Good morning, and welcome to the Flexsteel Industries' Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, today's event is being recorded. I would now like to turn the conference over to Derek Schmidt, Chief Financial Officer and Chief Operating Officer for Flexsteel Industries. Please go ahead sir.

Thank you and welcome to today's call to discuss Flexsteel Industries' fourth quarter and fiscal year 2021 financial results. Our earnings release, which we issued after market closed yesterday, Monday, August 23rd, is available on the Investor Relations section of our website www.flexsteel.com, under News & Events. I am here today with Jerry Dittmer, President and Chief Executive Officer. On today's call, we will provide prepared remarks, and then we'll 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 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 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 a reconciliation of the GAAP to non-GAAP measures. And with that, I'll turn the call over to Jerry Dittmer. Jerry?

Good morning and thank you for joining us today. Despite ongoing industry challenges related to supply chain, we executed well and delivered on continued strong demand for home furnishing products during our fourth quarter. We reported net sales growth of 110% to $136.2 million in the current quarter, compared to $64.8 million in the prior year quarter and organic sales growth of 123% compared to the prior year quarter, with growth in virtually all product categories. Comparisons versus prior year are heavily skewed because of the impact of COVID-19 in the prior year quarter, when retail stores shut down and ecommerce transactions soared. Year-over-year comparisons aside, I'm very encouraged by the double-digit sequential growth delivered in the quarter versus a third quarter in both our retail and ecommerce channel. Retail orders in the fourth quarter remained robust, growing 118% above prior year and 76% above the fourth quarter in fiscal 2019, which was unaffected by COVID-19. We feel that we are competing well in gaining market share. We've been building growth momentum throughout fiscal 2021 and finished the year strong. Looking back, fiscal 2021 was a year of significant challenges for all of us both personally and professionally. I'm especially proud and grateful of our team of dedicated employees who fought through these challenges. Their resilience in the face of numerous obstacles presented by COVID-19 and unprecedented global supply chain disruptions was outstanding. Even with these hurdles, our team delivered record sales of home furnishings products and a record adjusted earnings per share of $2.99. At the same time, we made notable strides in advancing our strategic agenda and building a resilient foundation for long-term profitable growth. We strengthened talent and culture, including the addition of three new executive team members to accelerate our success in ecommerce, new business development…

Thank you, Jerry, and good morning everyone. Fourth quarter net sales were $136.2 million, up $71.4 million, or 110%, compared to $64.8 million in the prior year period. Our sales results were slightly above our $120 million to $135 million guidance range despite the ongoing supply chain issues faced in the quarter, which Jerry highlighted earlier. We were highly encouraged by our fourth quarter sales results, which represented our highest sales quarter for the fiscal year and grew 15% sequentially from third quarter sales results of $118.4 million. We saw an increase in our home furnishing products sold through retail stores of $78.5 million, or 196%. Retail sales were especially favorable compared to prior year results which were adversely impacted by COVID-19 and related retail stores shut downs. Compared with the pre-pandemic fiscal 2019 fourth quarter retail sales for the fourth quarter of fiscal 2021 increased 60% for a compounded annual growth rate of 27%. Additionally, fourth quarter retail sales also represented a sequential growth versus the third quarter up 15%. We've gained significant retail placements this year and are competing well with a healthy inventory position of in-stock products and competitive lead times on custom manufactured products. Products sold through ecommerce declined $3.3 million or minus 16.3%. ecommerce sales were softer in comparison to prior year quarter when online sales increased by 86% due to COVID-19 and related retail store shutdowns. Compared with a pre-pandemic fiscal 2019 fourth quarter ecommerce sales for the fourth quarter of fiscal 2021 increased 56% for a compounded annual growth rate of 25%. Another useful measure of our ecommerce growth momentum is sequential growth versus the third quarter, which was plus 14%. Lastly, we realized the sales decline of $3.8 million due to the exit of our vehicle and hospitality product lines during the…

