader economy remain moderately positive although any major policy changes from the new Trump administration could have a meaningful and potentially adverse impact on our industry and company.
Derek Schmidt: More specifically changes in tax immigration regulations and trade policies could be inflationary.
Speaker Change: And could materially change our outlook.
Derek Schmidt: Which would create additional pressures on consumer spending and likely postpone reductions in mortgage rates and a recovery in housing.
Speaker Change: More specifically changes in tax immigration regulations and trade policies could be inflationary.
Derek Schmidt: Additionally, higher tariffs could be very disruptive given the high percentage of furniture that is currently imported into the U S.
Speaker Change: Would create additional pressures on consumer spending and likely postpone reductions in mortgage rates and the recovery in housing. Additionally.
Derek Schmidt: Even for U S furniture manufacturers, there remains a meaningful amount of product inputs like fabric leather mechanisms and switches that originate from outside the U S and would be subject to higher tariffs.
Speaker Change: Additionally, higher tariffs could be very disruptive given the high percentage of furniture that is currently imported into the U S.
Speaker Change: Even for U S furniture manufacturers, there remains a meaningful amount of product inputs like fabric leather mechanisms and switches that originate from outside the U S and would be subject to higher tariffs.
Derek Schmidt: Near term tariffs are the most significant risk and we're working multiple plans to mitigate the risk.
Derek Schmidt: Since the pandemic, we've made significant strides in building supply chain agility and resilience to maneuver potential challenges like this.
Speaker Change: Near term tariffs are the most significant risk and we're working multiple plans to mitigate the risk.
Derek Schmidt: And those efforts continue today.
Speaker Change: Since the pandemic, we've made significant strides in building supply chain agility and resilience to maneuver potential challenges like this.
Derek Schmidt: Today, our primary tariff exposures reside in Vietnam and Mexico.
Vietnam production supports roughly 50% of our current revenue and our Mexican operations supports almost 40% of sales.
Speaker Change: And those efforts continue.
Speaker Change: They are primary tariff exposures reside in Vietnam and Mexico.
Derek Schmidt: The executive orders announced this weekend to implement 25% tariffs on Mexico, and Canada introduced significant uncertainty and could materially change our business outlook, given our sizeable operations in Mexico.
Speaker Change: Vietnam production supports roughly 50% of our current revenue and our Mexican operations supports almost 40% of sales.
Speaker Change: The executive orders announced this weekend to implement 25% tariffs on Mexico, and Canada introduced significant uncertainty and could materially change our business outlook, given our sizeable operations in Mexico.
Derek Schmidt: The current situation of dynamic.
Derek Schmidt: And the magnitude of the profit and free cash flow impact on our business is dependent on the ultimate amount and duration of tariffs.
Derek Schmidt: To mitigate these risks we have and will continue to identify new sources of high quality supply in countries with lower tariff risk.
Speaker Change: The current situation is dynamic.
Speaker Change: And the magnitude of the profit and free cash flow impact on our business is dependent on the ultimate amount and duration of tariffs.
Derek Schmidt: We also are broadening the amount of product that can be dual sourced from multiple countries to provide additional agility.
Speaker Change: To mitigate these risks we have and will continue to identify new sources of high quality supply in countries with lower tariff risk.
Derek Schmidt: While reconfiguring, our global supply chain in response to major tariffs would not be easy or fast and tariffs could inevitably have a material impact to margins in the short term I do feel confident that we are as well prepared as any of our competitors to swiftly optimize our network and response.
Speaker Change: We also are broadening the amount of product that can be dual sourced from multiple countries to provide additional agility.
Speaker Change: While reconfiguring, our global supply chain in response to major tariffs would not be easy or fast and tariffs could inevitably have a material impact to margin in the short term I do feel confident that we are as well prepared as any of our competitors to swiftly optimize our network and response.
Derek Schmidt: To such a reality.
Derek Schmidt: Additionally, if it becomes evident that the likely duration of new tariffs will be extensive we will need to consider taking additional pricing, but only after contemplating the potential impact of such pricing on both consumer demand and our competitive position.
Speaker Change: It's just such a reality.
