Flexsteel Industries Inc (FLXS) 2010 Q4 法說會逐字稿

Good morning. We are now ready to begin our conference call. Welcome to Flexsteel Industries Incorporated's fiscal year 2010 conference call. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). At this time, I will turn the call over to Mr. Tim Hall, Flexsteel's Vice President of Finance and Chief Financial Officer. Go ahead, sir.

Thank you, Michelle. Good morning and welcome to our fiscal year 2010 fourth-quarter conference call. We appreciate your participation today. Joining me this morning is Mr. Ron Klosterman, our President and Chief Executive Officer.

During our call today, 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 our most recent 10-K, which was filed August 26, 2009 and the press release dated August 18, 2010 announcing our fiscal 2010 and fourth-quarter operating results. Any forward-looking statements are our opinion as of now and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today's call.

I would like to highlight some items from our fourth-quarter press release before I turn the call over to Ron for his comments on our operation and business outlook. Our net income for the fiscal year was a record $10.8 million, or $1.61 per share, compared to the net loss of $1.5 million, or $0.23 per share in the prior year. Net income for the fourth quarter was a record $4.1 million, or $0.61 per share compared to our net income of $0.8 million, or $0.12 per share a year ago.

Worthy to note that the efforts and items that we placed, strategies and implementations, actions that we took during fiscal year 2009 fiscal year contributed heavily to the results for fiscal year 2010. In 2009, we consolidated some manufacturing operations. We had workforce reductions that brought our capacity, production capacity and fixed overhead in line with the demand for our product.

During the prior fiscal year, the Company recorded pretax charges of approximately $2.6 million related to facility consolidation and employee separation costs. Companywide in fiscal year 2009, we reduced our employment by 30% and our employment remains at those levels now. We anticipate filing our fiscal year 2010 annual report on Form 10-K by August 25, 2010, so that information will be available to you shortly. Ron?

Thank you, Tim and good morning, everyone. I would like to make a few comments this morning, a little bit of historical perspective and some of the things that we have been working on and give you a little overview of some of the various channels of distribution that we participate in and what they looked like this past year what they look like going forward.

Over the past several years, we have been implementing a blended strategy at Flexsteel to provide furniture products that include both domestically manufactured and foreign sourced products. We distribute these products through multiple distribution channels for both residential and commercial uses and this has required a very significant adjustment to our traditional methods of operations here at the Company. And it has really been a transition that has been going on for several years.

In addition to that, last year, we battled through the great recession that impacted our national economy. Today, as we review our fiscal year 2010 results, I believe it is a validation that our strategies are appropriate and are being well executed by our team. And I think it is important that all of you understand that some of these changes we have had to make over the years have certainly been in response to changes in the marketplace, in response to what is happening within our industries, but also have been forward-looking and have allowed us I think to get to the level where we are today and to perform at a level, at least compared to some of the other public companies, that compares quite favorably.

Over the last several years, we have seen our sales decline from top-line revenue of over $425 million to this year about $326 million and we really saw our earnings diminish as we went through this transition in our industry, furniture industry, through fiscal year 2009 as demand for our products declined, as consumer left the marketplace and commercial activities slowed a great deal.

Beginning with last year's June quarter, we began to see some improvement in our operating results and a little bit of improvement in our top line. And as we completed fiscal year 2010, although we had a very modest sales increase of about $2 million compared to fiscal year 2009, we are very pleased to report that we achieved a record level of income from operations of $17.5 million and this level is certainly a great turnaround from last year, but also significantly exceeded our income from operations, even going back to the middle part of this decade, fiscal year 2006 and '07 when our sales were $100 million higher. So once again, I think a real validation of the strategies that we have implemented and the execution by our team here.

I will now give you a little overview of some of our various distribution channels and what we saw during the last year and what we are now beginning to see as we begin fiscal year 2011. As reported in our press release, our residential sales for the year were up about a little over 6%, between 6% and 7%. And we are really pleased.

