Flexsteel Industries Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 22, 2023

There are 5 speakers on the call.

Operator

Morning, and welcome to the Flexsteel Industries 4th Quarter and Fiscal Year 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Derek Schmidt, Chief Operating Officer and Interim Chief Financial Officer for Flexsteel Industries.

Operator

Please go ahead.

Speaker 1

Thank you, and welcome to today's call to discuss Flexsteel Industries' 4th quarter and fiscal year 2023 financial results. Our earnings release, which we issued after market close yesterday, Monday, August 21, is available on the Investor Relations section of our website atwww.flexsteel.comundernewsandevents. I am here today with Jerry Dittmer, President and Chief Executive Officer. On today's call, we will provide prepared remarks and then we will open the call to your questions. Before we begin, I would like to remind you that the comments on today's call will include forward looking statements, which can be identified using words such as estimate, anticipate, expect and similar phrases.

Speaker 1

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 ks as updated by our subsequent quarterly reports on Form 10 Q and other SEC filings as applicable. These forward looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Additionally, we may refer to non GAAP measures, which are intended to supplement, but not Thank you, operator. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of GAAP to non GAAP measures.

Speaker 1

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

Speaker 2

Good morning and thank you for joining us today. I am pleased to share with you our Q4 fiscal year 2023 results. We continued our strong momentum in the 4th quarter, delivering sales of $105,800,000 which was within our guidance range and represents sequential quarter over quarter growth of 6.8% compared to the Q3. While we continue to face market headwinds in the form of pricing pressure and slowing consumer demand, We are executing well and our growth initiatives are adding meaningful revenue to offset these challenges. Our growth initiatives, along with a continued focus on operational efficiency and controlling costs, enabled us to expand our gross margins and deliver operating income for the quarter of $4,200,000 or 4%, which was in the upper range of our guidance.

Speaker 2

While economic uncertainty and market headwinds will remain a challenge in fiscal year 2024. I am encouraged by the positive impact of our strategic priorities and excited to continue our momentum in fiscal year 2024. Looking back on fiscal year 2023, It was a very challenging yet exciting year. Coming off a year in 2022 of record high sales Due to post COVID demand, we were faced with slowing consumer demand, which was compounded by a glut of retail inventory that was ordered to meet expected post COVID demand, but backlog due to supply chain disruptions. At the same time, the industry experienced pervasive price reductions as many manufacturers and retailers quickly dropped prices in response to lower ocean freight and other cost inputs, forcing others to follow suit.

Speaker 2

The imbalance between supply and demand further intensified some pressure to lower prices in order to remain competitive And while ocean container rates began to return to normal levels, fuel prices surged. Despite the Significant decline in year over year sales caused by these challenges, our strong team of dedicated employees identified the obstacles early and executed plans to navigate them, which resulted in higher full year operating income of $10,500,000 compared to $6,600,000 in the prior year. It was exciting To see the advancement of our strategic growth initiatives, which included expanding our big box distribution channel, Launching our Zcliner Sleep Solutions recliner and our Flex contemporary modular furniture solution and launching the new Karisma brand. The impact of these growth initiatives created sequential quarter over quarter sales growth and the second half of the fiscal year despite the challenges already mentioned. We continue to see near term Due to competitive pricing pressure and a return of demand to pre pandemic levels amid macroeconomic uncertainty.

Speaker 2

However, we are maintaining our commitment to our strategic priorities and delivering long term profitable growth. With that in mind, we will continue to invest pragmatically in growth initiatives to drive sales and focus on operational excellence to drive margin expansion. I'll now turn the call over to Derek to discuss our strategic initiatives and financial results, as well as our outlook for Q1 2024. I'll be back at the end of the call with some closing comments on what we see ahead.

Speaker 1

Thank you, Jerry, and good morning, everyone. Like Jerry, I'm optimistic about the trajectory of our business And feel great about the momentum we've built with our growth initiatives. A few noteworthy highlights to share. With respect to new sales distribution, represented approximately 5% of our total sales in the 4th quarter and is expected to grow faster than our other channels in fiscal year 2024 as we expand the breadth of product offering and optimize our marketing and demand generation efforts within this channel. As important, we are building Flexsteel brand awareness with a different consumer audience through Big Box, which we feel will have positive long term growth benefits across all our channels.

