Q4 2019 Earnings Call
Good morning, and welcome to the Flexsteel industries fourth quarter and fiscal year 2019 earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Donnie case Investor Relations for Flexsteel Industries. This case. Please go ahead.
Thank you Anita and welcome to today's call to discuss Flexsteel industries fourth quarter and fiscal 2019 financial result.
Our earnings release, which we issued after market close yesterday Monday August 26 is available on our Investor Relations section of our website Www Flexsteel back under news and events on the call today is Gerry Dittmar, Chief Executive Officer, who is that an offsite location today and markets Hamilton Chief Financial Officer, who is hearing to be following management's prepared remarks, we will open up 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 by the use of 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 risk 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 on Form 10-K as updated by our aseptic subsequent quarterly reports on form Form 10-Q , and other FCC 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 management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures and with that I'd like to during the call over to Gerry Dittmer Jerry.
Thank you for joining us today, when we held our third quarter conference call on April Thirtyth I committed to a new era of transparent communications with Flexsteel stakeholders.
For those who have been following our public disclosures you can see there's been a lot of activity during the fourth quarter surrounding the quick and decisive execution of our restructuring plan.
All of which supports our end goal to better serve our customers generate profitable growth and improve shareholder returns.
As I said before it's a tall yet achievable order given three key ingredient best in class products, the talent and dedication of our people and the financial flexibility to execute our strategy.
I will start today with a progress update on restructuring plan in a few minutes markets will unpack the financial the financial results for us.
[noise] [noise] our approach has been to look at flex deal with an open mind and what they viewpoint of future growth opportunities, we analyze the business and opportunities top to bottom created a robust restructuring and profit improvement plan and immediately started the job executing some tough but necessary decisions.
I'm very pleased to report that we have made tremendous progress restructuring our company since we announced our plan on April 1st.
And in hand, with our mission to unlock the potential of Flexsteel. It was also critical to mobilize the entire organization by by installing excuse me.
[laughter] by installing new leadership in key positions in bringing on top tier channel it in high risk areas to drive a culture of winning through change.
We now have an energized team necessary to turn our plan vision into reality now summarize where we stand in the process.
Since May 15, we completed the closure of our Riverside, California manufacturing facility, which is now under a nonbinding letter of intent with the sale expected to close before the end of September .
We exited the custom design hospitality product line, which will wrap up in 2020 people still remaining orders the commercial office product line exit was completed at the end of July .
Well the exit of the commercial office product line.
We consolidated warehousing operations at our honeymoon Berg, Indiana facility.
Going from three to two warehouses are holding for sale that vacated property.
On June 18, we provided additional visibility on the entire scope and cost of our restructuring plan to investors at that time, we announced the closure of our Harrison, Arkansas operations, which consisted of two underutilized manufacturing plant.
With all its product lines transition to other facilities closure of Harrison was finalized in August 16.
And broad properties were listed for sale.
In conjunction with these actions we also implemented they brought a reduction in forces across the company.
To drive the overall restructuring plan, we developed six key work streams and here's an update on how we're moving forward.
Regarding network in logistics optimization as previously mentioned, we closed the Riverside Harrison locations and other opportunities for consolidation are being analyzed and consider based on plant performance and capabilities.
Following the initial focus on optimizing our manufacturing footprint, we're also assessing distribution and logistics and we'll provide more details when appropriate.
[noise] SGN a optimization is another key work streams to date, we have reduced our I'm going to ask you in a cost based on reductions in the workforce.
We plan to reinvest a portion of these savings into key functions, such as product development global sourcing and sales and operations planning.
Our objective is to improve cost and working capital management and to generate sustainable and profitable growth.
With global sourcing and procurement, we're developing and deploying sourcing strategies for each key spending category and we have identified opportunities for cost saving through resourcing value added specification changes and supplier negotiation.
Sourcing, it's highly relying on robust processes strong product development engineering capability in Kate.
We have a lot of work to do in these areas to achieve our full potential. It is a top priority and are seeing early signs of improving outcomes.
Total restructuring charges recorded in the fourth quarter were 10 million of which cash used for restructuring within the quarter was 3.8 million.
In addition, we impaired inventory of 7.7 million related to our exit from the commercial office in costume designs hospitality product line.
Moving on to our ERP system status and future plans.
Over the past year, our team has successfully stabilized ERP system.
In our view the ERP system function does design. However, it was the scope of the project will lack of upfront planning the design itself software development and the implementation that was flawed.