We participate in the residential furnishing industry with Flexsteel upholstered furniture, Wynwood bedroom, dining room, case goods products and our Home Styles division, which makes all-wood ready-to-assemble furniture that is primarily distributed through catalogs and through dotcom efforts. All three of those areas showed an increase in sales last year. And most of them in the range of 6% to 10%, coming out with a blended average of about 7%. So we were pleased that all three categories -- upholstery, wood products and the ready-to-assemble -- all showed increases last year.

In our commercial product categories, our DMI commercial office had a significant decrease in sales of greater than 20%. Although we are pleased to report that these numbers are actually probably in line or perhaps a little better than what the BIFMA industry numbers that have been reported, and also that although we have had a sales decline, we are quite confident that we've maintained our marketshare in all the areas we participate in. Our commercial office product is sold through office furniture stores, as well as through various catalog outlets and we do not believe that we have lost any marketshare in that area.

Our Flexsteel hospitality business also showed a fairly significant decline, in excess of 20%. Once again showing the slowness in hotels, motel, both construction and refurbishing and once again, we think we are about in line with the industry there or maybe even slightly better than the industry.

And lastly, for the last couple years now, we are grouping our vehicle seating business in our commercial category and they showed a very nice improvement of increasing their revenue by more than 30% this last fiscal year compared to the very devastating year in 2009. I have to qualify that a little bit because I want you all to remember that, from 2008 to 2009, we saw our vehicle seating sales decline by more than 70%. So although we have had a very nice recovery there, we are still far short of where we were in 2008 and earlier.

So overall, we are pleased with the progress that we have made. We are especially pleased with the improvements in our residential business. As we look ahead, we think we will continue to make gains in all of our residential categories. Although for the last 45 to 60 days, we have seen some slowness as we've worked our way through the summer on incoming orders from our residential dealers in almost all areas. We think that the consumer has probably pulled back a little bit, but we also think part of it is a little bit of seasonality that we always see some slowness during the summer and we are anxiously awaiting the arrival of Labor Day and getting into the fall selling season, which is normally a strong period for home furnishings.

On the commercial front, we think that the commercial office and hospitality businesses are either at or near the bottom of their downward cycle, and we think that we will see some improvement in those businesses. Although it is likely to come in the second half of our fiscal year 2011, so sometime after the first of the year. We think that these businesses will probably continue to struggle here over the next several months.

And lastly, our vehicle seating. We have maintained marketshare there, especially in the motorhome segment and we think that, although there is a little slowness right now in RV orders, that, as we get further into fiscal year 2011, that those will also show some increase in volume, although probably not the significant increase that we saw in fiscal year 2010 compared to 2009.

Lastly, on sort of what is going on as far as pricing and costs, etc., in our fiscal fourth quarter, the June quarter, we did start to see some cost pressures for some raw material items, also some items that we source overseas. We are watching these closely. We hope some of the increases are more temporary in nature. Although some look like they are likely to stay in place as we move through the balance of calendar year 2010. In some cases, in some of our productlines, we have implemented sell price increases to help offset some of these costs and in other product categories, we are looking at adjusting our prices. As we move through the next several months, we are, in some areas, waiting to see just how significant the impact of these cost increases might be.

So there are some headwinds out there both with the consumer looking like they have taken the summer off from shopping for home furnishings and on the commercial side waiting for a rebound in those businesses, but we do feel very confident about our strategies. We feel very good about our balance sheet. The strength that we have there allows us to be responsive to the markets. We think our inventory levels are very much in line and appropriate for what they should be at this point in time, and we are looking forward to another solid year in fiscal year 2011. With that, we will open it up for any questions that you may have.

(Operator Instructions). Budd Bugatch, Raymond James.

Hi, Tim. How are you?

Just fine, sir. Welcome.

