Flexsteel Industries Inc (FLXS) 2011 Q3 法說會逐字稿

We are now ready to begin our conference call. Welcome to the Flexsteel Industries, Incorporated third-quarter fiscal year 2011 conference call. At this time I will turn the call over to Mr. Tim Hall, Flexsteel's Senior Vice President of Financial and Chief Finance and Chief Financial Officer. Please go ahead, sir.

Thank you, Michelle. Good morning everyone and welcome to our third-quarter fiscal year 2011 conference call. We appreciate you taking time this morning to join us in the call. And joining me this morning is Mr. Ron Klosterman, our President and Chief Executive Officer.

During the call today we may make forward-looking statements. While these statements reflect our best judgment at the present time, they are subject to risks and uncertainties, and those are described in our SEC filings.

Accordingly, our actual results may differ materially from our current expectations. We undertake no obligation to update any forward-looking statements made during this call.

I would like to highlight some of the things from our third-quarter press release, and then I will turn the call over to Ron for his comments.

Our net sales for the quarter were $85.2 million, an increase of about 4.6% over the prior-year quarter. Our residential sales increased by 5.6% for the quarter and our commercial sales were up 1.5%

Our gross margin for the quarter was 21.4% versus 22.1% in the prior-year quarter, the difference being primarily material cost increases that we absorbed during the quarter.

Net income for the quarter $0.35 per diluted share versus $0.34 a year earlier. Net sales for the nine-month period have increased 5.9% to $255.2 million. Our residential sales were $193.7 million. That is an increase of 7.4% over the prior-year nine-month period. Our commercial sales for the nine months have increased 1.5% over the prior year as well.

Our gross margin was 22.2% versus 22.7% in the prior-year nine-month period. And the gross margin has been impacted by an inventory write-down of approximately $600,000 associated with the facility closing that we announced during our first fiscal quarter, and also the increases in material costs that I just alluded to.

For the year our net income, $6.9 million or $1 per share compared to $6.7 million or $1 per share. Our balance sheet remains strong. We have $98 million worth of working capital and no borrowings.

At this time I would like to turn the call over to Ron Klosterman, our President and Chief Executive Officer.

Thank you, Tim, and good morning everyone. I would like to just give you a little bit more flavor for the quarter and year-to-date and also what we are seeing as we look ahead here into the balance of the fiscal year and a little bit beyond that.

Looking at our shipment and order rates for both the quarter and year-to-date, overall our residential businesses have been a little bit stronger than our commercial business. Within our residential business, upholstery has been performing slightly better than our case goods, our wood products.

As we look at our commercial business, for the quarter our commercial office business is up double-digits from where it was a year ago, and certainly gaining some momentum. And we feel good about that.

Our hospitality business is probably down low-single-digits, but we think there is a pent-up demand story there that we will talk about a little bit more in a minute or two here.

Our RV business has got a modest single-digit increase on a year-to-date basis, although it was down a couple of percentage points in the March quarter.

Our spring order rate for Recreational Vehicle Products is a little bit sluggish. And we think our dealer base there is continuing to be cautious, perhaps driven somewhat by the higher fuel costs, which can have an impact, especially on larger motorhome products. We will have to see how that plays out as we go forward.

Looking at our cost side of the business and margins, there has certainly been pressure on margins. We started to experience cost increases during the latter part of our December quarter. And it escalated here in the March quarter. We have seen significant increases in material costs per fabric, for leather, for cut and sew kits, polyester fibers, packing materials, and more recently for steel and metal component parts as well.

Some of these increases are in the mid-single-digit range, but many of them have exceeded 10% and some have gone up in excess of 20%. So in some cases some pretty significant material cost increases.

In addition to that for the products that we source overseas is fully upholstered or finished products, whether it be leather stationary and motion furniture, we have seen increases there in the general range of 3% to 7%. But once again there are some outliers that have gone up more than that. Not every single product has gone up, but most of them have.

In addition, on the case goods, on the wood side, we have received increases from selected factories, and a lot of those are in the 6% to 8% range, some of them up as much as 10%.

