Flexsteel Industries, Inc. (FLXS) Q1 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Flexsteel Industries First Quarter of Fiscal Year 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Donni Case, Investor Relations for Flexsteel Industries. Please go ahead.

Thank you and welcome to today’s call to discuss Flexsteel Industries first quarter of fiscal year 2020 financial results. Our earnings release, which we issued after market close yesterday, Monday, October 28 is available on the Investor Relations section of our website, www.flexsteel.com under News and Events. I’m here today with Jerry Ditmer, Chief Executive Officer and Marcus Hamilton, Chief Financial Officer. On today’s call, management 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 by the use of the 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, 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 the reconciliation of the GAAP to non-GAAP measures. And with that, I’d like to turn the call over to Jerry Ditmer. Jerry?

Good morning and thank you for joining us today. Since our fourth quarter and fiscal 2019 year-end call, we have been busy executing the restructuring plan that we set forth last April to drive transformation and business simplification. During the first quarter of fiscal year 2020, we continue to make progress on all fronts. That said the only material event to report in quarter one was the completed sale of the Riverside, California facility and other capital assets for net proceeds of $18.9 million. This monetization was a timely and important capital infusion that we will use to continue driving Flexsteel transformation. As I mentioned on our last call, we have been very successful in attracting top talent to our organization for mission critical positions across the company. This quarter, we have also strengthened our board of directors. And I’m very pleased to welcome two new members who have impressive credentials in major areas of importance to us. Charlie Eitel has served as CEO, COO and Chairman of four public companies as well as nine years in leadership roles at Simmons Bedding Company. His proven leadership as a change agent and deep understanding of our industry will be a valuable asset to us. Matt Kaness is well respected as an innovator, operator and strategist in this digital, consumer and retail industries. His acknowledged leadership in the e-commerce space is especially relevant to guiding our strategy in this important channel. Matt’s experiences include being a Walmart's global leadership team in its e-commerce U.S. Division, Chief Strategy Officer at Urban Outfitters, heading the development of its e-commerce channel, as well as now serving as the Interim Chairman and CEO of Lucky Brand Dungaree. As you can imagine, there's a tremendous competition in the corporate world to attract top board members. So we are very excited that Charlie and Matt could see Flexsteel’s potential and contribute their talents and insights to transforming our company. We’re very confident that we're on the right path with the right people. Even with the extremely strong headwinds that many our industry are facing, with our high exposure to China, the 25% tariff is greatly pressuring both our top and bottom line. Outside of our self-driven initiatives where we continue to make good progress, unfortunately, we are in reactive mode on tariffs, we have a plan, but it will take some time to bear fruit. Like others in our industry, we want to move business out of China. This has resulted in a stampede to Vietnam and to a lesser degree to other Southeast Asian countries, causing labor shortages, stresses on distribution and logistics, as well as basic infrastructure capabilities, such as ports and highways. This challenge is the speed of execution, in which Flexsteel can pivot its supply chain without putting our customers business at risk of delivery disruptions or potential quality issues. All that said, we will continue to be as aggressive as possible to reposition the supply chain. With our China import volume down approximately 18% in units in the quarter, the tariff has caused unmistakable damage to our business. Switching gears to e-commerce, we are seeing positive signs of recovery in our e-commerce channel as sales were up over 5% sequentially in the first quarter versus the fourth quarter of last year. This is on the back of a fourth quarter, which saw an approximate 24% increase in sales sequentially over the third quarter. There's still work to unlock the full potential of this important channel and I want to see positive sequential comps turn into positive year-over-year comps before I will feel like we are back on track. In the first quarter, we've been working on a lot of moving pieces that will soon fall into place. As I said earlier, we will be able to discuss them in more detail as they unfold. But rest assured, we're going big and broad and fast to make them happen. Now I will turn the call over to Marcus to review our financial results and give you some more color on operations.

