Flexsteel Industries Inc (FLXS) 2009 Q3 法說會逐字稿

Good afternoon. My name is Shameeca, and I will be your conference operator today. At this time I would like to welcome everyone to the third quarter and fiscal year 2009 operating results conference call. (Operator Instructions).

At this time I would like to turn the call over to Mr. Hall. Mr. Hall, you may begin your conference.

Thank you Shameeca. Good morning everyone. Welcome to our fiscal year 2009 third quarter and fiscal year to date operating results conference call. We appreciate your participation. Joining me this morning from our corporate headquarters in Dubuque, Iowa is Ron Klosterman, our President and Chief Executive Officer.

During today's call we may make forward-looking statements that are subject to risk and uncertainty. A discussion of the factors that could cause actual results to differ materially from Management's expectations is contained in the Company's SEC filings including the most recent 10-K filed on September 15, 2008 and the press release dated April 21, 2009. Announcing our 2009 third quarter operating results, any forward-looking statements are opinion as of now, and we undertake no obligations to update or revise any of the forward-looking statements to reflect events or circumstances after today's call.

I would like to take just a couple of minutes and update the quarter and introduce some of the things that happened during the quarter and have occurred during our fiscal year to date.

For the quarter our sales were approximately $74 million, which is about a 25% decrease from the prior year quarter. Each of our operations showed sales decreases. Residential off 9.1%. Our vehicle seating sales were off 70%, and our commercial seating net sales were off 9.9%.

On a year-to-date basis our sales are $250 million compared to $305 million in the prior year nine month period, a decrease of approximately 18%. Each of our segments have shown decreases on a year-to-date basis as well.

Our gross margin for the quarter was impacted by a $1.7 million write-down in our receivables, and so as a result our gross margin is 16.5% versus 18.4%. On a year-to-date basis our gross margin is 18.2% versus 19.6%. The underutilization of our capacity on the significantly lower sales volume and the $1.7 million inventory adjustment are the major reasons for that decline.

Our selling and administrative expenses have been impacted by lower absorption of fixed costs on lower sales volume and higher bad debt expense.

Turning to the balance sheet, we have focused on our accounts receivable. They have decreased $11.6 million, primarily the result of the lower sales volume. But we've focused on maintaining quality in our agings and not extending our days sales. Our days sales outstanding are approximately 42 days.

Our reserve for bad debts is approximately $1.9 million, which is about $300,000 lower than what it was at June 30, so as a percentage of our outstanding receivables it now stands at approximately 5.6% versus 4.6% at June 30.

For inventory, we have reduced our inventories approximately $9.1 million. That includes the $1.7 million inventory adjustment that I referred to earlier. We continue to focus on right-sizing each of our inventory catalog categories to match current and expected business.

We have amended our debt agreements with our bank, JPMorgan, and an 8-K was filed with those documents on March 31, 2009.

On a year-to-date basis we have reduced our outstanding borrowings by approximately $12 million and reduced our interest expense by approximately $400,000 as a result of the lower borrowings and lower interest rates.

Fixed assets -- we continue to be frugal with our capital expenditures and pay close attention to our cash management.

At this time I will turn the call over to Ron Klosterman for his comments on operations and our business outlook. Ron?

Thank you Tim, and good morning everyone.

Well, Tim went through the quarter I think in quite a bit of detail so I will just do a little bit of an overview. As he indicated, on a year-to-date basis our sales are off 18%, down about $55 million. And over half of that decrease has been in the recreational vehicle business where we have been particularly hard hit throughout this fiscal year.

On a pretax basis our income a year ago was a little over $6 million where this year we have a pretax loss of about $3.6 million, although a lot of that loss has been the result of actions that we have taken. We have had significant changes in our operations throughout the year, closing two facilities, a very significant reduction in headcount both on the salaried and the hourly front. Some of it certainly tied in with the plant closings, but a pretty significant change again this quarter.

On a year-to-date basis I would like to point out that our volume is down about 20%, and yet our headcount in the last calendar year 12-months period is down over 30%, so we've certainly tried to adjust and be proactive in our adjustments as we face these very challenging times and the very severe economic downturn that we are working our way through.

Tim talked about the inventory write-downs that we had. Certainly a majority of those write-downs were a result of some changes in the RV business that have impacted us, although we have seen some inventory devaluation throughout all of our inventories.

With the changes that the Company has made and the -- I don't want to call them extraordinary write-offs, but I think the write-offs [were] necessary because of the economic downturn. If we look on a non-GAAP basis and exclude those, we have been able to, on the if you will, the operating business that's remaining generate a very modest pretax income of about $0.5 million throughout this nine-month period. So I point that out not to certainly be bragging about how well we've done but more to the standpoint to let you know that we are trying to be very responsive, do this on a very quick basis and yet be prudent that as we work through this downturn we are in a position where we can take advantage of the eventual upturn that will come.

Looking a little bit at our individual businesses that we participate in, our residential business -- overall we are seeing it to be down from where we were a year ago, but we are really operating in a level of low, double-digit declines, which I think is better than what the industry -- at least the publicly reporting companies have been seeing, and I think overall we are probably performing slightly better than the industry as a whole, at least based upon industry numbers that are published.