Speaker Change: Additionally, if it becomes evident that the likely duration of new tariffs will be extensive we will need to consider taking additional pricing, but only after contemplating the potential impact of such pricing on both consumer demand and our competitive position.
Derek Schmidt: In summary, we are executing well on what we can control.
Derek Schmidt: Continue to wisely invest and key enablers to drive long term growth and remain confident in our strategies and the ability to deliver growth exceeding the industry barring a highly disruptive external events.
Speaker Change: In summary, we are executing well on what we can control.
Speaker Change: Continue to wisely invest and key enablers to drive long term growth and remain confident in our strategies and ability to deliver growth exceeding the industry barring a highly disruptive external about.
Derek Schmidt: We're encouraged by our earnings momentum and believe that continued sales growth could drive meaningful operating leverage and margin expansion long term.
Derek Schmidt: The business environment is dynamic right now, but that has been true for the better part of my five year tenure at flex deal.
Speaker Change: We're encouraged by our earnings momentum and believe that continued sales growth could drive meaningful operating leverage and margin expansion long term.
Derek Schmidt: As a result, we've learned as a company to prepare for and be highly adaptive to new situations.
Speaker Change: The business environment is dynamic right now.
Derek Schmidt: I'll be back momentarily to share my thoughts on our outlook.
Speaker Change: That has been true for the better part of my five year tenure at flex deal.
Derek Schmidt: 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 financial outlook for the third quarter Mike.
Speaker Change: And as a result, we've learned as a company to prepare for and be highly adaptive to new situations.
Speaker Change: I'll be back momentarily to share my thoughts on our outlook.
Speaker Change: For the second quarter, net sales were $108 $5 million or growth of eight 4% compared to net sales of $100 $1 million in the prior year quarter as Derek mentioned this marks our fifth consecutive quarter of year over year sales growth and exceeded the high end of our guidance range of 103.
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 second quarter and the financial outlook for the third quarter Mike.
Mike: For the second quarter, net sales were $108 $5 million or growth of eight 4% compared to net sales of $100 $1 million in the prior year quarter as Derek mentioned this marks our fifth consecutive quarter of year over year sales growth and exceeded the high end of our guidance range of 103.
Derek Schmidt: <unk> to $107 million.
Derek Schmidt: From a profit perspective, the company delivered GAAP operating income of $11 7 million or.
Derek Schmidt: Or 10, 7% of sales in the second quarter.
Speaker Change: $3 million to $107 million.
Derek Schmidt: When excluding a $5 million pre tax gain from the sale of our Dublin, Georgia facility. Adjusted operating income was $6 7 million or six 1% of net sales to.
Speaker Change: From a profit perspective, the company delivered GAAP operating income of $11 $7 million or 10, 7% of sales in the second quarter.
Speaker Change: When excluding a $5 million pre tax gain from the sale of our Dublin, Georgia facility adjusted operating income was $6 $7 million or six 1% of net sales.
Derek Schmidt: Six 1% adjusted operating margin was within our guidance range of five five to six 5% and a 150 basis point increase from the prior year quarter.
Speaker Change: The six 1% adjusted operating margin was within our guidance range of five five to six 5% and a 150 basis point increase from the prior year quarter.
Derek Schmidt: Sales growth leverage and cost savings initiatives are the primary drivers of operating margin expansion compared to the prior year period.
Derek Schmidt: From a balance sheet and cash flow perspective, the company generated $6 $7 million of operating cash flow in the quarter and ended the quarter debt free.
Speaker Change: Sales growth leverage and cost savings initiatives are the primary drivers of operating margin expansion compared to the prior year period.
Derek Schmidt: The company received $6 $7 million in proceeds from the sale of our Dublin, Georgia facility in the quarter and invested an additional $1 million in capex, primarily for modernization of ERP systems.
Speaker Change: From a balance sheet and cash flow perspective, the company generated $6 $7 million of operating cash flow in the quarter and ended the quarter debt free.
Speaker Change: The company received $6 $7 million in proceeds from the sale of our Dublin, Georgia facility in the quarter and invested an additional $1 million in capex, primarily for modernization of ERP systems.