Not practical and in many cases totally unusable in the context of our future ERP neat that means that many of the components designed and developed we either not be used but would not be required in the future.
Having completed our analysis and rightsize the valuation of the ERP asking about books as painful and necessary as it was we now have been going go forward plan to share with you.
Our team has gained a strong knowledge and capability working within the new system environment and would be regressive just switch midstream to an entirely new platform. Therefore, we plan to reboot ERP system project on the same platform with a very.
With a very different approach, including significantly reducing the scope customization and complexity.
Guided by our six work streams, we have a clear path to transformation business simplification and reduce complexity.
In February I created the position of CIO was fortunate bring might Mclaughlin on board I work with Mike for many years and I've seen first hand as capability scoping, transforming designing and implementing a new ERP system successfully.
He has deep.
Yeah deep into the situation analysis, and Gord thinking what the teams and starting at the end of February our plan is to fully execute the project with limited additional capital of 1.5 to 2 million per year and keep our total operational I T expenses under 2.5% of sales through the implementation of the new scope.
I'm proud of what the team has accomplished so far and truly appreciate their tremendous support positive attitude and relentless pursuit of solution and feel confident that their can do spirit will continue.
The successful execution of a restructuring ERP plans are critically important to the long term future of the company. However, I recognize we cannot restructure away to long term prosperity.
To achieve our full potential it is critically important to us to stabilize the topline despite external headwinds and reestablish growth at or above marketing industry levels over the next year, we will continue implementing new processes and procedures to focus on our product development activities more intensely on consumer needs desires and needs to open up new channels of distribution and to expand our existing distribution through new partnerships.
We're already seeing some positive results from these initiatives in here just a few examples as you may recall in our home sells product like the initial implementation of the ERP system, resulting in a disastrous consequences with our E. Commerce customers. We are starting to see positive indications from the work we've done in stabilizing the business injecting new leadership and reestablishing relationships with key customers. We saw some strong sequential growth from home sales in the fourth quarter and expect to see more import more improvement as we gain momentum.
We are extremely committed to not only recovering lost ground, but also expanding the business opportunity and it's very important and growing sales channel.
To that end, we have a very exciting product launches coming this year and we believe it is going to gain quite a bit of traction in the channel.
For competitive reasons, we can't say anything more at this time, but are very excited about the opportunity as new product offers us and our channel partners.
In our traditional retail channel, we continue leveraging our great products in North American manufacturing capability to drive more performance like we saw this quarter in our manufactured Recliners motion in case goods, which demonstrated moderate to strong growth year over year.
We're also working on expanding distribution within retail by engaging some key partnerships that will increase opportunities for consumers to buy flexsteel products in the coming month.
During calls with investors. Some of you have some view that what should we expect when we are finished and during those discussions I said, we would set the bar next conference call, where we can hold us accountable.
Looking at the historical profitability of flux deal. The high end of the range has been seven plus percent EBIT margin. Our first bar is you get to this level of profitability by the end of 2021 on a run rate basis.
Rest assured we won't stop there and believe once we have a solid foundation built all the fundamentals in place. This business has upside potential never before attainable business decisions and investments we are making right now will give us the capability to reach growth and profitability height, not yet seen before in Flexsteel long and storied history.
Now I will turn the call over to Marcus to discuss our financials and operations.
Thank you Jerry as Jerry just discussed since our third quarter conference call in late April we took significant strides.
Our country.
And return the company to profitability.
That said our financial results for the fourth quarter and year end sharply reflect both the measures we are taking to turn our business around and the outside pressures our industry is experiencing.
Well, we feared most became a reality on May 10, the 10% tariff increase to a 25% tariff on all our products imported from China. As you know Flexsteel has a significant exposure was approximately 42% a fiscal year to date sales sourced from China.
Suffice it to say the tariff has had an adverse effect on fourth quarter earnings.
Net sales decreased 11% to $100 million with our residential business accounted for the biggest shortfall based on the softer demand that was triggered by the tariff and related price increases.
Also contributed to lower sales, but to a much lesser degree was our exar exit from two contract business lines custom design hospitality and commercial office.
We reported a fiscal fourth quarter net loss of $19.9 million or $2.52 per share that compares to net income of 2.2 million or 28 cents per diluted share in the prior year quarter.
The reported net loss includes 10 million a pre tax restructuring expenses of 7.7 million impairment of inventory related to the exit of commercial office and custom design hospitality product lines.