Speaker 1

In new product categories, we had good early success with Flex, which is our small parcel Contemporary modular furniture solution. Flex was initially launched in the big box channel last quarter And we've accelerated distribution expansion to make Flex available across a wide variety of selling platforms, Including e commerce partners like Amazon, Wayfair, Overstock, which recently rebranded itself as Bed Bath and Beyond, homedepot.com and our own direct to consumer site, www.flexsteelstore.com. In addition, we are aggressively expanding Flex into brick and mortar retail with our strongest independent retail partners. New product additions will be released in October with additional plans developed to meaningfully expand the line over the next 18 months. Decliner, our new sleep solutions recliner has become a home run.

Speaker 1

Over 500 retailers have placed the product With strong initial sales, we've also signed up multiple regional sleep store chains with more anticipated In fiscal year 2024, we expanded the line in April and have more innovation planned for release in October. This is an exciting category and our plan is to stay ahead of any competition by constantly innovating. To expand our customer base, last year we launched our new Charisma brand, targeting the style and price preferences of younger consumers. With a major competitor in the sub $1,000 sofa market recently closing their operations, we have an opportunity near term to gain additional retail penetration with Karisma. In the midterm, we are also pursuing cost efficient innovations to bolster Karisma's brand position of differentiated quality and comfort at affordable prices.

Speaker 1

The success of these new growth outlets coupled with our continued investments in our core business give us confidence to profitably grow the company in fiscal year 2024 and beyond. We are also proud to have published our 1st annual ESG report, which can be found on our website at www.flexsteelindustries.com. This report lays out the foundation of our approach to environmental, social and governance matters and formalizes our ongoing commitment to sustainable and responsible business practices. We are dedicated to making a positive difference wherever we can, Guided by the belief that not only is it the right thing to do, but it's also the right thing for our business long term. We are already combining sustainable business practices with product innovation to bring differentiated valued solutions to the market, As exemplified by our new Sky seating line, which utilizes Cloud Luxe, a cushion fill made from recycled plastic bottles.

Speaker 1

Not only does Cloud Lux provide exceptional comfort, but every 3 piece sky sofa helps prevent 7 30 plastic water bottles from entering waterways and landfills. We're excited about our ESG journey and convinced that we can positively impact people, communities and our planet, while also supporting and accelerating our growth strategies through these efforts. With that, I'll now give you some additional details on the financial performance for the Q4 and the outlook for the Q1 of fiscal year 2024. For the Q4, net sales were $105,800,000 within our guidance of $100,000,000 to $110,000,000 provided during our Q3 earnings call. More importantly, Our sales results represent a sequential increase of 6.8% from the 3rd quarter, which is our 2nd From a profit perspective, the company delivered operating income of $4,200,000 or 4% of sales in the 4th quarter, which was at the high end of our guidance range and represents a continuation of sequential quarter over quarter operating margin improvement throughout fiscal year 2023 even with increased strategic investments to support long term growth.

Speaker 1

Moving to the balance sheet and statement of cash flows. The company ended the quarter with a cash balance of $3,400,000 Working capital of $115,500,000 and a balance on our revolving line of credit of $28,300,000 a 25% decrease from the prior year. Working capital and our debt balance did increase from the Q3 due to the timing of inventory receipts, which were heavier in the Q4 as we bring in new products and additional inventory to support our growth initiatives. However, compared to prior year, we have executed our plan to reduce inventory levels and pay down debt and our balance sheet remains strong. We continue to prioritize debt reduction and expect inventory to be a meaningful source of cash in fiscal year 2024 to further pay down debt.

Speaker 1

Looking forward, sales guidance for the Q1 is between $92,000,000 $100,000,000 The Q1 is historically our slowest quarter of the year as furniture purchases are often deferred by consumers in favor of travel and entertainment during the summer months. That said, we are anticipating year over year unit volume growth in the low to mid single digits as a result of our growth initiatives. But the elimination of ocean freight surcharges, which occurred in the most recent quarter, will reduce revenue by approximately $5,000,000 compared to the prior year Q1 and ultimately keep year over year total sales dollars relatively flat. This revenue drag from the prior year ocean freight surcharges will lessen throughout the year and we expect our growth initiatives, which have begun to drive meaningful revenue to more than offset this and results in subsequent quarter over quarter and year over year sales growth. Regarding profitability, We expect gross margins between 18% 19.5% in the Q1.