Derek Schmidt: We ended the quarter with $98 1 million of working capital our cash balance of $11 8 million and no balance on our line of credit.
Derek Schmidt: Moving to our outlook sales guidance for the third quarter is between 110 and $115 million, reflecting three 7% growth compared to the prior year quarter sale.
Speaker Change: We ended the quarter with $98 $1 million of working capital, our cash balance of $11 $8 million and no balance on our line of credit.
Speaker Change: Moving to our outlook sales guidance for the third quarter is between 110 and $115 million, reflecting three 7% growth compared to the prior year quarter.
Derek Schmidt: Sales growth will be driven primarily by unit volume growth and to a lesser extent pricing from ocean freight surcharges that remain in place to offset higher ocean freight costs.
Speaker Change: Sales growth will be driven primarily by unit volume growth and to a lesser extent pricing from ocean freight surcharges that remain in place to offset higher ocean freight costs.
Speaker Change: Regarding profitability the situation with tariffs as dynamic as Derek noted and we will assess the impact from potential tariffs on our profitability in the coming days and weeks as we gain additional clarity on whether or not the U S can reach a timely resolution with its north American trading.
Derek Smith: Regarding profitability the situation with tariffs as dynamic as Derek noted and we will assess the impact from potential tariffs on our profitability in the coming days and weeks as we gain additional clarity on whether or not the U S can reach a timely resolution with its north American trading.
Speaker Change: <unk> to avoid a protracted trade war.
Speaker Change: Excluding tariff impacts we expect gross margin between 21.0 and 22.0% in the third quarter.
Derek Smith: <unk> to avoid a protracted trade war.
Speaker Change: With sales growth leverage more than offsetting dilution from higher ocean freight cost in Mexico wage inflation.
Derek Smith: Excluding tariff impacts we expect gross margin between 21.0 and 22.0% in the third quarter.
Speaker Change: We expect SG&A costs between 16, 5% and $17 $2 million and we will continue to prioritize high ROI investments and new product innovation and marketing to accelerate our growth strategy.
Derek Smith: With sales growth leverage more than offsetting dilution from higher ocean freight cost in Mexico wage inflation.
Derek Smith: We expect SG&A costs between $16, five and $17 $2 million and we will continue to prioritize high ROI investments and new product innovation and marketing to accelerate our growth strategy.
Speaker Change: Excluding tariff impacts we project operating margin in the range of 6.0% to 7.0% for the third quarter and expect free cash flow for the quarter in the range of $4 million to $7 million.
Derek Smith: Excluding tariff impacts we project operating margin in the range of 6.0% to 7.0% for the third quarter and expect free cash flow for the quarter in the range of $4 million to $7 million.
Speaker Change: Near term priorities for cash remain resourcing, new innovation customer experience initiatives and funding capital expenditures for the third quarter, we expect capital expenditures between 0.7 and 1.0 million.
Derek Smith: Near term priorities for cash remain resourcing, new innovation customer experience initiatives and funding capital expenditures for the third quarter, we expect capital expenditures between 0.7 and $1.0 million, primarily for modernization of ERP systems and <unk>.
Speaker Change: Primarily for modernization of ERP systems and supply chain maintenance.
Speaker Change: <unk> tariffs the most significant driver of variability in the third quarter guidance range, our consumer demand competitive pricing conditions and ocean freight rates, all of which will be shaped by macroeconomic factors.
Derek Smith: Supply chain maintenance.
Derek Smith: <unk> tariffs the most significant driver of variability in the third quarter guidance range, our consumer demand competitive pricing conditions and ocean freight rates, all of which will be shaped by macroeconomic factors.
To reiterate our outlook assumes no major economic impact from near term U S policy changes, including trade and tariffs, which could materially change our business forecast given our sizeable operations in Mexico, we anticipate that a potential tariffs on Mexican imports could have a meaningful.
Derek Smith: To reiterate our outlook assumes no major economic impact from near term U S policy changes, including trade and tariffs, which could materially change our business forecast given our sizeable operations in Mexico, we anticipate that a potential tariffs on Mexican imports could have a meaningful.
Speaker Change: Impact on our profitability and free cash flow.
