Flexsteel Industries Inc (FLXS) 2011 Q4 法說會逐字稿

Welcome to Flexsteel's fourth-quarter and fiscal year 2011 operating results conference call. At this time I will turn the call over to Mr. Tim Hall, Flexsteel's Senior Vice President of Finance and Chief Financial Officer.

Thank you, Tracy. Good morning, everyone, and welcome to our fiscal year 2011 conference call. We appreciate your participation.

Joining me this morning is Mr. Ron Klosterman, our President and Chief Executive Officer.

We may make forward-looking statements during this call. While these statements reflect our best judgment that the present time, they are subject to risk and uncertainties as described in our SEC filings. Accordingly, our actual results may differ materially from our current expectations.

We undertake no obligations to update any of the forward-looking statements made during this call.

Would like to highlight just a couple of things out of our press release and then I will turn the call over to Ron for his comments. Today we reported net sales or yesterday reported net sales for the fiscal year of $339.4 million. That is an increase of about 4% over the prior fiscal year. For the quarter we had about $84.2 million in sales versus $85.6 million, a decrease of 1.6%.

Our net income for the fiscal year was $10.4 million or about $1.50 a share compared to net income of $10.8 million or $1.61 per share in the prior year. Income for the quarter was $3.5 million or $0.50 per share compared to $4.1 million or $0.61 per share in the prior quarter. Our press release details some of the changes that have taken place at both a gross profit margin level and an SG&A level.

Our working capital is about $100.7 million. We have no bank borrowings.

At this time I will turn the call over to Ron for any comments that he might like to make.

Thank you, Tim, and good morning, everyone. Just a few additional comments on the fourth quarter and the fiscal year. Then I will give you a little overview of what we are seeing for our current business conditions and looking ahead a little bit.

For the fourth quarter we certainly recognize that we had a decrease in our net income, earnings per share going from $0.61 a year ago to $0.50. As I look at the quarter and a few of the individual line items, we are pleased that we were able to maintain our gross margins, both for the quarter versus a year ago quarter and also fiscal year this year versus last year.

It certainly has been challenging with some of the cost increases that we face throughout the year for some commodity-related items and other items that have come through. Our team has done a nice job of protecting our margins, of adjusting selling prices where we could, of remerchandising some items, and overall working very hard to maintain our gross margin line along with -- in the latter part of the year, with the facility closing that we did of a commercial office plant, it took some fixed costs out of our ongoing cost of goods sold. So pleased with where we are at on the gross margin.

In the fourth quarter this year versus last year, first of all, commenting back on last year. It was an exceptionally strong fourth quarter for us a year ago. We had very solid top line, nice margins, and a relatively low SG&A line.

This year the SG&A line jumped up for several reasons. Some of it was professional costs related to an IT project that we had undertaken to evaluate our IT systems. We also, as we had announced earlier, had put in place a new gallery program. We worked very hard on converting some of our existing galleries in particular in the fourth quarter. Some of that will carry over into the next couple quarters of fiscal year 2012 also.

But that is really an investment in growing our residential business, although it's a little challenging when we don't have the top-line results of that but we are having some of the expenses going on at this point in time. But, overall, not terribly disappointed with a $0.50 earnings per share in the fourth quarter of this year.

On a fiscal year basis our top line grew at about 4%. Once again, not an outstanding member for many industries but I think in the furniture industry and in the public company segment of the furniture industry a very reasonable performance. Our bottom-line earnings per share, although down $0.11 and part of that being in the fourth quarter -- we also earlier in the year took some facility closing costs and inventory write-downs related to that closing cost, which probably reduced our earnings per share around $0.15, $0.16 per share. So if we were to add back that $0.16 of sort of one-time charges, we would be at $1.66 versus $1.61 or about a 3% EPS increase on a [4%] top-line increase.

So once again I think in the challenging industries that we are working in a pretty respectable performance.

As we look ahead certainly concerning is the macroeconomic picture in our country and the impact that it could have, and in some cases is having, on our business. We always watch closely consumer confidence levels. The most recent University of Michigan consumer confidence numbers I believe were down to 55 with 100 sort of being the target line. That is certainly the lowest it has been in many years.

We felt the impact of that a little bit in the last couple of months. Month of June of our last fiscal year and the first 45 days of our new fiscal year consumers pulled back. That makes a lot of our products, which are easily deferrable purchases, causes some slowness in our business, and we are feeling that a little bit in both the month of July and August on our incoming orders.

Certainly that is the case with our residential business. On the other hand, in our residential business we have the Las Vegas furniture market the first few days of August and, although attendance is always much lower in the summer market than it is in the winter, we had reasonable attendance. And from the dealers that were there wrote some very solid business. So we are encouraged by the dealers who came to market liking our product and looking to place orders for the fall selling season.