Speaker 1

We expect gross margins to grow modestly throughout the fiscal year with expected sales growth and continued operational productivity. Near term, the recent strength of the Mexican peso Versus the U. S. Dollar is having an adverse impact on our margins given our large manufacturing presence in Mexico and is masking the favorable benefits of our operational efficiency gains. We will continue to prudently manage SG and A spend While investing in our growth initiatives and expect SG and A costs between $15,500,000 $16,500,000 for the quarter.

Speaker 1

We are projecting operating income as a percent of sales in the range of 1% to 3% in the first quarter and expect operating income margins to improve throughout the year in parallel with forecasted gross margin improvement. The most significant drivers of variability in the Q1 guidance range continue to be consumer demand and competitive pricing conditions, both of which will be shaped by macroeconomic factors. Regarding our cash flow outlook, working capital is Near term priorities for cash remain reducing debt, resourcing new innovation and funding capital expenditures. We may continue to be opportunistic with share repurchases at modest spending levels if the stock price remains at a significant discount to our view of intrinsic value. We expect debt levels at the end of fiscal 2024 in the range of $0,000,000 to $15,000,000 And for the Q1, we expect capital expenditures between $1,500,000 $2,500,000 The effective tax rate for fiscal 2024 is expected to be in the range of 27% to 29%.

Speaker 1

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

Speaker 2

Thanks. While economic uncertainty remains, I am confident that our long term growth outlook remains promising. Our team's commitment to profitable growth And the foundations we have put in place have positioned us to successfully deliver improved earnings and even stronger balance sheet in fiscal year We are focused on our strategic growth initiative, investing in future innovation And delivering sustainable profit through operational efficiencies, while continuing to reduce inventory levels and pay down debt. In summary, we're enthusiastic about fiscal year 2024 and the long term growth opportunities for the company, while being mindful that we still face near term economic uncertainty. With that, we will open up the call to your questions.

Speaker 2

Operator?

Operator

And our first question will come from Budd Bugatch of Water Tower Research. Please go ahead.

Speaker 3

Thank you. Good morning, Jerry. Good morning, Derek. Thank you for taking my questions.

Speaker 2

Good morning, Brad.

Speaker 4

Good morning, Brad. Yes.

Speaker 3

Just can you talk a little bit about the revenue pattern and the way It materialized during the quarter. How did it look year over year? And maybe talk about units versus Price as it came out for the Q4?

Speaker 1

Yes. Actually, if you were to look at The quarter, Budd, we started probably the quarter a little bit slow in April and then saw a really nice pickup in May June kind of around Memorial Day holiday. So feel like we finished the quarter strong. It's interesting year over year Total net sales were down 15%. Unit growth was actually up 2% year over year.

Speaker 1

So all the decline in the net sales number Was related to pricing, of which a large amount of that pricing decline was related to ocean freight surcharges. So if you remember, if you go back 12 months ago in Q4 of fiscal year 2022 is when we had peak Ocean freight rates, probably our surcharges were at their peak. And then we virtually I mean, we eliminated Those are Ocean surcharges here in our most recent Q4. So there was a big revenue decline related to that, But we feel good about our momentum in the market, the fact that we had positive year over year unit growth And then we're anticipating carrying that momentum into Q1 and expect to have mid single digit unit growth in the upcoming quarter as well. So Budd, most of that

Speaker 2

pricing is behind us. We will see some of that as the year goes on. There will be probably $4,000,000 or $5,000,000 of it See here in this Q1 from the pricing actions, that could be in May is when we took the last Our ocean freight charges away. So it would be pretty encouraging. Probably the most encouraging thing we really saw in the Q4 was our unit volume being up year over year.

Speaker 2

That was very

Speaker 3

I agree. I am painfully aware of what happened to ocean freight during the post pandemic timeframe. And historically, much of your sales were retailer based and special orders. Now with the big box strategy, I take it that there's a lot more placed on stock. How is how did that balance unfold during the quarter and What do you see going forward on that?