Thank you, Jerry. As Jerry just discussed, our business environment remain very challenging in the first quarter. The implementation of the China tariff continues to have an adverse impact on our financial results. As we discussed before, Flexsteel has significant exposure with approximately 42% of our sales sourced from China. Net sales decreased 11.6% to $100 million during the first quarter with our residential business accounting for the biggest shortfall due to continued soft demand related to the price increases imposed by the 25% tariff. Also our planned exit from the two contract business lines, Custom Design Hospitality and Commercial Office contributed to lower sales. Residential net sales declined 7.7% to $88.6 million compared with a year-ago quarter. Home Furnishings products represented approximately 86% of the residential net sales in the first quarter and were down 8.1% largely due to the tariff impact. Home Furnishings Products imported from China and consequently subject to the tariff contracted 16% in net sales and 18% in units this quarter representing approximately 95% of the overall contraction in residential net sales. We did see positive comps in our North American manufacturer recliners and motion products of 27% and 39%, respectively. However, manufactured recliners and motion products represent less than 20% of residential net sales. Our home styles products distributed primarily through e-commerce decreased 5% to $11.6 million versus a year-ago quarter. On a positive note, we’re seeing an improving trend with products sold through this channel as they grew approximately 5.5% on a sequential basis. As Jerry noted, this is the second quarter in a row of sequential growth in the e-commerce channel. Contract net sales were down $5.7 million, of which $4.3 million was primarily driven by our decision to exit the Commercial Office and Custom Design Hospitality product lines coupled with a decline in our vehicle seating and health care products due to softer demand. We reported net income of $9.6 million, or $1.17 per share compared to net income of $1.3 million or $0.16 per diluted share in the first quarter last year. Net income included $6 million of restructuring expense primarily for facility closures, professional fees and employee termination costs related to the Transformation Program and a $200,000 inventory impairment related to the restructuring. Reported net income also included a net gain of $18.9 million from the sale of a Riverside property. Excluding these one-time items that total $12.8 million. Non-GAAP adjusted net income was $8,000 or $0 per diluted share, compared with non-GAAP adjusted net income of $2.3 million or $0.29 per diluted share in the year-ago quarter. Turning now to profitability results for the quarter. Gross margin as a percent of net sales in the first quarter was 17.2% versus reported 19.2% in the prior year quarter. The 200 basis point decline was primarily driven by the following. A decline of 220 basis points due to lower volume and product mix, a decline of 40 basis points related to depreciation for our Dubuque manufacturing plant, and the decline of 40 basis points in foreign currency exchange which is partially offset by an increase in our labor productivity of 110 basis points from the consolidation of our manufacturing plants as part of our ongoing restructuring plan. Selling, general and administrative expenses decreased $2.7 million to $17.5 million. In the prior-year quarter, we incurred a one-time severance expense of $1.3 million related to the retirement of our Former CEO. In addition, restructuring actions taken during the fourth quarter of 2019 drove $0.8 million of savings in the first quarter compared with a year-ago period. As a percentage of net sales, SG&A was 17.4% compared with 17.8% last year. Regarding taxes, income tax expense is $3.2 million or an effective tax rate of 25.2% during the first quarter compared to tax expense of $0.5 million in the comparable period, or an effective tax rate of 27%. Now turning to the balance sheet. During the first quarter, net cash used in operating activities was $3.3 million, and we ended the quarter with $36.2 million in cash and cash equivalents up from $22.2 million at the end of the fourth quarter. Working capital current assets minus current liabilities at September 30 was $125.8 million, compared to $118.2 million at the end of the fourth quarter. The increase in working capital was primarily attributed to proceeds from the sale of our Riverside California facility, which drove the increase in cash and cash equivalents of approximately $14 million. This was partially offset by decline in other current assets and trade receivables of $9.3 million, and a decline of $4 million in accounts payable largely due to restructuring related expenses accrued at the end of the fiscal year and paid in the first quarter. Capital expenditures for the first quarter was $0.5 million as we mentioned previously, we expect annualized CapEx to be in the range of $5 million to $6 million. The company currently maintains $20 million on a revolver of which $18.7 million remains available at September 30. As we begin the second quarter, it's all about execution. We have the right talent in place to execute our transformation plan and remain fully committed to returning Flexsteel to profitable growth and long-term value creation. With that, I'll open the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from JP Geygan of Global Value Investment Corporation. Please go ahead.

