Good day and welcome to the Flexsteel Industries’ Fourth Quarter Fiscal Year 2022 Earnings Results 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'd now like to turn the conference over to Alejandro Huerta, CFO. Please go ahead.

Thank you and welcome to today's call to discuss Flexsteel Industries fourth quarter and fiscal year 2022 financial results. Our earnings release, which we issued after market close yesterday, Monday, August 22nd is available on the Investor Relations section of our website at www.flexsteel.com under News & Events. I am here today with Jerry Dittmer, President and Chief Executive Officer and Derek Schmidt, Chief Operating 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. 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 the GAAP to non-GAAP measures. And with that, I will turn the call over to Jerry Dittmer. Jerry?

Good morning, and thank you for joining us today. I'd like to start by welcoming Alejandro. His addition to our team aligns with our strategic focus of building talent across the organization and we are glad to have him as part of the Flexsteel team. We performed solidly in the fourth quarter given challenging conditions, which included slowing consumer demand, exasperated by a glut of retail inventory, continued inflationary pressures, most notably fueled and intensifying competitive pricing pressures. I'm encouraged by the fact that we adjusted to these challenges and we're able to deliver sales for the quarter of $124 million, which was within the range of our guidance of $120 million to $135 million. Whilst sales have slowed, revenue from our ongoing residential furnishings business is still ahead of pre-pandemic levels. In addition, we prudently managed our spending to deliver operating income of $3.6 million for the quarter. While near-term challenges may create choppiness in our first half fiscal year 2023 earnings, we remain committed to delivering long-term profitability. Reflecting on fiscal 2022, it was a year of significant challenges, but also many successes. We navigated major disruptions in the supply chain, quickly responded to extraordinary ancillary shipping charges and adapted to surging inflation, while making important strides in advancing our strategic agenda. I am very proud of and grateful to all our dedicated employees around the world. Their agility, resilience, and commitment led to us achieving record home furnishing sales of $544 million, an increase of over 13% from the previous record set last year. And while full-year profit result fell short of our expectations due to the exceptionally high ancillary shipping cost and inflationary pressures. I am encouraged by our ability to return to positive operating income in the second half of the fiscal year. We remain…

Thank you, Jerry, and good morning, everyone. As Jerry noted, business conditions for the furniture industry are challenging at the moment, but we have an experienced management team that's agile and skilled at maneuvering through periods of uncertainty. We're embracing the current environment, because in times of disruption, we know there are opportunities to gain share from competitors, who are less agile; less financially secure and take a more defensive posture. While near-term sales will likely be strained for the next three to six months, due to slowing consumer demand and bloated retail inventories were staying on the offense and aggressively pursuing opportunities to gain share in our existing markets, but as important to enter new growing markets where we believe we can provide differentiated solutions and have a right to win. As we've shared in the past, our long-term growth pursuits for new business have three legs. All of which we are progressing in fiscal year 2023. First, new sales distribution. We know that consumers are broadening where and how they buy furniture and we are pivoting to where people shop. On the retail side of the business, we are expanding with new customers beyond traditional furniture retail, most notably big box retail. As an example, we recently launched a successful trial of motion product with a large national retailer and will be shipping a new program of custom manufactured stationary product to them in the coming months. In the e-commerce channel, our historical sales have predominantly come from our home styles brand and have been concentrated with a few major players like Amazon, Wayfair, and homedepot.com. While we'll continue to aggressively grow with these customers, we are also focused on expanding relationships with other leading e-commerce partners, like Overstock, Walmart.com and Symantec, to name a few. We are…

Thank you, Derek. Good morning, everyone. I'm glad to be with you today and happy to be part of a great team here at Flexsteel. For the fourth quarter, net sales were $124.5 million, down $11.7 million or 8.6%, compared to $136.2 million in the prior year period, while down from the prior year, our sales results were within our $120 million to $135 million guidance range provided during our third quarter earnings call. Sales performance in our retail channel decreased by $7.6 million or 6% versus the prior year. Product sales through e-commerce declined $4 million or 23% versus the prior year. While we are competing well in both the retail and e-commerce channels, several of our customers are reporting sizable declines in both in-store and online traffic, compared to last year's robust results that were spurred by pandemic-driven buying. Although the downward shift in traffic is expected to remain a near-term headwind, we remain positive on the long-term prospects as we are pursuing aggressive plans to gain share through new customers, new product launches and improved content and advertising effectiveness. From a profit perspective, in the fourth quarter, the company delivered operating income of $3.6 million or 3% of sales. We recorded a net loss of $0.3 million and a loss per diluted share of $0.05. The net loss was primarily driven by a $3.6 million income tax charge, mainly related to changes in our deferred tax assets for which we do not receive the tax benefit due to our full valuation allowance. Adjusted net income for the quarter, which excludes the impact of remeasuring our valuation allowance was $2.2 million and adjusted income per diluted share was $0.41. Gross margin as a percent of net sales in the fourth quarter was 14.2%. The decline from the third…