In addition to that, our margin is being pressured with higher freight costs. Container costs for items coming from overseas are up significantly from where they were at very low levels a year ago. And domestic trucking costs are up significant and also over last year, certainly driven by the higher fuel prices that are out there today.

In reaction -- in response to these higher material and finished products costs and the freight costs that are also built into those, we are implementing price increases. In our main residential lines we announced price increases that became effective April 1. They gave us an opportunity in many of those product categories as it was the spring High Point furniture market, the international furniture market. And we announced the increases in mid-March in most cases. And we are getting those through, although there is certainly a time delay, and with the time delay it has a negative impact on our margins.

In our commercial product categories, depending on what the items are and what business we're in, the increases can be delayed even further. For instance, in our recreational vehicle business we are working on price increases, sell price increases, but most of them won't be implemented until the new model year, which will start probably in the late fiscal fourth-quarter. So many of these cost increases we are observing for many months.

This is not untypical. It is just the normal delay that we have in these. So they did have an impact. The cost increases had an impact on our March quarter and will also have an impact on our June quarter.

Looking ahead to the last half of calendar year 2011 and into 2012, we feel confident about our position in the marketplace. Our Flexsteel upholstery line is well-positioned with both our independent dealer base and our gallery dealers, and with both fully upholstery product that we source overseas, which is primarily leather goods, and also our broad line of special order domestic products, which is primarily a fabric line.

Our Wynwood case goods business continues to expand its product offerings. And our dealer base is growing, and we anticipate stronger topline performance for our Wynwood products in fiscal year 2012.

Our Home Styles ready to assemble wood furniture is having another solid year with approaching double-digit topline growth. And we expect solid performance there as we look into fiscal year 2012 also.

In our commercial businesses, our commercial office business, our order trend there is improving. We are lagging a little bit the BIFMA reports, which is the industry guideline for commercial office business, by a few months, as ours is more transaction business which seems to be picking up a little bit slower than maybe some of the larger commercial office companies are seeing in their order flows. But we are seeing some strength there and believe that that should continue.

Our RV business should maintain the levels that we experienced in 2011. We are a little bit cautious there with the higher fuel prices have clouded what the outlook might be as we go ahead. We think as we get through the next 90 days or so we will get a better picture of just how much of an impact these fuel prices might have on holding back that business.

Our hospitality, our hotel products, has been a challenging business for us, but we think there is a real pent-up demand story there. Refurbishing of hotels normally happen about every seven years. That is the typical cycle, and in fact, with some of the mid- to upper-end properties sometime there is even a shorter cycle.

For the past 2 or maybe 2.5 years furnishings have been deferred by most of the properties. At some point in time we believe that this refurbishing cycle will begin and this pent-up demand will start to break loose.

We do know historically that once one or two major hotel brands begin to do refurbishings the other ones are almost forced into a situation where they have to do refurbishings also, just to keep pace and keep their revenue flow going and occupancy rates at acceptable levels.

So we're not quite sure when this is going to break loose. We really thought that it would be happening now in the first part of 2011. There is a little indication as we are seeing some projects start to come in that this is happening, but not at the level that we would have anticipated yet. So we are confident that there will be a breakout of that pent-up demand.

Lastly, we also provide some seating products and other related products for the senior living marketplace, facilities for seniors. And we are experiencing some nice pickup in orders there, and hopefully -- and we believe that will continue.

Overall our Company continues to have a very solid financial position. This is not only important to our Company and our ability to operate, but it is really an added selling tool, as many of our existing and potential customers look at the financial strength of their suppliers. And we are getting very high marks in this area, and should help position many of our products with the likelihood of continued placements with our existing customers and also gain us some new customers.

As we look at our balance sheet and our capital, one of the things that we are doing -- we recently announced that we will invest approximately $12 million of our capital in a new 40,000 square foot office building here in Dubuque, Iowa to house primarily our corporate offices.

Our current facility that we are located in is a 100-year-old plus manufacturing facility that has been converted over the years to office space. This has taken place over the last 75 years. And the reality is our existing facilities are well past their prime, and we are really very excited about the opportunity to provide a 21st century work environment for our many associates that will be relocating to the new building. We are anticipating this will happen sometime during the summer of 2012.