Speaker Change: But the current situation is dynamic and the profit impact is dependent on the ultimate magnitude and duration of such of tariffs as well as subsequent changes in foreign exchange rates.
Derek Smith: Impact on our profitability and free cash flow, but the current situation is dynamic and the profit impact is dependent on the ultimate magnitude and duration of such of tariffs as well as subsequent changes in foreign exchange rates.
Derek Schmidt: If we gain better clarity and there is a material change in our outlook, we will update our guidance as Derek noted we have multiple strategies that we are working to both strengthen our supply chain agility and resilience and mitigate tariff risks.
Derek Smith: If we gain better clarity and there was a material change in our outlook, we will update our guidance as Derek noted we have multiple strategies that we are working to both strengthen our supply chain agility and resilience and mitigate tariff risks.
Derek Schmidt: Now I'll turn the call back to Derrick to share his perspectives on our outlook.
Speaker Change: Thanks, Mike while the impact of tariffs remains a large risk near term I believe that our commitment to customer experience and innovation combined with the other foundational growth investments. We've made have positioned us well to drive continued top line growth throughout fiscal year 2025.
Speaker Change: Now I'll turn the call back to Derrick to share his perspective on our outlook.
Speaker Change: Thanks, Mike while the impact of tariffs remains a large risk near term I believe that our commitment to customer experience and innovation combined with the other foundational growth investments we've made have been <unk> us.
Speaker Change: We have a balanced diversified portfolio of growth initiatives supported by tight alignment of both financial and human resources.
Speaker Change: US well to drive continued top line growth throughout fiscal year 2025.
Speaker Change: That gives me confidence that our growth momentum is sustainable.
Speaker Change: 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.
Speaker Change: We have ample manufacturing and distribution capacity to support continued growth with minimal fixed cost investment.
Speaker Change: And as such believe the earnings growth potential of the company is compelling with additional sales volume leverage.
Speaker Change: We have ample manufacturing and distribution capacity to support continued growth with minimal fixed cost investment.
Speaker Change: In summary, <unk> is financially strong growing sales improving profitability generating cash and aggressively investing for the future we.
Speaker Change: And as such believe the earnings growth potential of the company is compelling with additional sales volume leverage.
Speaker Change: We have confidence in our ability to continue delivering healthy results in fiscal year 2025, and as important to position the company for sustainable long term profitable growth.
Speaker Change: In summary.
Speaker Change: Still a financially strong growing sales improving profitability generating cash and aggressively investing for the future.
Speaker Change: We have confidence in our ability to continue delivering healthy results in fiscal year 2025, and as important to position the company for sustainable long term profitable growth.
Speaker Change: 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 your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: 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 your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys. If anytime. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: Anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Anthony <unk> with Sidoti <unk> Co. Please go ahead.
Speaker Change: Good morning, everyone and thanks for taking the questions certainly nice job and they still tough.
Speaker Change: The first question comes from Anthony <unk>.
Speaker Change: Operating environment.
Speaker Change: <unk> with Sidoti <unk> co. Please go ahead.
Speaker Change: So I have a few questions about the quarter and then ill follow up about tariffs so as far as the topline.
Speaker Change: Good morning, everyone and thanks for taking the questions certainly nice job and they still tough operating environment.
Speaker Change: What were the main reasons for your revenue being better than your guidance that you provided.
Speaker Change: So I have a few questions about the quarter and then I'll follow up about tariffs so as far as the top line.
Speaker Change: A couple of months ago, and if you could just as a follow up to that maybe if you could just parse out the growth of your core business versus the growth initiatives.
Speaker Change: What were the main reasons for your revenue being better than your guidance that you provided a couple of months ago and if you could just as a follow up to that and maybe if you could just parse out the growth of your core business versus the growth initiatives.
Speaker Change: Yes, good morning Anthony.
Speaker Change: So in terms of really the driver for the outperformance as I alluded to in my opening comments really pleased with the broad based growth that we're seeing across just about every element of our business.
Anthony: Yeah. Good morning Me Anthony.
Anthony: So in terms of you know really the driver for the outperformance as I alluded to in my opening comments really pleased with the broad based growth that we're seeing the cost just about every element of our business, maybe with the exception of our home sales ready to assemble brand.