Thanks. We believe the next 12 months will be challenging for our industry due to slowdowns in the economy, continued inflationary pressure and bloated retailer inventory levels. These challenges along with decreased furniture demand will continue to put pressure on our profit margins in the near-term. However, I am confident that our team, the investments we made in fiscal 2022 and the fiscal 2023 priorities, which Derek outlined earlier will provide a solid foundation for long-term profitable growth. Production in our third and newest manufacturing plant in Juarez, Mexico accelerated the reduction of our backlog and successfully brought our lead times from manufactured products down to three to five weeks faster than many of our competitors. Our new distribution center in Greencastle, Pennsylvania is supporting improved service levels and growth in the East Coast furniture market. While these recent investments to expand North American capacity may be underutilized in the near-term, they will support improved customer service levels, build supply chain resiliency and provide meaningful capacity for future growth. These initiatives combined with ongoing investments in talent, product innovation, digital capabilities, and our brand position us well to compete effectively in the near-term, as well as achieve our longer term growth ambitions. In the near-term, we remain focused on delivering profitability and generating cash flow to pay down debt and preserve liquidity while supporting critical strategic investments. With that, we'll open the call to your questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] First question today comes from Anthony Lebiedzinski with Sidoti. Please go ahead.

Yes, good morning, and thank you for taking the questions and welcome Alejandro to catch up with you guys as well. So first, just curious as far as the monthly cadence of revenue during the quarter, was there much variability in terms of going from April to June or was it fairly consistent throughout the quarter? Just wanted to get a better handle on that?

Yes. So for that, Anthony, for the fourth quarter, basically April, May, June were almost identical months. So -- and that's on the sales side, we really didn't see much difference. On the -- and a lot of that has to do with our backlog, we were still finishing up our backlog and then back down to, kind of, the historical level, which is where we're at now. The order side was obviously different, the orders had really trended back now towards the pre-pandemic levels that we would have seen back in calendar 2019.

Got it, okay. Thanks for that. And then as far as geographic positioning, I mean, are you seeing much variation there? Or is it just kind of consistent throughout different parts of the country, just curious about that.

No, geographic is very consistent. We really haven't seen any shifts, I mean, where we were stronger, we continue to be stronger, so no real changes there.

Got it, okay. All right. And then Derek, in terms of the three main strategies that you outlined, which one out of these will you think will be the most impactful would you say?

Yes, I think in fiscal year ’23, our entry using a new brand and a lower priced soft goods is probably going to have the biggest impact on sales. I think as we think about the next two to three years, all those initiatives that I mentioned will have a meaningful impact. But in terms of ’23, it's really our launch actually here in a couple months, we'll actually be fulfilling orders for that new brand. And as I mentioned, kind of, during the call, we feel pretty strongly that not only are we matching competitive price points in the market, but we're doing so when providing a product that has superior quality and comfort versus the alternative. So we're pretty jazzed up about that opportunity and our sales team is excited to sell it.

Got it, okay. And so in terms of this new brand, what will be the distribution of where will these -- where will consumers find this product? And will this be supported by additional marketing spending, just curious about that?

Yes. We're thinking about this new brand really omnichannel. So we're selling it to our traditional furniture retailers. We're having discussions with club stores regarding the offering and we're happy discussions with our large online marketplaces like Wayfair.

Okay. So we will be broadly distributed. Okay, got it, okay. All right, and then so just in terms of the near term outlook, so as far as -- so at this point that you’re fulfilling orders within looks like three to five weeks. So it definitely implies quite a meaningful step down as far as how you see your own inventories like where would you say like, you know, how should we expect that by the end of the first quarter? I mean you may have said this, but I may have missed this, but just in terms of how are you thinking as far as your own inventories throughout the course of the year?