In conclusion, those of you who follow our Company know that fiscal year 2009 was a most challenging year, followed by a very successful turnaround year in fiscal year 2010. And we believe that fiscal year 2011 will conclude as another very solid year, although our fourth-quarter earnings will likely not match the record income levels that we had in last year's fourth quarter. We really had an outstanding fourth-quarter and fiscal year 2010, and with especially the pressure on margins right now, we probably won't achieve those levels in the fourth quarter.

However, as we look ahead and into fiscal year 2012, assuming that we have a relatively stable economy and reasonable consumer confidence levels, we think -- we anticipate that most of our business areas will maintain or improve their performance in fiscal 2012. And we are really quite excited about our position as we look ahead to the future.

With that, that concludes my prepared remarks. Michelle, we will take any questions.

(Operator Instructions). John Deysher, Pinnacle.

Regarding the new building, I was just curious how that is going to be financed in terms of how you're going to pay for the $12 million?

And, secondarily, I guess what was the thought process that led to that? I don't know what the commercial vacancy rate is in Dubuque, but I am just wondering why you felt it was appropriate to spend $12 million when perhaps there were some available space that could have accommodated you?

I will let Tim address the funding of this in a second. But as far as occupancy rates in Dubuque, we have been -- this has been a process that we've been going through for well over a year, probably a year and a half. We have looked at many different alternatives before we came to the conclusion that the only one that really made a lot of sense was going out and building this.

There is not a lot of space available at this point in time that would meet our needs. There are some things that are likely to come online somewhere down the road, but we felt this made the most sense for us, and is the reason we made the decision.

We have also had nice cooperation from the city on a development plan that provides us some incentives and property tax relief, etc., by doing this structure so that our net investment in this will -- although the capital outlay will be $12 million upfront, our net investment over the next say 10 years will be -- part of that will be recouped. And I will let Tim address the funding.

Our balance sheet really provides us a fair bit of flexibility looking at how we finance the building. As we go through our planning process we are also looking at where we need to have not only other capital expenditures, but where our business might grow, and so we haven't locked in anything as far as long-term financing for the building.

We have some available cash. Depending on whether what our other uses might be for that, we can utilize it. Obviously, it is not returning a whole lot in today's marketplace as far as return on that.

We have available lines of credit that have very favorable rates for us if the interest rate should stay down. Then, of course, because none of our assets are secured in our lending, we have the possibility of entering into some longer-term financing for the building as well.

So I guess that is a long way of saying we are evaluating it and comparing it with what our future plans might be, and then we will make a decision in the future as to where we go with that financing.

That makes sense. When do you expect to break ground?

We would like to have groundbreaking around July 1.

Okay, July 1. So then it will be complete by the end of 2012, is that right?

That is my goal.

How many people will actually be making the move?

We will move approximately 100 people into the facility.

Ron, you mentioned recouping some of that over future years. What would be the payback -- how many years before you get your money back on that, do you think?

Well, what I was referencing was some of the incentives that were going to be provided by the state and local governments. So some of it will be actually during the construction phase with some -- and I don't want to say too much, because I don't know if everything has been approved yet at the state level or not. I think that was supposed to happen later this week.

But there is some relief on sales tax. There is some relief on some property tax, etc., that will help -- perhaps allow us to recoup up to, let's say in the area of 25% of the building cost. And when we say $12 million that is what we are looking at for all-in with whatever it might be -- furnishings, etc., so that is not just the raw building itself.

Right. I guess, final question, how many people are in the facility where you're at now, which is the plant and the office space?

Well, the total operations here, I think, we are somewhere in the 325 total employment here at our Dubuque campus, including the factories and the warehouses. So this will primarily -- we will still have some manufacturing operation here, as well as warehousing and distribution. So it is really our -- primarily most of our corporate functions that will be moving to the new facility.

Okay, very good. Thank you.

I have no further questions at this time. Mr. Hall, I turn the call back over to you.

Thank you, Michelle. Thank you very much for taking time today to participate in our third-quarter call. We look forward to reporting our fourth quarter to you in the future. And we will have an announcement out so you can prepare to listen to our next call. Thank you.

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