Thanks. Given my confidence in our team and our strong growth momentum, we enter fiscal 2022 well positioned to continue profitable growth. We begin the new fiscal year with a record retail home furnishings backlog of $152 million and are aggressively working on plans and investments to expand our capacity to both fulfill the current backlog and support future growth. Our third and newest manufacturing plant in Juarez, Mexico recently started operations with limited production, but will ramp up quickly throughout the year as polyfoam availability improve. Additionally, we recently entered into an agreement to secure a fourth leased building in Mexico to expand manufacturing. Construction for the new 507,800 square foot facility located in Mexicali will begin shortly and we hope to take possession by June of 2022. By the end of the calendar year 2021, we expect to start up a new distribution center on the East Coast to better service our customers in that region and to handle increased inventory levels to support growth. Our inventory position relative to our competition was a clear advantage in fiscal 2021 and we intend to maintain that strength. We've remained aggressive with purchasing and our inventory and in fiscal 2021, at $161 million, of which $62 million was in transit to our distribution centers. As a result, we estimate our in stock position to improve significantly in our first quarter, which we expect will subsequently spur additional growth. With most of Southern Vietnam in COVID-19 lockdown currently, furniture production there has plummeted in the short-term, and the strength of our inventory position will only be a larger advantage if COVID-19 shutdowns in Asia expand or are extended. In summary, we're enthusiastic about the long-term growth opportunities for the company. And we are making the right strategic investments now to realize our growth potential. Looking forward, we will continue to build on our strong growth momentum, focus on long-term opportunities for aggressive growth, invest strategically in our businesses to improve our customers experience, expand our digital and ecommerce capabilities, build our brand, and drive product innovation relevant to the market. The future of the company remains as promising as ever, and we are confident in our ability to create value for our customers, employees, partners, and shareholders. With that, we'll open up the call to your question. Operator/

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Sandy Mehta with Evaluate Research.

Yes, congratulations on the strong results. If you look at your expansion in Mexico, the Juarez plant, and the new CapEx that you talked about. And once all of the CapEx plans that you have for this current year, which you just mentioned, once all of that is up and running 100%, fully online. Can you talk about what would be your sales potential once all this CapEx is online? And also could you talk about the mixed change in terms of how much of your product you sourced from Asia as well as how much from North America? Thank you.

Yes. Good morning. Thanks. This is Jerry. Yes, probably in that $650 million range, it could be a little higher, a little lower is kind of the expansion that we've got planned right now. And as far as the movement back and forth, currently about, 70% of our volume comes from Asia, our plan is over time, and that wouldn't be in the next year or two would be to move closer to a 50:50 is really what our ultimate goal would be.

And with all of these CapEx plans, it sounds like you are -- you sound very bullish about the future and the longevity of this upcycle in housing and furniture. And can you talk a little bit about, how much legs the cycle has? Do you see the strong housing and furniture marketing lasting for two, three years? And what are the variables? And how do you guys look at it and analyze it? Thank you so much.

Sandy, it's Derek. So in the near term, I think the industry outlook has some legs. Again, if you put the recent surge in COVID related the Delta variants aside, I mean, a lot of the macroeconomic indicators are certainly bullish. Once we get into 2022, there's been so much uncertainty, it's hard to call a long, long-term play, but currently we view the macroeconomic conditions as favorable. As we look at our growth, though, I mean, we do not need the industry to grow substantially in order to reach our growth ambitions. We are planning on expanding our addressable market, reaching different consumer segments, developing new brands competing at different price points through different styles, in different product categories. So when we think about our long-term growth and how we're investing for that growth, it is not widely dependent on, significant growth in the industry we believe that we can penetrate, our existing markets and expand our addressable markets to continue to drive healthy, profitable double-digit growth for Flexsteel.

And our next question comes from JP Geygan with Global Value Investment Corporation.

Good morning, gentlemen, and congratulations on a nice report. You recently relaunched Flexsteel's website and launched Homestyles website. Can you discuss your outlook for ecommerce sales, including direct-to-consumer sales, versus your traditional distribution channels over the long-term?

Yes. JP, it's Derek. So in terms of ecommerce, we've laid out a longer term objective to double the size of the business over the next five years, we believe ecommerce in that period could triple or quadruple. So ecommerce today is about 15% of our sales. If we're successful with our ecommerce endeavors, there's no reason that that couldn't be 40% or higher in five years from now. Direct-to-consumer certainly will play a role in that. But, also, we're mindful that developing a large direct-to-consumer business takes time, and it takes significant investment. So we are continuing to evaluate all the outlets related to ecommerce. So today, our business largely revolves around large etail partners, Amazon Wayfair, Homedepot.com, we will continue to grow with those customers and expand with others kind of specialty etailers while in parallel, investing and growing our D-to-C business. So when we think about ecommerce, it's really multifaceted. It isn't overly dependent on D-to-C. But that's an area certainly that will continue to nurture and develop capabilities over the next several years.

Thanks. That's very helpful. Your recent footprint expansion has been I believe, exclusively in Mexico, does this represent a shift in your preference for sourcing product? Namely, away from Southeast Asia? Or has this capacity been added only to meet expected future demand? And then, perhaps to expand on Sandy's question, can you add any additional color around the general development of your global supply chain?