Speaker 1

Yes. In terms of again unit volume, we feel good about Really performance in both traditional retail as well as kind of our e commerce pursuits, including big box. So I think we're competing well in kind of both channels. Obviously, as we alluded to in our opening remarks, we expect that Big Box will Grow faster than the other channels, given the fact that, again, this is a relatively kind of new probe for us. But beyond that, we're not seeing really any material kind of changes in mix.

Speaker 3

And are you seeing better reports from your retailer? You have a wide swath of retailers throughout the country. How is their demand looking? What can you see from that from your incoming order book?

Speaker 2

Yes, Budd. So our retailers are not panicking They're actually it's pretty strong, especially year over year. And as Derek said, both the retail and the big box Are both up year over year, especially in the order side, which is very encouraging. So, obviously, we are worried like everybody about what's going to happen There's going to be an economic slowdown, but right now we really haven't seen that. So we're pretty encouraged where we're at right now.

Speaker 1

Yes. Orders for the Q4, actually total company were up 20% year over year. So again, we feel like we're competing well. As Jerry alluded to, most retailers will tell us that traffic is a bit slow. So the fact that we're seeing Pretty robust year over year order growth would suggest certainly that we're gaining some share and we have good momentum.

Speaker 3

I'll add just a couple more, but let some others have at it. Just the gross margin progress was notable. Can you give us a little bit of color on that? You called it from operational efficiencies. How does it look like With the material labor and overhead, what's where were those efficiencies and the reduced inventory Breakdowns.

Speaker 3

Can you give us some color on that and maybe a walk from quarter to quarter or year to year?

Speaker 1

Yes. So from a productivity and operational efficiency standpoint, Budd, we made really good gains across all the aspects of our supply chain. So that's Manufacturing, that's global sourcing, that's logistics. So we have 3 strong leaders in each of those areas and And they're doing a great job executing from my viewpoint, in terms of just constantly driving cost savings. They've been doing that all fiscal year 2023.

Speaker 1

Unfortunately, a lot of that got Used to fund some price concessions in the market. So good momentum on that front. And I'm sorry about the second part of your question, operational efficiencies.

Speaker 3

Right.

Speaker 2

Yes.

Speaker 3

What do you see going forward on that? How far can you take the gross margin

Speaker 1

Yes. Again, we've talked about near term, mid term. Certainly, our goal is to Get our gross margins at or above kind of 20%. Continued operational efficiency will be a really important part of that. The other piece that you noted, which was in the press release is year over year reduction And inventory kind of write downs.

Speaker 1

If you remember in fiscal year 2024 Q4, We had a lot of inventory. We put reserves against some of that because demand was slowing. So that comment as it relates to fiscal year 2023, Q4 was simply there was a negative Kind of comparison in fiscal year 2022. So, overall, we feel good about our inventory levels, the quality of inventory. So no concerns on that front.

Speaker 1

So I think as we go forward, we feel pretty confident around our ability to continue to expand Overall margins throughout fiscal year 2024 and the big levers there are twofold. It's continued operational efficiencies And then second, volume leverage.

Speaker 2

The other thing too, Budd, and there are 2 things. The inventory will continue to come down. We don't see that there will be growth during this fiscal year in inventory, even as our revenue goes up. And probably the only thing we really that's kind of an uncontrolled lender right now is The peso versus the dollar is having a negative effect on us here in the short term and maybe even longer term. We saw about $1,000,000 last year and we'll see Probably a good $400,000 this year in this Q1 as the peso and the dollar aren't really moving in the best direction for us.

Speaker 3

I see. And you did talk about inventory as a source of cash and is it what 122 at the end of the year? Do you think is it what's the goal for the end of fiscal 2024? Is it $100,000,000 back to where it was maybe Before pandemic timeframe?

Speaker 2

Yes, I think in that range. Our goal would even be a little bit better than that, but that would definitely it's definitely our goal.

Speaker 4

And so that

Speaker 3

would get your funded debt down to just about 0, if not at 0?

Speaker 2

Correct. I mean, we stated it's 0 to 15, but our ultimate goal obviously is to get that down to 0.