We continue to have good acceptance of our Wynwood product line and our Home Styles ready-to-assemble product line. As I mentioned earlier, we spent some money in the fourth quarter and will the next six months on the gallery updates and conversions and new galleries, so it will be a short-term expense.

But that bodes well for our long-term residential business. More business is done through these galleries as a channel for us and it also bodes well when we do conversions. We almost always see a dealer who updates his store, puts in new fixtures, maybe updates the lighting, and puts some new product on the floor; we generate additional sales in the period of time after our galleries do that.

We are also seeing -- we continue to have a nice crossover of our Wynwood product line going into some of our Flexsteel independent dealers in the secondary and tertiary markets. And that helps expand our dealer base for the Wynwood product line. The case goods product has been a little more of a challenge the last couple of years than the upholstery line, but it's good to increase that market penetration on more dealers' floors.

In the commercial side of our business, our commercial office, desk, and related products line is improving. The industry in general is improving, although the transaction part of the business where we participate is coming back at a slower rate than some of the big projects that are going on that you may see with some of the big four or five national commercial office companies.

But we are seeing that come back. We have not lost any dealer placements or market share there as our dealer structure remains committed to our line. We just need to see more activity. A lot of our activity is driven by small business and, hopefully, as small business in our country starts to grow again we will see the commercial office line, product line be a nice participant in that.

The hospitality business, there are some signs that deferrals of some of the refurbishing are starting to break loose. We recently got a nice order from a large hotel property that we have been working on for an extended period of time. Finally, they are to the point where they are ready to move ahead.

There is a lot of pent up demand in the hospitality business that we think will be coming into the picture here over the next year, and we think we are well positioned to participate in that pent-up demand as it breaks loose.

Lastly, our RV business. We continue to maintain our very strong market share in the motorhome business, but over the last several months since last spring the order rates have been a little slower than they were previously. We really believe that is closely tied to the higher fuel costs that we have seen this spring and throughout the first months of the summer. It looks like there is a little relief in sight, so we are hopeful that we will see some stronger RV business as we move into the fall of the year and then certainly as we move back into the early part of calendar year 2012.

So certainly some headwinds out there today because of the macroeconomic picture in our country. Don't have to tell any of you about what is going on in Washington, DC, and all the political maneuvering, but when we see consumer confidence levels that are low and obviously high unemployment, etc., those are -- make our business far more challenging than it normally would be. But we continue to be well positioned. We think strategically we are in good shape and we are maintaining market shares in the business that we are doing.

So as the economy settles down and hopefully gets on a little sounder footing going forward we will be in a position to take full advantage of it. Our balance sheet, as Tim mentioned, continues to be quite strong so that financially we are very solid. We look forward to stronger business as we work through fiscal year 2012.

Tim, that is all that I have at this point in time.

Thank you, Ron. Tracy, we are ready to take questions.

(Operator Instructions) John Deysher.

Good morning. Two questions; one regarding the furniture galleries. I realize that has been a strength of yours for many years, but I was just curious how many galleries are in place right now amongst your customers, how many have been refurbished to date, and how many are left to refurbish.

John, this is Ron. Good morning. I think at the current time we have really two formats, galleries and studios, and combined we have -- I think that the current number is in the range of 630 combined. And, I am sorry, I don't have in front of me how many refurbishings we have done.

I think we have, since we introduced the new gallery program two high point markets ago, I think we have had commitments I am going to say for somewhere in the range of 140 refurbishings plus some studios that would be upgrading to galleries. But I am not quite sure how many we have completed at this point in time. Tim, do you happen to know?

No, I don't have the exact numbers with me, Ron, but I think that you are in the ballpark with all of those.

Okay. Cost wise how much did we spend on that refurbishing upgrade in the last fiscal year that just ended? How much do we anticipate spending in the next fiscal year?

I think -- and help me if I am off base on this, Tim -- but I think we looked at our cost and a lot of it hit in the fourth quarter or some of it was before that. I think it was about $0.75 million.

We will have -- certainly have some additional expense as we go forward, but some of that was upfront cost. So I think we are looking at -- if the pace continues through the next year, it will probably be somewhere in the area of $1 million for this next year, which would be spread out over more conversions than what we actually accomplished in this last year. And we should start to see -- as the conversions get in place, we should start to see additional volume from the converted galleries that we really didn't have the benefit of through this past fiscal year.

And what is the -- if you can answer this, what is the incremental sales on a gallery that has already been converted? You mentioned you normally see an uptick there, but in terms of dollars and cents kind of what is the average increase in sales for a gallery?

The volume varies a great deal by the size of the gallery, but if I can give you kind of a percentage basis, it's not at all untypical to see -- in the first six months after a gallery is converted we will see something a little bit north of a 15% increase in volume over what they had done in the prior periods.

Good. And you said you thought 140 or so were refurbished or upgraded last year?