Speaker Change: Maybe with the exception of our home sales revenue to assemble brand.
Speaker Change: So why it why the outperformance I think we just continue to gain momentum, what's working really well for US right. Now is this combination of driving relevant new product development.
Anthony: So why why the outperformance I think we just continue to gain momentum, what's working really well for US right. Now is this combination of driving relevant new product development and in providing compelling.
Speaker Change: And in providing.
Speaker Change: <unk> values to the market, we're driving innovation, we're ramping up our marketing and we're seeing great results in return from that and.
Speaker Change: And simultaneously, we continue to enhance the customer experience.
Anthony: Compelling values to the market, we're driving innovation, we're ramping up our marketing and we're seeing great results in return from that and simultaneously we continue to enhance the customer experience and then and ensure that we are the preferred partner for our retail partners. So I think it's really the.
Speaker Change: And ensure that we are the preferred partner for our retail partners. So I think it's really the combination of those four things.
Speaker Change: That is enabling us to continue this momentum.
Speaker Change: To provide a bit of additional details in terms of growth levers.
Anthony: Combination of those four things.
We do talk about the core markets, which I can parcel out into flex steel brand versus our homestyle brand. What I was really encouraged by is our flex steel branded core markets were up 7% in the quarter. So.
Anthony: That is enabling us to continue this momentum.
Anthony: To provide a bit of additional details in terms of you know growth levers.
Anthony: We do talk about the core markets, which I can parcel out into flex steel brand versus our homestyle brand. What I was really encouraged by is our flex steel branded core markets were up 7% in the quarter.
Speaker Change: So again, we are we are continuing to drive new product development innovation, that's resonating really well and we're gaining momentum there now on the flip side, we've got the small home styles ready to assemble brand Thats largely sold online Amazon way fare home depot dot com that that category.
Anthony: So again, we are we are continuing to drive new product development innovation that is resonating really well and we're gaining momentum there now on the flip side, we've got the small home styles ready to assemble brand that's largely sold online Amazon way fare home depot dot com that that category.
Speaker Change: <unk> continues to struggle, it's lower price points.
Speaker Change: It's been a hyper competitive due to.
Speaker Change: A really low cost Chinese imports and so that business was almost down 30% in the quarter.
Anthony: <unk> continues to struggle, it's lower price points, it's been a hyper competitive due to a really low cost Chinese imports and so that business was almost down 30% in the quarter.
And then when you look at our expanded market initiatives and that includes everything from the decline reflects case goods.
Speaker Change: Charisma.
Speaker Change: Each one of those actually contributed to year over year growth in terms of our results.
Anthony: And then when you look at our expanded marketing initiatives and that includes everything from the decline or flex case goods.
Speaker Change: In total growth for our expansion initiatives were up 92% year over year. So again, when you think about how we're executing in our core markets with the flex steel brand and then you add on top of the success, we're having in terms of our new expanded marketing initiatives. It really gives me confidence that.
Anthony: Charisma.
Anthony: Each one of them was actually contributed to year over year growth in terms of our results in.
Anthony: In total growth for our expansion initiatives were up 92% year over year. So again, when you think about how we're executing in our core markets with the flex steel brand and then you add on top of the success, we're having in terms of our new expanded marketing initiatives. It really gives me confidence that our.
Speaker Change: Our growth trajectory and our growth momentum is sustainable here as we pivot into the second half of the fiscal year.
Speaker Change: That's great to hear thanks for that additional color certainly very helpful and then.
Anthony: Growth trajectory and our growth momentum is sustainable here as we pivot into the second half of the fiscal year.
Speaker Change: The gross margin.
Speaker Change: There was some impact from ocean freight costs.
Anthony: That's great to hear thanks for that additional color certainly very helpful and then.
Speaker Change: Just wondering what are you seeing with these costs.
Do you expect to.
Speaker Change: The gross margin.
Speaker Change: Continue with Ocean freight surcharges, what is your thinking on that.
Anthony: There was some impact from ocean freight costs.
Speaker Change: Yeah. Anthony this is Mike good morning, Michael as far as what we've what we've what we've seen with with rates is that they remain volatile.
