Flexsteel Industries, Inc. (NASDAQ:FLXS) Q2 2024 Earnings Call Transcript
Flexsteel Industries, Inc. (NASDAQ:FLXS) Q2 2024 Earnings Call Transcript February 6, 2024
Flexsteel Industries, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Flexsteel Industries’ Second Quarter Fiscal Year 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Ressler, Chief Financial Officer for Flexsteel Industries. Please go ahead.
Mike Ressler: Thank you, and welcome to today’s call to discuss Flexsteel Industries’ second quarter fiscal year 2024 financial results. Our earnings release, which we issued after market close yesterday, February 5 is available on the Investor Relations section of our website at www.flexsteelindustries.com, under News and Events. I am here today with Jerry Dittmer, Chief Executive Officer; and Derek Schmidt, President. 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.
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 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.
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. And with that, I will turn the call over to Jerry Dittmer. Jerry?
Jerry Dittmer: Good morning, and thank you for joining us today. I’d like to start by welcoming Mike Ressler, our new Chief Financial Officer. Mike has been with Flexsteel over 17 years in various accounting, finance and other cross functional roles, most recently as the Vice President of Manufacturing. His appointment as CFO reflects his leadership and contribution to the company’s transformation over the past several years. And I’m excited for Mike to further expand his positive impact on the company as CFO. I would also like to congratulate Derek Schmidt on his appointment to President and to the Board of Directors. Derek’s promotion reflects his leadership of the company’s operations and growth strategy and aligns with his expanded responsibilities since joining the company nearly four years ago.
With that, I am very pleased to share with you our second quarter fiscal year 2024 results. While headwinds from macroeconomic challenges and shifts in consumer spending towards experiences and away from things persist in our industry, we continue to execute on our strategic initiatives and delivered sales growth of 7.5% when compared to the prior year quarter. In addition, our relentless focus on operational efficiency and cost savings propelled gross margin expansion and helped fund additional investment in growth initiatives while delivering significantly improved operating income when compared to both the same quarter of the prior year and our first quarter fiscal 2024. While we expect the business environment in the near term to remain challenged, our team isn’t deterred and remains intensely focused on continuing to profitably grow our business throughout the remainder of fiscal year 2024 and long term.
We will continue our positive momentum going into the third quarter and are confident in our ability to grow sales, both compared to last year and the second quarter. I’ll now turn the call over to Derek to discuss our results and an update on our growth initiative. I’ll be back at the end of the call with some closing comments on what we see ahead.
Derek Schmidt: Thank you, Jerry, and good morning, everyone. Like Jerry, I am very pleased with our second quarter results. We are competing well in our core business and executing our market expansion initiatives, resulting in both sales and profit growth even in a difficult business environment. As Jerry noted earlier, we grew our top line by 7.5% in the fiscal second quarter. This year-over-year sales comparison continues to be adversely impacted by the elimination of ocean freight surcharges which reduced revenue by approximately $3.5 million compared to the prior year quarter. As discussed in our first quarter call, in the prior year, we used this surcharge mechanism to pass through higher cost of ocean container delivery which were significantly inflated due to supply chain issues.
Container delivery costs normalized throughout the last fiscal year and we subsequently eliminated this surcharge. Excluding the $3.5 million impact from this ocean freight surcharge elimination, sales growth related to unit volume and product mix was a robust 11.7%, further reinforcing our strong sales execution. Despite challenging industry conditions, we remain confident in our ability to continue our growth momentum into the second half of fiscal 2024 from both continued share gains in our core business and increasing momentum in our market expansion initiatives. In our core business, we expect to continue outperforming the industry by continuously improving and providing a differentiated customer experience, aligning ourselves with the strongest, most capable distribution partners, and driving a constant stream of relevant and compelling new product.