Thank you. Congratulations on the quarter and on the year. You were talking about the slowness in the last 45 to 60 days. Can you kind of elaborate on that? Maybe were there -- any more slowness in any particular channels of distribution that you could talk about?

Budd, across the home furnishings, it has really been pretty uniform -- I say uniform. It varies a little bit from product to product. But we have seen it both in our Flexsteel upholstered product and also our Wynwood case goods line. The Homes Styles ready-to-assemble is a little -- kind of a business among itself, so that has been probably a little bit more solid than the other two areas. But as I think you are aware, many of the retailers are reporting slower than we would like to see business here during the summer months, but we will see where it goes from there.

And just to be clear, is that sequential slowness or year-over-year slowness?

I think it is a little year-over-year slowness. Certainly, it is sequential.

And can you quantify what the level of that is, where you think it is in terms of your business?

I would suspect that we are seeing incoming orders this year on our home furnishings overall probably down, I don't know, probably less than 10%, but probably more than 5% versus a year ago.

Okay. In the fourth quarter, how was the operating margin performance of the various segments? I'm not sure that was in the release.

It's not. And we really don't get into that level of detail. I think I will just -- suffice it to say that we really had -- to get to the $0.61, we really needed all of our areas to contribute nicely.

And when you are looking at the commercial, that actually had an up sales quarter year over year, and are we seeing more strength now in the office side of that and the hospitality side in relation to vehicle seating or was it vehicle seating that provided the --?

Vehicle seating was the one that primarily provided that improvement. The commercial office and hospitality I think were not that much different than the year before. In fact, they may have actually been down just slightly yet, but most of those are coming from the recreational vehicle seating area.

Well, seeing four consecutive months from BIFMA of up quarters, of incoming orders being higher, are you saying that -- is your backlog built year-over-year now?

It has. Our backlog is higher now than it had been, so it seems as if there is starting to be some momentum there. I guess we would like to see a few more months before we, if you will, declare victory in that category.

With the economic news out this morning, that is a little worrisome.

Yes.

And the last couple of weeks, so I can appreciate that. You talked about cost increases? We have seen relative cost increases in a couple of areas in foam. In plywood, it looks like it has abated. In transportation costs from the Far East and in some steel costs. And I think all of those probably affect you as well.

You just read off my list, Budd. It is all of those areas. We have had some selected foam increases from some of our vendors. Plywood had gone up pretty significantly, but seems to be leveling off and coming down a little bit. Certainly, the transportation costs, as you mentioned, are there and we have seen some selected steel increases and that one seems to be a little more persistent at this point in time.

So if you could rank those in order of importance or impact to Flexsteel, how would you look at that?

Well, we do -- corporately, we do now a little north of 50% of our total volume in products that come in from overseas. So the transportation number continues to get to be a bigger player in our overall operations. From our domestic manufacturing, certainly foam is always a big number and with the chemical people, it seems like there is always the threat of a lot of volatility there. Some of it comes through in the way of price increases and periodically a decrease. So that one can be a pretty big number.

Plywood, over the years, kind of bounces back and forth depending on what is going on in housing and other areas, sometimes weather-related. We have a lot of severe storms and that type of thing. But overall, the plywood is probably a little bit less of a factor. And the steel used to be very significant to us with our RV business being a little bit less -- although we certainly use high carbon steel in all of our Flexsteel spring units, the high carbon steel is always a -- is more of a new product and doesn't seem to be quite as volatile historically as our RV steel where it is driven a lot by what is going on in scrap steel prices, etc.

Thank you very much and good luck.

Thanks, Budd.

Thanks, Budd.

(Operator Instructions). There are no questions at this time. Mr. Hall, I will turn the call back over to you.

This is Ron. Once again, I just want to thank all of you for joining us and for our shareholders who may be on the line, we are pleased to provide a better picture for you today than we have in some of the prior quarters and look forward to reporting to you in about mid-October for our September -- our first-quarter 2011 results. Thank you very much. Good day.

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