Anthony: Just wondering what are you seeing with with these costs.
Anthony: Do you expect to continue.
Anthony: Continue with Ocean freight surcharges, what is your thinking on that.
Speaker Change: They are lower than what we were paying.
Anthony: Yeah. Anthony this is Mike good morning, Michael as far as like what we've what we've what we've seen with with rates is that they remain volatile.
Speaker Change: <unk>.
Speaker Change: Kind of the first quarter.
Speaker Change: But it certainly has a dilutive effect on our margin as we're just passing that cost through.
Anthony: They are lower than what we were paying you know in and kind of the first quarter, but it certainly has a dilutive effect on our margin as we're just passing that cost through.
Speaker Change: To try to maintain as going to retail price points as we can for our partners.
Speaker Change: But we're going to continue to assess the situation, we look at rates regularly and our plan would be to adjust accordingly.
Anthony: You know to try to maintain as good a retail price points as we can for our partners.
Speaker Change: But certainly to try to recover those costs, but not try to margin up on them.
Anthony: But we're going to continue to assess the situation. We look at rates regularly and our plan would be to Ah you know adjust accordingly, but certainly to try to recover those costs, but not try to margin up on them.
Speaker Change: Got you, Okay and then so your SG&A was certainly lower than what we had expected and actually lower versus last year or so.
Speaker Change: How should we think about SG&A going forward, even beyond the current quarter.
Anthony: Mhm Gotcha, Okay, and then so your SG&A was certainly lower than what we had expected and are actually lower versus last year. So.
Speaker Change: Just wondering if you could provide some color on that.
Speaker Change: Anthony I think we're going to continue to be very thoughtful about where we add structural costs into the business.
Anthony: How should we think about SG&A going forward, even beyond the current quarter.
Speaker Change: Just given kind of the volatility in some of the uncertainties.
Anthony: I'm just wondering if you could provide some color on that.
Speaker Change: Uncertainties, we have around trade et cetera.
Speaker Change: Yeah, Anthony I think where we're going to continue to be very thoughtful about where we add structural costs into the business.
Speaker Change: So our.
Speaker Change: The way, we're thinking about SG&A is try to manage it in that 15% to 15, 5% of sales range, but we certainly want to continue to reinvest in the high ROI initiatives to accelerate our growth strategy.
Speaker Change: Just given kind of the volatility in some of the uncertainties, we have around trade et cetera.
Speaker Change: So are you know the way we're thinking about SG&A has tried to manage it in that 15% to 15, 5% of sales range, but we certainly want to continue to reinvest in our high ROI initiatives to accelerate our growth strategy.
Speaker Change: Mhm.
Speaker Change: Gotcha.
Speaker Change: Understood. Okay, and then in terms of the tower. So obviously it was great to see a pause.
Speaker Change: A month.
Speaker Change: As far as Mexico is concerned.
Speaker Change: Mhm.
Speaker Change: I know you talked about some strategies, but I guess.
Speaker Change: Got you the understood. Okay, and then in terms of the tower. So obviously it was great to see a pause for a month.
If for some reason.
Speaker Change: No.
Speaker Change: As far as in Mexico is concerned.
Speaker Change: There is no definitive agreement that longer term about tariffs.
Speaker Change: I know you talked about some strategies, but I guess.
Speaker Change: If there is a 25% tariff put in place.
Speaker Change: If for some reason you know.
Speaker Change: How should we think about broadly as far as the financial impact on your business.
Speaker Change: There is no definitive agreement that longer term about tariffs.
Yeah, Anthony obviously, the situation is very dynamic right and the ultimate impact will be.
Speaker Change: If there is a 25% tariff on.
Speaker Change: The in place you know how should we think about broadly as far as the financial impact on your business.
Speaker Change: A matter of whats the actual rate ended up being what would the duration of the tariff.
Speaker Change: Yeah, Anthony obviously, the situation is very dynamic right and the ultimate impact will be you know.
Speaker Change: What happens to FX rates et cetera, but just to give you. Some color. If you just put a 25% tariff increase and on our Mexico cost it could be a one $5 million to $2 million increase in our costs.