Yes. This is Jerry, JP.I It's expanded out a little bit. Part of it is to move away from Asia a little bit because we're overly dependent. A lot of the Mexico is for our expansion but we also are really balanced out. We've got in our -- some of our new product categories, the products going to be coming from Eastern Europe, we have some OEMs and suppliers here in the United States. And we've also got, like I said, this expansion in Mexico, it's really just a balance out kind of our footprint with more of a global footprint and not be quite as much on the line as we need to do now. With that said, we will continue to have a large footprint over in Thailand, Indonesia, Vietnam, China, like we do today. But we're just trying to balance it out more.

Yes, seems to make sense to mitigate some geopolitical risk. Finally, we're glad to see that you implemented SAP without any disruption. Are there plans to add additional components of an ERP? Or is the work largely completed?

Yes. So there's going to be additional. So I mean, we still are running our manufacturing on our old AF400. There are some other areas of SAP that we're working through with some of our partners in the logistics and distribution area. And there will be other modules that we will hang off of the current SAP as we go forward. But we're excited that we finally got the financials up and in some other areas, but this will be an ongoing thing that we'll continue to look at.

Okay. And finally, not to belabor the point, but on rising ocean freight charges, have you considered any strategies to control costs there other than what you're already doing?

Yes, So there's several things JP that we've done. Number one, we've expanded the number of partners that we work with in terms of freight forwarders. We are leveraging our network of suppliers to tap into their transportation partners. We are working with our suppliers where they're open to it in order to help subsidize some of the increases. So we're taking a multitude I think of actions in order to best manage the situation given the circumstance.

Great. Appreciate the color and congratulations again on a nice print.

Thank you.

[Operator Instructions] Our next question comes from [John Dicer with Clinical] [ph].

Good morning and congrats on a nice way to wrap up the year. I was just curious, 70% of the volume came out of Asia this past year. What was the mix between China and Vietnam?

Yes. So John of our total source globally sourced product 67%, currently a source from Vietnam and 21% is from China and then the remainder is largely Indonesia and Thailand.

Okay. So the 70% that came from Asia 67% was Vietnam, and what was the precent from China?

21.

21. Okay. Rest is oaky, good. The tariffs are still a factor from China at this point.

They are.

Okay. And you see that mix changing for the next fiscal year?

I think, assuming the tariffs stay in place, we'll see be opportunistic in terms of moving production away from China, where it makes sense. Given how robust the demand has been this past year, there simply wasn't enough capacity in Vietnam to support both our growth and support additional production ship from China into Vietnam. Certainly, if the demand horizon changes, there may be an opportunity to ship more away from China.

And a large chunk that came out of Vietnam, that's under pressure because of COVID. Where do you sense that inventory to come from going forward?

Yes. So again, we've been, as you know, Jerry, and I stated in our earlier comments, we've been very aggressive with our inventory buy. Again, we finished the year with $160 million of inventory on the balance sheet, we've got $62 million in transit as of the year end. So we're actually in a very, very good competitive position, if Vietnam stays shut down for an extended period. So we don't know how long this Vietnam shutdown is going to last. But we feel confident that we've got enough inventory in our system or on the water to support us into those the latter part of calendar 2021.

Okay, all right. That's good to hear. Shifting to ecommerce, you said it was about 15% of sales. Is that ballpark around $72 million for the year for ecommerce?

$66 million, $67 million of net sales.

Okay. Good. There was no discussion of any kind of buyback. And I know you spent $29 million , I think $29.8 million on buybacks last fiscal year. How many shares was that? And is there room for any additional buybacks going forward?

Yes, if I remember, John, we probably have repurchased $1.1 million, $1.2 million shares all together since we started the repurchase program. What I will tell you in terms of how we're thinking about capital allocation and prioritization, our number one focus right now is reinvestment back in the business to support growth, and you're seeing that in terms of our inventory build as well as the capital expenditures to expand our supply chain capacity. We will continue to keep the share repurchase program active and be opportunistic if our share price were to fall substantially below our intrinsic value. But right now, again, the priority is to invest back in the business for growth. So I do not anticipate share repurchases being anywhere near the level that they were in fiscal year '20 just because again, or I'm sorry, fiscal year '21 because of the growth opportunities we have in front of us.

All right. Okay, good. That makes sense. Thanks and good luck going forward.

Thanks, John.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Thank you. In closing, I would like to thank all our Flexsteel employees for their outstanding performance and service during the fourth quarter. I would also like to thank you for participating in today's call. Thank you for your questions today and please reach out if you have any additional ones. We look forward to updating you on our next call. Everybody have a great day.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.