Flexsteel Industries Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 20, 2024

There are 4 speakers on the call.

Operator

Good day, and welcome to the 4th Quarter Fiscal Year 20 24 Earnings Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Mike Ressler, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you, and welcome to today's call to discuss Flexsteel Industries' 4th quarter fiscal year 2024 financial results. Our earnings release, which we issued after market close yesterday, Monday, August 19, is available on the Investor Relations section of our website at www.flexsteel.com under News and Events. I'm here today with Derek Schmidt, President and Chief Executive Officer. On today's call, we will provide prepared remarks and will then 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 substitute for the most directly comparable GAAP measures. Press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non GAAP measures.

Speaker 1

And with that, I'll turn

Speaker 2

the call over to Derek Schmidt. Derek? Good morning, and thank you for joining us today. I am pleased to share with you our 4th quarter and fiscal year 20 24 results. We continued our positive momentum in the 4th quarter, delivering 4.7% sales growth over the prior year period, near the top end of our guidance range.

Speaker 2

Despite continued weak demand conditions for our industry, our 4th quarter results represent our 3rd consecutive quarter of mid to high single digit year over year growth. I'm confident that our growth strategies are working. We are winning and gaining share, and we are working aggressively to accelerate our positive sales momentum going into fiscal year 2025. Our strong execution over the past 12 months resulted in annual sales growth of 4.8%, which we feel is exceptional performance relative to the industry and the many industry participants who realized double digit declines during the same period due to challenging industry dynamics. Our strong performance in fiscal year 2024 not only reflects our team's intense and aggressive focus on growing the business, but also the attractive returns from continued investments in innovation, new product development, customer experience and marketing, which are unlocking growth in our core markets and opening doors to new growth and expanded markets with long term potential.

Speaker 2

At the same time, we continue to improve our profitability. Adjusted operating margin was 5.6% in the 4th quarter, up compared to 4% in the prior year quarter and represents our 3rd consecutive quarter of sequential quarter over quarter growth in adjusted operating margin. For fiscal year 2024, we grew our adjusted operating income to $18,300,000 or 126% year over year improvement. The keys to our consistent profit improvement have been our sales growth, strong operational execution and efficiencies, robust cost savings and disciplined product portfolio management, all of which have strong momentum and will continue to be catalysts for continued margin expansion in fiscal year 2025. I'm also very pleased with the progress we've made to improve working capital efficiency and strengthen our balance sheet.

Speaker 2

Inventories were reduced by over $25,000,000 in fiscal year 2024, while sustaining strong customer service levels. Coupled with higher profits, solid working capital management helped generate almost $32,000,000 in operating cash flow and eliminated most of our bank debt. In the recent period, where we've seen numerous industry bankruptcies and many industry participants continue to realize meaningful year over year declines in both sales and profits, Flexsteel is financially strong, growing sales, improving profitability, generating cash, and aggressively investing for the future. Our customers, investors, and other business partners should all have confidence that Flexsteel is well positioned long term for profitable, sustainable growth. As we look forward to fiscal year 2025, weak consumer demand is expected to continue to be a major headwind for the industry in the near term.

Speaker 2

The impact of inflation, albeit slowing and high interest rates continue to take a toll on consumers' cost of living and their overall confidence and on the housing market, which is an important underlying driver for furniture demand. Until U. S. Consumers regain confidence in the economy and the outlook for these structural concerns, there's not an obvious catalyst to meaningfully move consumer demand for furniture in a more positive direction. That said, we are deeply committed to continue growing and gaining share under challenging industry conditions.

Speaker 2

And we will remain aggressive with our strategies and investments to pursue new growth. Our strategic priorities for fiscal year 2025 remain largely unchanged. We have robust plans to continue growing through both our core markets and expansion into new markets. In our core markets, we remain focused on differentiating ourselves through value added innovation and new product development and delivering a superior customer experience. Our focus on expanded markets remains threefold.

Speaker 2

1st, expanding and repositioning our brand portfolio to align with consumer needs of the future, especially younger consumers. 2nd, expanding beyond our core sales distribution and into new brick and mortar and e commerce channels to position our brands wherever consumers desire to shop, both today and in the future. And third, expanding our penetration in the home beyond primary living areas. In fiscal 2024, we made strong progress in advancing all these strategic growth initiatives and we are gaining momentum to further these pursuits in fiscal 2025. Simultaneously, we will continue to aggressively invest in 3 key growth capabilities that are foundational to achieving our long term growth aspirations.