Speaker Change: A matter of what's the actual rate ended up being what would the duration of the tariff be what happens to FX rates et cetera, but just to give you. Some color. If you just put up 25% tariff increase in honor of Mexico cost it could be a one and a half to $2 million increase in our cost.
Speaker Change: Per month.
Speaker Change: Now certainly.
Derek can weigh in on some of the strategies, we have but we would certainly implement some initiatives to mitigate that from vendor.
Per month.
Derek Smith: Now certainly you know what can you know Derek can weigh in on some of the strategies. We have on but you know we would certainly implement some initiatives to mitigate that from vendor.
Speaker Change: Rice negotiations.
Speaker Change: To re looking at cost structures to Resourcing.
Speaker Change: Products to lower cost manufacturing opportunities et cetera.
Anthony: Anthony I will add a little bit more color. So obviously we knew.
Speaker Change: Negotiations.
Speaker Change: To re looking at cost structures to resourcing products to lower cost manufacturing opportunities et cetera.
Speaker Change: Prior to the.
Anthony: The inauguration that there was a risk around.
Anthony: Tariffs and so the team has been working diligently I think to accelerate our planning around us.
Anthony: Anthony I will add a little bit more color. So obviously we knew.
Speaker Change:
Speaker Change: Prior to the.
Anthony: So we've taken multiple actually we've taken multiple steps over the last several years and continue to accelerate that but we've identified.
Speaker Change: The inauguration that there was a risk around.
Speaker Change: Tariffs and so the team has been working diligently I think to accelerate our planning around this.
Anthony: Potential sources of again high quality supply and a multitude of different countries. Obviously, the biggest risk right now near term is tariffs on Mexico.
Speaker Change: So we've taken multiple actually we've taken multiple steps over the last several years and continue to accelerate that but we've identified.
Speaker Change: Potential sources of again high quality supply and a multitude of different countries. Obviously, the biggest risk right now near term is tariffs on Mexico.
Anthony: But there is a relatively large trade imbalance with Vietnam.
Anthony: And as you know there is significant product that's imported from Vietnam across the industry.
Anthony: So we continue to look for diversified suppliers outside of Vietnam.
Speaker Change: But there is a relatively large trade imbalance with Vietnam and as you know there is significant product that's imported from Vietnam across the industry.
Anthony: We continue to develop products that can be dual sourced made in both Mexico as well as Asia.
Speaker Change: So we continue to look for diversified suppliers outside of Vietnam. We continue to develop products that can be dual sourced made in both Mexico as well as Asia, which will put us in a position certainly that.
Anthony: Which will put us in a position certainly that.
Anthony: If things don't get resolved on the trade front and there becomes a permanent or semi permanent 25% tariff on Mexico.
Anthony: We'll have to adjust our structure of our global supply chain.
Speaker Change: If things don't get resolved on the trade front and there becomes a permanent or semi permanent 25% tariff on Mexico, we will have to adjust our the structure of our global supply chain.
Anthony: So we're prepared to do that.
Anthony: Obviously, we showed last time, there was tariffs on China.
Anthony: We recalibrated our supply chain, we did it effectively we can do it again.
Speaker Change: So we're prepared to do that obviously, we showed you know last time, there was tariffs on China, we recalibrated our supply chain. We did it effectively we can do it again it is not something that happens overnight, but we do have plans in place to to restructured.
Anthony: It is not something that happens overnight, but we do have plans in place.
Anthony: Two to restructured restructure our supply chain, if and when needed.
And as Mike suggested in the near term.
Speaker Change: Plans in place.
Speaker Change: To try to manage cost differently potentially to partner with our suppliers to subsidize part of a tariff hit.
Speaker Change: Restructure our supply chain, if and when needed.
Speaker Change: And as Mike suggested in the near term.
Speaker Change: And then we would have to take a close look at.
Speaker Change: Plans in place.
Speaker Change: Some level of potential pricing surcharge to push through the market.
Speaker Change: To try to manage cost differently potentially to partner with our suppliers to subsidize part of a tariff hit.
Speaker Change: The point is here is I think we're we've got a playbook.