That is what we have commitments for. We don't have them all in place yet. Our dealers give us a commitment that they want to refurbish. Then we have a design staff that goes out and works with them on layout of their store, repainting, updating, etc., and then finally placing the furniture.

So it takes -- some of those refurbishings that we have commitments for we may actually not get into, especially if the dealer is doing any significant reconstruction with changing floor layout, maybe recarpeting, reflooring, etc. Some of the ones that we have just gotten commitments for we may not get to until after January 1. It's frequently a 90- to 180-day process to go through, sometimes longer than that.

All right. And then one more question on this. Does the dealer kick in any of the cost of the renovation or upgrade?

The dealer -- we participate with the dealer. The dealer pays -- if he redoes flooring, lighting, sort of the structural things he takes care of. Then we work with them and supplement them with fabric racks, signage, emotives, different things for the display.

Kind of the accessories?

Not furniture accessories but --

Display accessories.

Display accessories, yes.

Okay, got it. And then switching gears, on the new headquarters building, $12 million to construct, furnish, and equip that. Where are we now and kind of now does that fold going forward?

Tim, do you want to take that?

Yes, Ron, thanks. This is Tim. John, we are in the bidding process right now. That process will last through the end of the month.

We will then select the bidders. Expect to have groundbreaking around the middle of September or before, slightly before, and expecting the construction period to last approximately 11 or 12 months.

Okay. So 12 months would be October 1 or thereabouts of 2012, so most of the cost is going to fall in this fiscal year?

I am expecting it to be around September or so that we -- no later than September a year from now that we would be in the building. And so most of it will be incurred during fiscal year 2012.

Okay, and that is $12 million. What is the non-building related CapEx going to -- it's I think $15 million, okay. $15 million of which $12 million is the building?

Correct.

Is that right? Okay.

Kind of a normal amount of CapEx going forward, John, for our corporation.

Okay. And depreciation for next fiscal year will fall about where?

I am thinking around $3 million, so up slightly from where it was this year.

Okay, very good. Thank you.

(Operator Instructions) Irwin Michael, ABC Funds.

Good morning. I have a comment and a couple of questions. I would like to congratulate you on managing the Company in a very, very difficult period. I am sure it has been very challenging for you.

My questions relate primarily to your balance sheet. It's obviously incredibly solid and that probably relates to the fact that you have managed your company extremely well. You are trading at a discount to book; your working capital is pretty healthy as well. Other than obviously this $12 million you are using to build this facility, what needs do you have for the capital? And obviously by extension, any thoughts on acquisitions, share repurchase, and/or dividend increase?

Thank you for your comment on managing the business. Yes, we do have a very strong balance sheet and our company has prided itself for a long time on that being the case.

We probably don't have a lot of internal capital needs. The potential is there as some of our businesses grow that we may need to do something, but as our model has changed over the years to a blended model of sourcing products and manufacturing products, we don't have the needs on the manufacturing side that perhaps we did at one time. It's more replacement costs for manufacturing equipment and delivery equipment, etc.

Could be the potential that we would need to expend some money on additional warehousing space if that part of the business grows significantly in the coming years.

We have had a long history of paying dividends. We did reduce our dividends a couple years ago when business got very challenging and we weren't quite sure how long it was going to take us to get the Company back on solid ground again. We have had one dividend increase since then from $0.05 per share per quarter to $0.075. Our Board, as we have accumulated cash in the past and have a solid earnings stream, have looked at a higher dividend rate so that was something that could be considered.

We have had share repurchases, although it's something we haven't done -- I am sure it's over 10 years now since we have had any share repurchases -- we are not opposed to it, especially when our price on a relative basis seems to be perhaps undervalued. Although we also have the issue of illiquidity of our stock, so it's a little bit of a two-edged sword. If we have a significant repurchase program, we maybe even make our stock more illiquid. On the other hand, if we don't have better use of our cash on a long-term basis, it may be something that makes sense.

Lastly, on the acquisition front. We look at a lot of acquisitions from what we would consider to be a small size to a fairly significant size. We are open to that, but we are pretty particular. We don't necessarily like the idea of paying a lot of money for something that we think we can accomplish internally.

On the other side, we also want something that fits in with what we look at as our core business, that being furniture and furniture-related items that we think we have some feel in knowing how to manage. Aren't necessarily interested in going out and making an acquisition in an unrelated area. So we will continue to look at all of those as we go forward, but we are not uncomfortable with having a strong balance sheet.

Thank you very much. Appreciate this.

You are welcome.

There are no further questions at this time. I turn the call back over to the presenters.

Well, thank you all very much for listening today and your questions. Hopefully, you continue to show an interest in our company and continue to be shareholders for those of you that are. We look forward to talking with you again in mid to late October when we have our September results. Thank you.

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