Speaker 3

Thank you. Thank you very much. I'll let others ask questions and come back in the queue if possible.

Speaker 2

Thanks, Budd.

Operator

And the next question comes from Anthony Lebiedzinski of Sidoti and Co. Please go ahead.

Speaker 4

Good morning and thank you for taking the questions. Good morning.

Speaker 2

Good morning.

Speaker 4

So Just curious as far as the revenue impact from the growth initiatives, I know, Derek, you talked about the big box Yes, impact for the quarter, but just overall when we look at collectively big box expansion as well as So Zeekliner and Flex and others, so how much of that you think contributed to the 4th quarter sales? And then kind of How should we think about that as far as outlook for fiscal 2024?

Speaker 1

Yes. In terms of the 4th quarter, A little less than $10,000,000 was derived from kind of growth initiatives. So Going into certainly fiscal year 2024, we feel good about the momentum there. As it relates to fiscal year 2024, we would estimate Our growth initiatives would contribute probably another on an annual basis another at least 30 $40,000,000 over and above what we delivered here in fiscal year 'twenty

Speaker 2

three. We're hoping, Anthony, that the plan is for that to be maybe to rise up Somewhere in that 15% range going forward on an annual basis.

Speaker 4

Got it. Yes. Thanks for that. And then Yes, certainly terrific job with gross margin expansion. I know for the upcoming quarter here, Looks like there will be a little bit of a sequential decrease because of, I guess, lower revenue.

Speaker 4

But Overall, do you think you can get above 20% at some point later this fiscal year? Or is that probably not doable just yet? If we

Speaker 2

do it sequentially, I think the answer would be yes. I mean, obviously, our revenue will be down in that $10,000,000 type range. So that does have an effect here in the Q1. Historically, our second, 3rd, 4th quarters are stronger quarters. And so the plan will be to continue to take that upward.

Speaker 2

And maybe for the year, it will average close to that 20%. But hopefully, by the end of the fiscal year, we will be above that 20%.

Speaker 4

Okay, very good. And then as far as inventories at retail, we would like to hear your perspective. I know you talked About last year having a glut of inventory at the retail level, what's your sense now as far as Inventory levels to your customers?

Speaker 2

From where we're at or from where our retailers are at?

Speaker 4

As far as where the retailers are at, I mean, so last year, obviously, there was this big glut of inventory just as demand started to slow down. But fast forward a year later, I mean, do you feel like your retail customers have In general, appropriate inventory levels or still maybe too much or just wanted to get a better perspective from you?

Speaker 2

Yes, it's a good question. So our retailers for the most part, especially our strong retailers are in a good place. Of course, everyone's a little bit Cautious, not sharing what's going to happen from an economic standpoint, but most of our retailers are in a decent place. A lot of their caution comes from store traffic is what's really down. Sales are hanging in there pretty well And most of the folks coming in are coming in to buy, but true retail traffic is down.

Speaker 2

And as that correlates into inventories, people are a little bit cautious. But for the most part, most part retailers are in good place and we're seeing a lot of good they sell through, there's orders come back our way, which is good.

Speaker 4

Okay. That's good to hear. And then, so by fiscal by the end of fiscal 'twenty four, you could potentially be debt free. So as you move Beyond that, what would you say would be your cash flow priorities As you look to be it looks like debt free by the end of F24? Yes.

Speaker 4

The main one,

Speaker 2

of course, will be to continue with our growth initiatives because we plan on taking a lot of our growth initiatives and doing more with each one of them coming out With new products and enhancements, things like that, obviously, we'll continue to look at acquisitions if there's Things that are favorable there, but those are really the main 2.

Speaker 4

Got it. Well, thank you very much and best of luck. Thanks,

Operator

Anthony. This concludes our question and answer session. I would like to turn the conference back over to Jerry Gitmer for any closing remarks.

Speaker 2

Great. Thanks. In closing, I want to thank all of our Flexsteel employees for their dedication and outstanding performance during the fiscal year. I'm also thankful to all of you, Budd and Anthony, for participating in today's call. We really appreciate that.

Speaker 2

Obviously, you can please contact us

Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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Flexsteel Industries Q4 2023
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