Our commercial office business started to slow down late last fall, and that has continued throughout this March quarter. We think that will be the case for several quarters going forward. But we think that hopefully we are approaching a bottoming level there.

Certainly our RV business has bottomed out when we are only shipping roughly $2.5 million in the last quarter and are off 80-plus percent from a year ago, is a very strong indication of how challenging that business is for us. We also had -- the industry experienced -- two of the larger publicly owned companies filed bankruptcy in the last quarter. So there is a lot of shakeout that's going out at the OEM level, and the good news for us is, although we are certainly impacted by that, we do business with most of the major original equipment manufacturers, and whenever there is an upturn in the RV business, we think we will be positioned to take advantage of it.

Our hospitality business has -- from an incoming order perspective it has really started to decline since the 1st of the calendar year as hotels have either deferred projects or delayed refurbishings, etc. We anticipate that that will probably be the case throughout the balance of calendar year '09, and then we'll just have to see where that business goes to as we get into calendar 2010.

So overall from a topline perspective, we think that it's likely that we're liable to see a couple more choppy quarters as we work through the spring and the summer, and it may be actually the end of 2009 before we see a more consistent operating level and order level going forward.

Obviously the overall economic situation in our country will have a lot to do with that, and we are very dependent on consumer confidence. So if we can see -- start to see as we work through the next six to nine months some stability, see consumer confidence come off the incredibly low levels that they are at now, we think those would be signs that would bode well for our business going forward.

In the meantime, as Tim has indicated, we will continue to focus on strengthening our balance sheet. We'll keep our receivables in good order, continue to work on bringing down inventory levels based upon the volume of business that we're doing. And we are very focused on continuing to reduce our borrowings to allow us to participate in better business conditions when they present themselves and when the economy starts to recover. It will happen. We just don't know when.

One other thing I do want to mention, and at our March 9 Board meeting our Board took the difficult but very appropriate action of reducing our dividend from $0.13 per share to $0.05 per share. We think the $0.05 level is a more appropriate level as we work through the current environment that we are in, and that reduction in dividend will conserve about $2 million of cash on an annual basis and will allow us either to further pay down debt or use it for other business opportunities as they come forward.

So just kind of a quick overview for you. And with that, we will open it up to any questions that you might have.

(Operator Instructions). Budd Bugatch.

I guess a couple of questions. When you look at the capacity now that you have, are you right sized enough? Have you done what you needed to do? And what kind of capacity utilization are you running at? I know that's a difficult question at times, but --

Well, it -- Budd, this is Ron. We certainly have excess capacity. We have excess capacity in the RV business. We have some excess capacity in our hospitality -- domestically manufactured hospitality and also our domestic residential business. Having said that, we think that we have adjusted our work force level to the appropriate levels based on the volume that we are doing. So people-wise we think we are okay. We have extra square footage that we are not fully utilizing.

At this time I would tell you I do not anticipate any further plant closings because we are in that balance between where do we go on capacity today versus what we're hopeful we may need, whatever the timeframe might be, whether it's nine months or 12 months or 15 months out from here. So we're pretty comfortable with where we are at.

We do think capacity-wise based on current business and what we think it's going to be going forward that once again it's probably going to be choppy over the next couple of quarters, but we are at about a point where we are plus or minus breakeven, and so if we can maintain our current capacity and we get some uptick in business somewhere down the road here, we think it will look good for our bottom line.

Percentage-wise I even hesitate to throw out a number of -- like I said, from a personnel perspective we have pretty good utilization, from a square footage percentage we certainly have more square footage than we need.

So when you look at gross margin by the segments or by the sales reporting, the RV drop is just stunning. I imagine that's got to be where much of the gross margin -- and I'm not even sure you can probably maintain a positive gross margin with the volume down that low, but --

Well, we really don't talk about our margins or our operating results by the -- we only talk about the top line by the business areas. But your assumption would be right that obviously when volume is off 80%, it's pretty brutal to adjust to that. We've certainly taken significant action and are trying to work through it as best that we can.

And that's a business that has to be separate from the other businesses, both geographically and plant-wise; right?

Well, we do have -- one of the reasons that we don't report -- further report other than the top line of the segments is because we do have co-mingling of the RV manufacturing operations with other facilities, and so it makes it a little -- it makes it more challenging to break everything out in a reasonable method. But certainly just the -- some of the overhead and the administrative costs, etc., when you are only doing $2.5 million a month on a business that was say $15 million a year ago or thereabouts, it's pretty hard to generate anything that anyone would be proud of on a gross margin basis.

And that business, when it comes back, do you ever think it's going to come back to where it was given what's gone on with kind of where the society -- and the way people look at these big vehicles now?

Well, I think there's several factors there. The height of the recent RV business probably goes back to 2004, 2005. So it had -- those were probably record years for the industry, and it's come down some both in '06 and '07 until we got into the disaster that we faced [here in] the last nine months or so.