Yes, Anthony. This is Alejandro. Thanks, good question. We're going to work to bring down inventory levels consistently over the rest of the year to a meaningful place somewhere in the near-term of $20 million to $25 million, as we look towards the end of the year. But that will also depend on where our sales demand goes throughout the year, because we may have to reinvest back into inventory throughout the -- as demand may or may not pick up.

Got it, okay. All right, and then lastly, I guess, in terms of the SG&A spending, so you guys did a nice job there for the quarter here roughly 11% of revenue. I don't know near-term and longer term as a percent of revenue, kind of, what do you think is the right appropriate way to think about that?

Yes. From a normal run rate, Anthony, at this time, we're looking at normalized 14% to 15% SG&A spend as a percent of sales.

Got it, okay. All right. Well, thanks a lot and best of luck.

Thanks, Anthony.

The next question comes from JP Geygan with Global Value Investment Corporation. Please go ahead.

Hey, good morning. Thank you for taking my questions. You made the decision several quarters ago to invest in inventory, which of course allowed you continued supplying your customers during COVID, but it's not looking like it might force you to engage in some discounting. Can you talk about retrospectively the ramifications of that decision? Your deposits were negative, particularly as it pertains to customer relationships and market share?

Yes, JP, good question. Yes, so we -- it really helped us as far as you know, customer demand went high, we were able to do a lot of good things in there. We were able to supply a lot of our customers, which really helped us. We've been able to get decent control of our inventories. Obviously, we've been able to get under control all of our ancillary charges and costs as we had problems with last year, those are largely behind us, which is great. Some of the discounting, there may be some mostly, because we're seeing it more from a competitive landscape where we've got competitors out there now that are bringing things down and we're going to obviously be smart about it, but we're looking at what else we can possibly do there. We don't think it's going to be a huge drag. But like I say, we're going to keep looking at it.

Couple of things JP I will add. Number one, in terms of the positive ramifications, in traditional retail, retailers sell what placements they have on their floor. And our investment in that inventory among other things helped us gain significant placements during, kind of, the post pandemic period. I mean, our retail placements went up double-digits, largely because I think we serviced our customers better than the competitive set. Jerry went through some of the adverse ramifications. The other thing I’d share with you is that we've been really disciplined around product lifecycle management. So we are constantly cutting slow moving items. So we do not have a long tail in our inventory of obsolete or slow moving. So yes, we're doing surgical discounting on some products where we've got really deep inventory levels, but the good news is the inventory of what we have is stuff that sells in the market still wants.

That's helpful. Thanks. Can you give us a sense for how much excess inventory exists across the industry recognizing that might be a more nuanced question than on its faced?

Yes. So from a timeframe standpoint, there's probably six months out there. We're thinking it's going to take at least to the end of this calendar year, maybe into the first part of calendar ‘23. Obviously, it really depends what the demand looks like. We will see a lot of changes hopefully here now after Labor Day people, kind of, know we'll move into market and but we're really feeling that by the end of the calendar year inventory should be in a pretty good place.

Okay, great. Moving on, you mentioned a lot of exciting developments slated for fiscal '23, sleep oriented, living room furniture, [indiscernible] modular furniture. Can you give us a sense of the expected size of those opportunities either by dollar amount, by magnitude or relative to your existing business? And then the second part of this question, which Anthony addressed a little bit, was what type of investment in design production and distribution sales, marketing, et cetera [Technical Difficulty] be required?

Yes, JP, so for competitive reasons, I prefer not to share sales forecasts on specific product initiatives. What I can tell you though, all the growth initiatives that I shared earlier in aggregate, we believe that those will contribute somewhere between $40 million and $50 million incrementally to our core business. So again, a big part of our growth strategy is going after new markets, new consumers, new products, and we've invested fairly heavily around product development here this past year and I think we'll start to see the fruits here in fiscal year ‘23. In terms of the spending, what I will tell you is we've managed SG&A in a very prudent manner, but all the growth initiatives that I shared are fully funded both in terms of IP, product development, as well as marketing to launch those successfully in the market. So we are managing within the SG&A guidance that Alejandro gave and still fully supporting those initiatives.