We define our core business based upon where the majority of our current sales are derived from, which is product designed for primary living spaces like the living room, which are sold through independent furniture retailers and have a more traditional or transitional style that primarily appeals to Gen X and Baby Boomers consumers. This core business is large and profitable and we will continue to defend and expand our penetration in this market. At the same time, we are pursuing growth in markets outside of our core that we believe are relevant and growing, and where we have a clear right to win. If you recall from prior calls, these market expansion initiatives take three forms. First, consumer segments, namely Gen Z and Millennials. Second, product categories outside of primary living spaces, and lastly sales distribution outside of independent furniture retailers.
I’m pleased with our solid progress in all three of these areas. First, to address younger consumers, we’re repositioning our brand portfolio through a three pronged approach. We are modernizing the Flexsteel brand and last October we launched a strong lineup of more contemporary product at lower price points with exceptional comfort and quality. We’re encouraged by initial placements, and sales of these new products are ramping nicely. We also launched a new brand, Charisma, last year to reach younger consumers with even lower price on-trend product. And this year we’ve invested in new talent and product engineering to support Charisma and we’ll be launching multiple exciting new products at April’s High Point market to grow this new brand.
Additionally, we continue expanding our new flex solution with broader accessories to further improve its modularity and appeal to younger consumers. Moving on to our second market expansion focus, which is to expand into newer product categories. We focused on health and wellness this year with our new Zecliner sleep chair. A recent third-party sleep study validated the superior sleep results from using Zecliner, which we are now leveraging in our marketing and demand generation initiatives. The product is now placed in over 960 retailers and we are investing aggressively in additional innovation to protect our leadership position in this emerging market. Our third market expansion focus is to broaden our sales distribution to position our brands, where and how consumers want to purchase furniture, both now and into the future.
For example, our Flex Modular Solution, which I mentioned earlier, can be purchased not only in leading retailers, but also on Amazon, Wayfair, costco.com and our own online platform at flexsteelstore.com. While I'm excited about our top line growth and future growth prospects, I'm equally energized by our improved profitability, which is being propelled by four drivers. First, new products with higher margin profiles. We've raised the threshold for new product margins and expect product life cycle management will continue to improve our gross margin over time. Second, we're executing well operationally and delivering strong cost savings within our supply chain. Third, we've remained disciplined with pricing and pull back promotions were needed to improve overall profitability.
And fourth, we are achieving leverage on fixed costs through higher sales volume, which we believe will continue to be an important driver of operating margin improvement going forward as we grow the business. As I noted earlier, differentiated customer experience is an important element of share gains in our core markets. As part of our ongoing commitment to improve the customer experience, the company announced the closure of our Dublin, Georgia manufacturing plant. While this decision was very difficult, it enables us to reduce customer lead times and handling damage to improve the overall customer experience, while also decreasing inventory, simplifying logistics execution and improving profitability. Currently, the Dublin facility supports less than 5% of the company's sales, and we expect to retain virtually all sales through this transition.
Closure of the facility is expected to occur by the end of our fiscal fourth quarter. As part of this transition, the company expects to incur pretax restructuring and related expenses between $2.5 million and $3.2 million. The one-time costs are associated with employee separations inventory and equipment transfers and other expenses directly related to the closure and are expected to be incurred primarily in our third and fourth quarters of fiscal year 2024. Once the closure is fully executed, the company expects annualized savings in the range of $4 million to $4.5 million. The Dublin facility will be listed for sale upon closure, and the company anticipates a future one-time gain in excess of the carrying value of the asset. To summarize, we are growing and gaining share under challenging industry conditions.
We have robust plans to continue that growth both through our core markets and expansion into new markets. We are rapidly improving profitability with more gains expected through fiscal 2024 and into fiscal 2025. We are generating strong free cash flow and strengthening our balance sheet, and we are investing to continuously improve our customer experience and to drive new innovation that will differentiate us and strengthen our market leadership long-term. Future is bright and I'm excited about what lies ahead for our organization. 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 outlook for the third quarter of fiscal year 2024.