A $2.6 million or pre tax ERP business information system impairment charge.
And a $2.6 million pre tax valuation allowance for foreign value added tax.
Excluding these expenses, which totaled 22.9 million non-GAAP adjusted net loss was 2.2 million or 28 cents per share compared with non-GAAP . Adjusted net income of 2.2 million or 28 cents per diluted share in the year ago quarter.
Net sales for the quarter were not were $100.2 million down 11.4% compared to a year ago.
Home furnishing sales, which represented approximately 74% of our total business in fiscal 19 were down 12% during the fourth quarter due primarily to the adverse impact of the tariff on Chinese manufactured furniture.
The largest category within home furnishings, which accounts for the bulk of China source product is down 26% in units in the fourth quarter and down 12% in units fiscal year to date 2019 versus 18.
This decline in units sourced from China, largely reflects the immediate impact the tariff is having on our business.
We have worked very hard with our suppliers to provide concessions that would mitigate as much as possible the pass through pricing to retail.
Unfortunately, despite these efforts pass through price increases where necessary, especially since the implementation of the 25% tariff.
We believe the tariff impacts stretched our retail partners pricing to the consumer to uncomfortable levels, which in turn squelched demand for import products.
Currently we are working with our supply base to aggressively move the supply chain to other countries in an effort to eliminate the tariff impact and return our pricing to historical levels with a goal of restoring a more normalized demand and home furnishings.
Outside of the tariff impacts and some positive comps in our manufacturer recliner and motion products. We saw overall softness in the traditional retail market, which also contributed to our underlying top line performance.
On the contract front total sales were off $2.2 million or 13%.
As planned we exited two product lines, which were noncore and subscale and they accounted for approximately $1.6 million or the sales decline.
Well, we exited the custom design hospitality product line, we still expect to ship at modest levels through the end of the calendar year.
The commercial office product inventory was liquidated during the quarter and wrapped up at the end of July .
For fiscal 2019, net sales declined 9.3% to 443.6 million versus sales of 489.2 million in fiscal 2018.
The lower sales in fiscal 2019 were a function of the significant ongoing impact of the failed ERP implementation, our e-commerce products, which declined 25% versus the prior year the negative impact of the tariff, which created an approximate 10% sales gap in our large and leading product category as I just discussed the exit of the two contract product lines and the generally softer demand across traditional retail versus the prior year.
Turning now to profitability results for the quarter.
Gross margin as a percent of net sales in the fourth quarter was 5.3% versus reported 15.1% in the prior year quarter.
There was quite a bit of noise that had an impact on both this year and last years quarterly results.
The fourth quarter of 2008 fiscal 2019 included a charge for inventory impairment, which is approximately 760 basis points related to the discontinuance of commercial office and custom design hospitality and the value our valuation allowance for foreign VT, which accounted for about 260 basis points.
The fourth quarter fiscal 2018 included the year to date portion of the correction for the volume rebates previously this classified as selling general administrative expenses.
Which accounted for 250 basis points.
The key drivers of the remaining approximate 200 basis point deterioration in gross margin were higher costs due to inefficiencies and distribution manufacturing labor, which is about 100 basis points of favorable adjustments insurance reserves in the prior year due to claims history trends, representing about 80 basis points and a higher cost structure. The new do viewed manufacturing facility, which represented about 60 basis points offset by some favorable price and mix representing 30 basis points.
Selling general administrative expenses were 18.8% of net sales compared with 12.7% of net sales in the prior quarter.
Approximately 250 basis points were due to the year to date reclassification of volume rebates as a reduction in price that occurred in the fiscal fourth quarter of 2018.
The remaining year over year increase nesting they reflected lower volume hundred 90 basis points incentive stock compensation 30 basis points and a difficult comparison due to the recording of a reduction in cash and long term incentives in the fourth quarter of fiscal 2018, driven by business underperformance, representing about 160 basis points.
Regarding taxes.
During the quarter, we reported a tax benefit of six and a half million or an effective tax rate of 24.7% during the fourth quarter compared to tax expense of 700000 in the prior year quarter or an effective tax rate of 23.5%.
The tax benefit was primarily a result of a large impairment and restructuring charges and the associated net operating losses.
Now turning to the balance sheet.
During the fiscal year 2019, we generated $6.7 million in cash from operations and then in fiscal 2019 with 22.2 million in cash and cash equivalents and investments.