Will it come back? It will come back from the levels that it's at today. I have no doubt about that. Will it come back to '06/'07 levels? I think it's likely to take some time, and I think it's likely to be a somewhat different industry and also probably somewhat of a different product. I think there will continue to be motor homes, travel trailers, fifth wheels -- which are the pull-along trailers behind pickup trucks, etc.

The mix is likely to change. I think there will be probably fewer of the large class A motor homes and more in the smaller classes, but putting more amenities into instead of a -- say a 40-foot motor home, try and put more amenities into a 24-foot motor home with all the comfort that people have gotten used to.

And I think the industry for a long time has talked about the demographics and the baby boomers who will be retiring and hopefully want to move into RV'ing, etc. I'm not sure that there is going to be the -- percentage-wise the demand from the baby boomers that there perhaps was from the previous generation. But just the fact that there are so many baby boomers will help support the industry, longer term.

Just let me go one other place. I thought that the performance in residential was actually probably heroic, being down 12% -- from some of the numbers that we've seen even recently this morning.

Can I have you write a letter to our Board of Directors for me? (multiple speakers) I say that in jest. Thank you. We're -- we continue to be pleased with our overall performance in residential. As you know in particular, Budd, it's not uncommon for many companies to be reporting their top line in residential to be off perhaps twice the percentage that we are showing.

So my question then comes, is what are we seeing more recently? Did March stabilize over January and February? How did that look? And what can you tell us about April so far? I know we are going into market, so that always throws a monkey wrench into things.

I think we're probably not too much different than some of the other comments that have been made that in late February and early March we did see some pickup in business from where we were in January. We are hopeful that that would continue. To be honest, our incoming orders the first almost 20-plus days now of April have been [aligning] where they were in March.

Now once again, we're about ready to go into market, so that's not at all untypical to see that softening just before market, but we'll probably know -- we'll have a little better feel for the flavor of where the retailers think we're at I guess after we come out of market.

And just my last question is, as you look at that residential, can you give us some distinction in top line of the soft goods versus case goods, your Wrangler collection and Don's DMI and what's (multiple speakers)

Just in general our upholstery continues to be stronger than our case goods, than our wood. But I think that's, once again, somewhat the case in the industry as I looked at AHFA numbers, etc., that upholstery is holding up somewhat better than case goods. And we may be more in line with the industry on case goods and be doing a little bit better than the industry on the soft goods side.

Okay. That's helpful. Thank you very much. I'll see you at market.

John Deysher.

I don't think it was such a bad quarter, I mean, given the sales declines and the write-offs that you took. So hat's off there.

But I have a couple of specific questions. One, the decline -- the inventory write-off of $1.7 million. I think you indicated that it was due to a change in the way some of the RV OEMs do business. What specifically did you mean there?

Well, I don't think it was so much the way they do business, John. Its' really a reflection of where our inventory levels are versus where the current volume is at and the fact that we have, in that RV area in particular, excess inventory that we are going to have to try and find a home for. And to be conservative on our accounting for it, we took a write-down at this point in time because we are unfortunately confident that we won't realize the full book value of -- or that cost value of that inventory.

Okay. So you will have to mark it down to sell it, is what you are [saying] (multiple speakers)

There you go.

Okay. All right. That (multiple speakers)

To dispose of it. And hopefully some of it we can work into finished products. Some of it we may even have to just scrap out.

Okay. Do you think there will be further charges of that type?

Well, a lot depends on where business goes from here. Certainly with the $1.7 million write-down that we took in March, as we looked at our inventories at the end of March, we felt that that was an appropriate and all-inclusive number at that point in time.

Okay. Got it. I think that does it. You talked about -- you don't anticipate any further reductions in headcount or plant closures; is that correct?

Certainly on the plant closure side, that is right. Headcount -- we think we are at the level we need to be at today, but that's one where we continually review, and if we see that some additional changes are appropriate, we would take that action.

And I guess finally, just to make sure I understand the trend as the quarter progressed -- so January was up -- I mean obviously January was down, but then February and March got worse? The sequential results deteriorated as the quarter unfolded?

On the residential side of the business, we saw on incoming orders an uptick on -- as we got into the last half of February and into March, and I think that was the question that Mr. Bugatch was asking. In some of our other businesses we saw -- for instance our hospitality incoming orders -- not the shipments in the quarter, but the orders declined. Commercial office probably was off slightly as the quarter went along, and the RV was just at a very low level throughout the quarter.

Okay. So residential improved a little bit about at the end, but the rest were -- [finished] (multiple speakers)

Flat or off.

Yes. Finished the quarter at their lows. Okay. Got it.

And residential incoming orders the first few weeks or three weeks of this month are off from where they were at the end of March.

When is market over?

Well, market starts this Saturday, April 25 and is over at the end of the month (multiple speakers) so it's about six days or seven days.

Very good. Thank you.

(Operator Instructions). There are no more questions at this time.

Well, thank you all for joining us this morning and listening. It will be probably mid to late August when we talk with you again, as June 30 is our fiscal year end so therefore our call is always a little bit later during the summer months.

We know that we have more choppy seas ahead of us. And know that we're all here working through that. And we look forward for some stabilization in the economy and better results to report to you as we work through these challenging times. Thank you very much.

This concludes today's conference call. You may now disconnect.