All right. You mentioned some, sort of, value oriented product lines, how should we understand the effect of those product lines on your consolidated margin profile?

Yes. The margins are similar, if not better. And there's really no cannibalization with the Flexsteel brand, because there is such a huge disparity around kind of price points and the quality. So this truly is new incremental business for us.

Okay, great. Finally, you previously provided long-term performance guidance including gross margins and I think a three year timeframe ranging in the 20% to 22% and then longer term, which I think you say is five plus years potentially exceeding that range. Is that guidance along with the other broad parameters you've put around your, kind of, mid-term and long-term performance still intact considering recent developments?

What do I tell you, JP, I think the long, long-term goals are still intact, I think given the disruption that we've seen here, because of economic slowing, because of inflation, the roadmap on how we get from where we're at today to that, we'll probably look different than the view that we had six, 12-months ago. So as things become more certain, more clear, we'll certainly provide the investment community our best view on what that roadmap -- that new roadmap might look like. The intent still is to get gross margins longer term above 20% certainly.

Great. Okay, thank you.

All right.

[Operator Instructions] The next question comes from Richard Dearnley with Longport Partners. Please go ahead.

Good morning. When would you think that the Juarez plant will be up to normal loading or utilization?

So right now, we've obviously had to make some adjustments, because of the slowing demand. It's probably something that we will probably see again till probably fiscal year ’24, because we think ’23 is obviously as we've mentioned is going to be a rough year, but we've got gradually see it increase especially with some of the new stuff that Derek was talking about. So we're probably a good 12-month out until we'll have it totally back to where it was.

I think in the first quarter, I mean, we're running in the 50% to 60% utilization in terms of maximum capacity. Given our view of how demand will shape here throughout the year, we'd expect to end the year closer to the 80% utilization range. Certainly, if demand picks up, that will increase. And if we see a more sustainable increase in demand, we will then have the option to start up our new Mexicali facility.

Right. And what's the current outlook for the Mexicali facility starting? [Multiple Speakers]

Right now, as Jerry, kind of, alluded to, yes, fiscal year ’24, so it is a strategic long-term asset, we are still focused on our long-term growth ambitions and having that facility and the capacity is an important part of the strategy. So in the near-term, the assets going to be underutilized, but we still feel confident that it's going to play a really important role in our success in the future.

Thank you. And then it would seem as though your new growth initiatives for the next three years or so, lean less on the Flexsteel steel capability stronger, better and played by the word steel. Is that -- am I reading that incorrectly or does that -- is that less important these days?

No, it's still very, very important to us and our plans are to continue to grow in there. We've still got a lot of product development and a lot of great new launches that are planned there. Really what we are highlighting here, other ways that we're going to also grow besides there. So we're not going to be downplaying that at all. It's a very, very important in the durability and the whole Flexsteel story and where we've come from and how we'll go forward. These other -- those and we have a lot of capabilities in manufacturing and sales and customers that are looking for other things, and whether that's more modern furniture, whether it's the sleep solutions, whether it's our new brand at lower price points, these are all great ways for us to grow the company.

Great. And have you re-examined at all the buyback versus paying out dividends and/or accumulating cash?

Go ahead.

Yes. We continue to look at how to get back to our shareholders. At this time, we are not planning to stop the dividend, but we're in continuous conversations with our Board on how to maximize shareholder experience. And so right now, we have always been examining it, but at this time, we're still planning to have the dividend in place.

You know, a little bit too also. We’ve continueed to look at, hey, what investments do we need in inventory? What do we need from like a manufacturing and distribution center equipment et cetera. We obviously look at investments in talent to support not only our current business, but growth, acquisitions that could have possibly accelerate our growth in the future. And then with all that, we also then look at both the share buyback and dividends and kind of do it in that order.

And as Alejandro said, we review our dividend all the time and in the near-term, there is no intent to reduce the dividend.

Okay, thank you.

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

Great. Thanks everyone. In closing, I'd like again to thank all our Flexsteel employees for their outstanding performance and service during the fiscal year and what they're going to do for us going forward. I'd also like to thank those of you that had questions today and participated in today's call. Thank you for your questions. And if you have anything else, please reach out if you have any additional ones and we look forward to updating you on our next call. Everybody have a great day. Thank you.

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