Speaker 2

1st, we are investing more heavily in consumer insights to reveal both emerging and unmet consumer needs that we can uniquely position Flexsteel to address. 2nd, we are investing in innovation fed by consumer insights that both differentiates Flexsteel and can be protected through IP, exclusivity or trademarks. Our innovation focus transcends many areas, including health and wellness, safety, ease of use and superior consumer experience. The 3rd area of key investment is marketing and brand awareness. While we will continue to excel at marketing to and through our trade partners, we are also building new abilities to engage consumers directly and strengthen awareness and trust in our brands.

Speaker 2

While we are intensely focused on growing the business and building long term growth capabilities, the organization is also highly attentive to driving meaningful profit growth through operational excellence and disciplined portfolio management in fiscal 2025 and beyond. I am very proud of what our Flexsteel team accomplished this year and even more excited about the future potential of the business. We have the right strategies, talent and culture to continue to strengthen our market leadership long term and to deliver exceptional results to our customers and investors. With that, I'll turn the call over to Mike, who will give you some additional details on the financial performance for the Q4 and the outlook for the Q1 and full year fiscal 2025. Mike?

Speaker 2

The 4th quarter net sales were $110,800,000

Speaker 1

or growth of 4.7% compared to net sales of $105,800,000 in the prior year quarter. As Derek mentioned, this marks our 3rd consecutive quarter of sales growth compared to prior year periods and near the upper end of our guidance range of $107,000,000 to $112,000,000 Sales orders for the quarter were $108,500,000 or 17% above prior year quarter orders of $92,700,000 Sales order backlog at the end of the period was $59,500,000 an increase of $9,800,000 or 20 percent above the prior year ending backlog of $49,700,000 From a profit perspective, the company delivered GAAP operating income of $7,600,000 or 6.9 percent of sales in the 4th quarter. The GAAP operating margin exceeded our guidance range of 3.5% to 4.3%, primarily due to a one time gain on the sale of our former manufacturing facility in Starkville, Mississippi of $3,200,000 When adjusted for the impact of certain items, such as the gain on the sale of our Starkville property as well as CEO transition costs and restructuring costs related to our previously announced Dublin, Georgia plant closure, the company delivered adjusted operating income of $6,200,000 or 5.6 percent of sales in the 4th quarter. The 5.6 percent adjusted operating margin was within our guidance range of 5.2% to 6.0% and a 160 basis point increase from the prior year quarter.

Speaker 1

Moving to the balance sheet and statement of cash flows. Company ended the quarter with a cash balance of $4,800,000 working capital of $95,000,000 and a balance on our line of credit of $4,800,000 Increased profit and working capital efficiency allowed us to pay down our debt by another 66% or $9,400,000 compared to the fiscal Q3. Looking forward, sales guidance for the Q1 is between $100,000,000 $105,000,000 reflecting 5% to 10% growth compared to the prior year quarter. 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. With that said, sales growth will be driven primarily by unit volume growth and to a lesser extent pricing from recently implemented ocean freight surcharges in response to rising ocean freight rates.

Speaker 1

Regarding profitability, we expect gross margins between 21.5% 22.0% in the Q1, a slight improvement from fiscal 2024 4th quarter gross margin of 21.3%, driven by savings from our manufacturing network optimization initiative and favorable mix, partially offset by deleverage of fixed costs on lower sales and higher ocean freight costs. We expect gross margin to grow modestly throughout the fiscal year with sales growth leverage, cost savings initiatives and new product profitability mix more than offsetting supply chain inflation. We will prudently manage SG and A spending while investing in our growth initiatives and expect SG and A costs between $16,500,000 $17,000,000 for the quarter. We are projecting operating income as a percentage of sales in the range of 5.0 percent to 6.0 percent for the Q1 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 are consumer demand, competitive pricing conditions and ocean freight rates, all of which will be shaped by macroeconomic factors.