Down from $43.7 million at year end fiscal 2018.
Working capital current assets minus current liabilities at June 32019 was $118.2 million compared to $149 million last year changes in working capital include decreases of 16 million investments and 5.6 million in cash and cash equivalents and a $5.7 million increase in accrued liabilities.
Capital expenditures for the 12 months ended June 32019 were 21.3 million, including 16.4 million for the Dubuque, Iowa manufacturing facility.
As Weve mentioned previously we expect five to 6 million of ongoing Capex.
The company currently maintains 20 million in a revolver, which 18.7 million remained available at June 32018, we're considering several financing options to provide additional liquidity through the restructuring transformation process.
As we disclosed in our press release last night, we expect to close on the sale of the Riverside manufacturing facility by the end of September which will create additional liquidity.
Each quarter, our board reviews capital allocation at this time the board has no plans to change the level of dividend.
As Gerry said at the top of the call. We've made tremendous progress mobilizing the organization of the restructuring our company to drive transformation and business simplification.
The cost and infrastructure this business these serious attention.
We are fully engaged in this activity across the board, but to reach the bar the jury laid out in his remarks, it's imperative, we get our growth story back on track.
To that end our commercial teams are laser focused on expanding distribution brief discipline and more robust approach to product development and the lift driving delivery speed all of which are important to our partners and consumers.
With that I'll open the call for questions.
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 using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
The first question today comes from JP Geygan with global value. Please go ahead.
Good morning, and thank you for that comprehensive update I just have a few follow up questions.
As you think about your turnaround through fiscal year 2021.
You said in your press release that you've targeted at 7% EBIT margin you talked a little bit about how you make progress towards that number but I'm, hoping you might elaborate on how you achieved this and maybe more specifically, where we should expect revenue relative to recent sales data.
Yes. This is Gary at this point, we've really kind of told you everything via what's in our prepared comments. The press release, it takes cetera, where it's going to come from you heard in my prepared comments, a little bit about some different channels. Some different distribution, that's where it's really going to come from do we know exactly where it's going to come from absolutely not but so at this point in time, there's not a lot of other detailed that we could really share at this point.
Okay as a follow on to that question you did talk about new product launches I Wouldnt typically expected to issue an 8-K upon a new product launch but.
How might you communicate that marketplace.
Well, we would like we would anything we would we go to four major shows year to Las Vegas into an Highpoint. We also do would be our homestyle business on working with our major customers there and so new product is part of the life blood of residential furniture, and we really at least four times a year introducing new products.
Okay great.
Moving on can you help us reconcile the numbers you provided in your rate case in mid May and mid June .
About your projected restructuring costs with the numbers you provided in yesterday's press release, and where you are to date.
Marcus do you have any light you can shed on that.
Yes, I mean, we've so far weve.
I think on the call JP it'd be tough for me to go through the detail of that but essentially we've we've incurred about $10 million of restructuring charges. So far to date.
Plus the $7.7 million for the inventory impairment, so that totals about $17.7 million and versus what we had we had provided earlier in the May 15 call. So the next at the next report out we will provide a more detailed understanding of where we're at progress wise.
Okay. My back of the envelope math puts you somewhere between roughly 17 and $23 million remaining in your restructuring program without committing you to a specific specific number might somewhere in the ballpark.
Yeah, you're somewhere in the ballpark.
Okay has your allocation between cash and non cash charges changed significantly no.
Okay.
And then my final question is in your June 8-K, you announced that you expected proceeds from the sale of real estate of 45 to 55 million is that still a valid assumption and if so should we expect that from the sale of the four properties, you've already announced or should we expect additional sales.
We have no reason that we have no reason to change our estimates that we put out there originally and it will not all come from one sale now.
Okay, great. Thank you for the update.
Again, if you have a question. Please press Star then one.
Since there appears to be no further questions. This concludes our question and answer session I would like to turn the conference back over to Gerry Dittmar for any closing remarks.
Thank you for participating in today's call before signing off I want to recognize the tremendous contribution and dedication that our employees have shown as we continue this journey together to Reenergize our company.
We know there is still hard work ahead, but we are fully committed to realizing flexsteel full potential and are very excited about our future. We are grateful for the support of our shareholders and its pledge we will keep you informed on our progress as it unfolds everyone have a great day. Thanks.
[noise]. This conference has now concluded. Thank you for attending today's presentation you may now disconnect.