Speaker Change: And then we would have to take a close look at some.
Speaker Change: Documented that with that we're ready to run depending on ultimately how the situation evolves.
Speaker Change: Some level of potential pricing surcharge to push through the market.
Speaker Change: The point is here is I think we're we've got a playbook.
Speaker Change: I will say, though that we are intensely focused on continuing to run the business and executing successfully the way we have been.
Speaker Change: Documented that we're ready to run depending on ultimately how this situation evolves.
Speaker Change: And while we will adjust certainly to a tariff situation, we will not do anything short sighted to derail the momentum that we have in the market.
Speaker Change: I will say, though that we are intensely focused on continuing to run the business and executing successfully the way we have been.
Speaker Change: And while we will adjust certainly to a tariff situation, we will not do anything short sighted to derail the momentum that we have in the market.
Speaker Change: Understood. Okay, Wilsons, yeah, it sounds like Youre, certainly our remaining agile.
Speaker Change: On all fronts, so thats great to hear and then lastly, just switching gears to the balance sheet.
Speaker Change: Nice to see you guys are paying off the debt as you said you would building up some cash so as you look forward.
Speaker Change: Understood, Okay, well since it sounds like Youre, certainly our remaining agile.
Speaker Change: On all fronts. So so that's great to hear and then lastly, just switching gears to the balance sheet.
Speaker Change: How should investors think about the.
Speaker Change: Just overall your cash priorities as you start to build up that cash.
Speaker Change: Nice to see you guys are paying off the debt that as you said you would building up some cash so as you look forward.
Speaker Change: Yes, I think near term Anthony.
Speaker Change: Probably.
Speaker Change: How should investors think about the.
Speaker Change: Feel comfortable having a little bit of cash on the balance sheet for a cushion given kind of what's going on.
Speaker Change: Just overall your cash priorities as you start to build up that cash.
Speaker Change: Externally until we get a little bit better clarity around trade et cetera, but are out our capital allocation strategy kind of remains intact and that we want to reinvest.
Speaker Change: Yeah, I think you know near term Anthony.
Speaker Change: Probably.
Speaker Change: We feel comfortable having a little bit of cash on the balance sheet for a cushion given kind of what's going on.
Speaker Change: 70% back into the business.
Speaker Change: Externally until we get a little bit better clarity around trade et cetera, but are out our capital allocation strategy kind of remains intact and that we want to reinvest 70% back into the business.
Speaker Change: On high ROI initiatives.
Speaker Change: In the event that we do not.
Speaker Change: Have attractive options, we'll consider returning capital to.
Speaker Change: Shareholders in similar manners as we've done in the past.
Speaker Change: On high ROI initiatives.
Speaker Change: Sounds good.
Speaker Change: In the event that we do not.
Speaker Change: Thank you very much and best of luck.
Speaker Change: We have attractive options, we'll consider returning cash.
Speaker Change: Alright, Thanks, Anthony a great day.
Speaker Change: Capital to shareholders in similar manners as we've done in the past.
Speaker Change: Okay.
Speaker Change: Thanks.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: Sounds good well, thank you very much and best of luck.
Speaker Change: Alright, Thanks, Anthony a great day.
Speaker Change: And this concludes our question and answer session and I would like to turn the conference back over to Derek Schmidt for any closing remarks.
Speaker Change: Okay.
Speaker Change: Thanks.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: Thank you and in closing I do want to thank all of our flex still employees for their hard work and dedication in driving the company's strong performance during the second quarter and I'm also thankful to all of you for participating in today's call. Please contact us if you have any additional questions and we definitely look forward to updating you on our next call. Thank you and have a.
Speaker Change: Great day.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Pardon me. This is the operator, we have reconnected the speakers and we will continue and this concludes our question and answer session and I would like to turn the conference back over to Derek Schmidt for any closing remarks.
Derek Schmidt: Thank you and in closing I do want to thank all of our flex still employees for their hard work and dedication in driving the company's strong performance during the second quarter and I'm also thankful to all of you for participating in today's call. Please contact us if you have any additional questions and we definitely look forward to updating you on our next call.
Speaker Change: And have a great day.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.