Speaker 1

Regarding our cash flow outlook. Our fiscal Q1 is normally a period with heavy outflows due to the timing of incentive compensation payouts and prepaid software and service agreements. With that, we expect free cash flow for the quarter in the range of $0,000,000 to $5,000,000 and expect debt levels at the end of the quarter of between $0,000,000 $7,000,000 Near term priorities for cash remain reducing debt, resourcing new innovation and funding capital expenditures. We will be opportunistic with share repurchases at modest spending levels if the stock price is trading at a significant discount to our view of intrinsic value. For the Q1, we expect capital expenditures between $500,000 $1,000,000 The effective tax rate for fiscal 2025 is expected to be in the range of 30% to 32%.

Speaker 1

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

Speaker 2

Thanks, Mike. While industry headwinds are expected to remain near term, I am confident in our team's ability to deliver exceptional results in fiscal 2025 and believe that our long term growth outlook remains promising. Our team's unwavering commitment to excellence coupled with the foundational growth investments we've made and will continue to make have positioned us to successfully drive attractive top line growth and even stronger earnings in fiscal year 2025. In summary, we're excited about the potential of the business in the new fiscal year and the long term growth opportunities for the company. With that, we will open the call to your questions.

Speaker 2

Operator?

Operator

Our first question comes from Anthony Lebiedzinski with Sidoti and Company. Please go ahead.

Speaker 3

Good morning, gentlemen, and thank you for taking the questions and great performance in a tough environment for sure.

Speaker 2

So I

Speaker 3

guess so yes, good morning. So first, just wanted to see if you could parse out the growth from the core business versus new channels of distribution and maybe you could just start with that and I had a couple of other questions as well.

Speaker 2

Yes, I think what's encouraging Anthony is that our overall growth was driven both by gains in our core business as well as our strategic growth initiatives, those being the market expansion initiatives that I mentioned earlier. So I think again, we're executing well. The investments we're making certainly around new product development and customer experience, I think are the key drivers in our core business. And then you're familiar with the initiatives that we have to address expanded markets, things like ZCLINER and FLX and Karisma and our big box entries. So again, what I'm really encouraged by is the fact that on both of those fronts, we're making good headway and we're growing both aspects of the business.

Speaker 3

Okay. So great to hear that there is balanced growth from this strategy here. So and I guess just looking at the quarter or so, the sales trends to retail stores versus sales to e commerce retailers, there was quite a bit of a divergence there in the quarter. How do you see that shaping up here Q1 and through the balance of fiscal 'twenty five?

Speaker 2

Yes. I think on the e commerce front and being the industry expert, Anthony, this won't come as a surprise. But on the e commerce front, it's the whole industry has been sluggish, but e commerce has been especially challenging. Where we largely compete on that front is through our ready to assemble home styles business at lower price points. And that part of the market, I think is significantly more challenging than the rest of the market.

Speaker 2

I think until we see some of those macroeconomic factors like inflation, high interest rates, housing actually start to stabilize, I think that part of the market is going to continue to be pretty choppy. Again, on a positive note, we're doing extremely well on the retail front. And I think that's going to continue to be a very positive catalyst for fiscal year 2025 for overall growth.

Speaker 3

Got you. And then my last question here. So as far as from a cost perspective, so I know you mentioned the ocean freight costs and you put in a freight surcharge there. But other than that, I mean, is there anything else to call off from a cost perspective that we should think about?

Speaker 1

Anthony, yes, I'll take that. So that's really kind of the one area in terms of kind of supply chain inflation that we're feeling now. We've implemented surcharges to mitigate that. And so far, we haven't seen a substantial impact to the volume, but we'll continue to monitor that situation quite closely. In terms of other areas of cost within the supply chain, we have wages within our distribution centers.

Speaker 1

There's a little bit of pressure there as well as within our Mexico operations. We would anticipate in the second half of the year, the normal cost adjustment for the labor force down there. But other than that, we haven't been seeing too much on the inflation side.

Speaker 3

Got you. All right. Well, thank you very much and best of luck.

Operator

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

Speaker 2

In closing, I first want to acknowledge the passing of Bud Gugach this week. As many of you know, Bud was a long time furniture and bedding industry equity analyst, personal friend and admired colleague and a follower of Flexsteel and a regular participant on our earnings call. Bud will be deeply missed and may he rest in peace. I also want to thank all of our Flexsteel employees for their dedication and outstanding performance during the fiscal year. I'm also thankful for all of you for participating in today's call.

Speaker 2

Please contact us if you have any additional questions and we look forward to updating you on our next call. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Flexsteel Industries Q4 2024
00:00 / 00:00