Mike Ressler: Thanks Derek. For the quarter, net sales were $100.1 million, slightly above our guidance of $94 million to $100 million, provided during our first quarter fiscal 2024 earnings call. As Derek noted earlier sales growth related to unit, volume and mix, which when excluding prior year quarter ocean freight surcharges was a strong 11.7% in the quarter. And we feel we have sustainable growth momentum throughout the rest of fiscal 2024 and into fiscal 2025. From a profit perspective, the company delivered operating income of $4.6 million or 4.6% of sales in the second quarter, which exceeded our operating guidance range of 2% to 4%. A meaningful increase in our operating income was driven by an expansion of our gross margin to 21.9% in the quarter compared to 17% in the prior year quarter.
Moving to the balance sheet and statement of cash flows. The company ended the quarter with $3.3 million in cash, working capital of $100.5 million and a balance on our revolving line of credit of $17.9 million. Our increased profit, combined with improved working capital levels, allowed us to pay down our debt by 46%, when compared to the fiscal first quarter. Looking forward, we reiterate the sales guidance release with our preliminary results announcement on January 11, 2024. And while we expect one-time costs related to the closure of our Dublin facility, will adversely impact GAAP operating income, we still expect to achieve our fiscal 2024 operating income guidance on an adjusted non-GAAP basis, when backing out the one-time costs associated with the facility closure.
Specifically, for the fiscal third quarter we expect sales between $101 million and $106 million, which represents sales growth of 2% to 7%. Regarding profitability, we expect gross margin in the range of 21% to 22%. We expect gross margin to grow modestly throughout the remainder of the fiscal year and into fiscal 2025, driven by sales growth and continued realization of our cost savings initiatives. We will continue to prudently manage SG&A spending with a focus on investing in our growth initiatives and expect SG&A costs between $17 million and $17.5 million for the third quarter. Due to one-time costs related to the closure of our Dublin facility, we expect to incur restructuring costs in the third quarter between $2.0 million and $2.5 million, primarily related to employee separation costs in the transfer of equipment and materials to other facilities.
We are projecting GAAP operating income as a percentage of sales in the range of 2.5% to 3.5% for the third quarter. Excluding one-time charges related to the closure of our Dublin facility, we expect adjusted non-GAAP operating income of 4.5% to 5.5%, consistent with our previously disclosed guidance. The most significant driver of variability in our forecasted guidance ranges, our consumer demand changes, increases to ocean container rates resulting from the disruption in the Red Sea and competitive pricing conditions, all of which will be largely influenced by external factors. Regarding our cash flow outlook in the second half of fiscal 2024, we expect improved profit and further inventory reduction to be a meaningful source of cash. Near-term priorities for cash remain reducing debt, resourcing new innovation and funding modest capital expenditures, mainly related to cost savings initiatives and continued modernization of our IT systems.
For the third quarter, we expect capital expenditures to be between $1.0 million and $1.5 million. We expect debt levels at the end of the third quarter to be in the range of $12 million to $17 million. And by the end of fiscal 2024, we expect debt levels in the range of zero to $10 million. The effective tax rate for fiscal 2024 is expected to be in the range of 30% to 32%. Now I'll turn the call back over to Jerry to share his perspectives on our outlook.
Jerry Dittmer: Thanks Mike. While we remain cognizant of macroeconomic factors, which could impact our current outlook, I am optimistic about our ability to continue to gain share and confident we can maintain our profitable growth trajectory both in the near and long-term. We have great momentum and are well positioned to successfully deliver improved earnings and an even stronger balance sheet over the remainder of fiscal year 2024 and into fiscal year 2025. With that, we will open the call to your questions. Operator?
See also 50 Richest Countries in the World by GDP Per Capita in 2024 and 10 Dividend Stocks That are On Sale 30% or More.
To continue reading the Q&A session, please click here.