Hey, good morning, gentlemen and congratulations on the progress you've made. It looks like things are moving at a quick pace.

Thanks JP.

Jerry, you said that you discuss additional details on your restructuring plan depends on hold. Given the speed at which you're progressing on this plan, do you anticipate announcing progress on a quarterly basis? Or would we expect some sort of interim announcement?

Yes, good question, JP. Right now the plan is that we will definitely come back to you each quarter and give a detailed plan of where we're at and where we're going. If there is something that's major, obviously we come out. At this point in time, our plan is to come out just during the quarterly reviews.

Okay, can you provide some more detail on your customers reactions to the new present paradigm given tariffs, what might be done to or be being done to mitigate the effect of the tariffs either from the supplier end or from the customer end? And then maybe elaborate on some of the bright spots that you've mentioned and how we might expect customer behaviors going forward?

Yes, I'll do that, JP. So we just got it done in I think I met with Jeff who works with your firm also down in High Point, which is a show that's every six months and we introduced a lot of new products that will be coming from other places besides over in China. So obviously there would be no tariff. In Marcus's prepared comments, you heard us talk a lot about what's happened to us so far. But going forward, we think we can begin to mitigate a lot of that, of course, there's a lot of port congestion and things like that that are making a little bit slower. From a pricing standpoint, we've pretty well been able to secure our slots going forward albeit there's some short term issues we will have just because of the tariffs in there, but going forward, our plans are that the tariffs will make -- will have a lot less exposure to us. Now, that's assuming they stay at 25%. Of course, as you know, they can go to 30% to 50% whatever. And of course, we hope they all go down. But at the end of the day, we'll deal with those as they come. Our customers, if you really the big thing we saw at the High Point show was that everybody really come out with what we'll call non-tariff pricing. So if you had gone to our showroom, you would have seen us not mention tariffs at all, this is a new price, these are the new slots, and our customers were very comfortable with that. So we're pretty excited about that we -- for the most part will have that behind us here in the next six to 12 months.

Great. And then finally, can you provide an update on your property footprint, particularly as it relates to properties that you've previously announced or being closed or consolidated and the transition of your Dubuque facility?

So Marcus, do you want to go and handle that?

Yes, so JP, we've, as you know, we've sold the Riverside property in the quarter. So that's now gone. We are trying to sell our Harrison, Arkansas facility. We've had some interest in that property. And then we're also selling one of our warehouses in Huntingberg, Indiana, which we've also had some interest and nothing confirmed yet or no, no offers on it yet but some interest. In terms of the Dubuque, the Legacy Dubuque property, it's in the process of being torn down and they've already torn down, I would say probably 50,000 to 100,000 square feet of the facility and if you recall, it's over 700,000 square foot facility. So we're in the process of remediating that site. The plan at this point in time is to get the facility down to the ground and then we'll decide what we do next after we get to that point.

Great, thank you for your time.

Thanks JP.

Thanks JP.

[Operator Instructions] As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Jerry Ditmer for any closing remarks.

Thank you very much. I appreciate those that are listening to the call today. I want to thank JP for coming on and asking us some questions. We feel we have the right people in place, and a clear direction to continue our journey together to re-energize our company and accomplish our goals of better serving our customers, generating profitable growth and improving shareholder returns. I want to thank our board of directors for their guidance, all our employees for their contributions in our transformation and we’re most grateful to the support of our shareholders. I look forward to updating you on our progress next quarter. Thanks again.

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