Flexsteel Industries Inc (FLXS) 2012 Q1 法說會逐字稿

Welcome to the Flexsteel Industries, Inc. first-quarter fiscal year 2012 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, Stephanie, and good morning and welcome, everyone, to our first-quarter fiscal year 2012 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 the call. While these statements reflect our best judgment at the present time they are subject to risks and uncertainties as we've described in our SEC filings. Accordingly our results, our actual results may differ materially from those expected. We undertake no obligation to update any forward-looking information made during the call.

I'd like to make a couple of comments and point out some things on our press release before I turn the call over to Ron. Our net sales were approximately $81.5 million, down about $5.7 million from the prior year quarter. That includes a decrease of approximately $2.7 million in our residential and approximately $3 million in our commercial net shipments.

Our gross margin improved to 23.3% from 22.5% compared to the prior year quarter due to lower ocean freight costs and lower fixed costs resulting from reductions in manufacturing capacity that we undertook in the prior year. SG&A (technical difficulty) approximately 18.8%. We had additional expenditures to support our new gallery program that we've introduced and higher legal and professional fees.

Our net income for the quarter was $0.34 a share which was equal to what we had posted the year before. However, the prior year did include $1 million for closing the manufacturing facility. Our balance sheet remains strong and we have no bank borrowings and working capital of $102.7 million.

Capital expenditures were approximately $600,000 during the quarter. Our building construction is underway and we expect completion by August of 2012. At this time I'll turn the call over to Mr. Ron Klosterman. Ron?

Thank you, Tim, and good morning, everyone. Well, it continues to be a very interesting business environment that we're participating in. As Tim just noted, our shipments this year are less than last year.

We had a very strong shipping quarter for the quarter September of '10, aided greatly by a large buildup of backlog from the spring of calendar year 2010 when we experienced, and many of our competitors did also, slow deliveries out of Asia and a buildup of orders that we were able to ship a year ago. So our top-line volume was down from $86 million to $81.5 million.

Actually if I go back to the first quarter of fiscal year 2009, our shipments were in the range of $76 million. So looking back two years and if we -- it's kind of hard to completely take out this buildup of backlog and what the impact was on last year's quarter, but going back to '09 we would have had shipments of about $76 million versus $81.5 million this year.

I think the other thing that supports current business is that -- as we noted in our press release, that our actual orders received for the July to September period were mid- to high-single-digits higher this year I think at 8-point-some-percent higher this year than they were last year.

So our overall order trend for the September quarter was pretty solid. It was up about 5% for our various commercial businesses and orders were up close to 9% for our residential businesses in total. We're seeing some strength in the commercial business especially in hospitality and commercial office continues to improve.

We're seeing some weakness yet though in the recreational vehicle business. Our July to September quarter shipments were lower than we normally would have anticipated for this and down probably high-single-digits from the year-ago quarter. We think this is likely to continue through the December quarter which is traditionally a slow quarter for us in the recreational vehicle business.

And we think it's just we're following the trend of the industry. We've seen a couple of the -- not all of, but a couple of the publicly traded companies report lower volume this fall than they did the year before. So we've maintained our position with our key customers in that business, but the overall business is just slower.

In general that's somewhat in spite of the high-single-digit or mid- to high-single-digit increases in our orders for the July to September quarter, business is choppy. Whether it's home furnishings business or our commercial business, we'll see a period of several weeks of very solid business, look like things are on a good trend and then it will slow down significantly for a couple week period.

And even now as we look at the first couple weeks of October business has been slower than what we would normally expect to see in this fall time period. So a lot of things going on, we all know about the national economy and all the issues facing our country and Europe, etc. All of this impacts, I believe, consumer confidence and with that the consumer I think is having a lot of stops and starts in many of the areas that we do business.

This is likely to be the trends for the next several months. We continue to believe our Company is well positioned. We're maintaining and in some cases believe we're actually gaining some market share, but it could be a very irregular period of time over the next couple of quarters until we get to -- perhaps even through the national election at the end of 2012.

But we'll take it one quarter at a time. We continue to focus on controlling fixed cost, matching our manufacturing capacity with order levels. I think our team has done a very good job of that and that has certainly helped us maintain our margin in the first quarter of this year and we're hopeful going forward.

The SG&A expense is likely to run higher this year than what we've experienced the last year or two, partially driven by the emphasis we're putting on our Flexsteel residential gallery program. We've done a number of conversions and installed several new galleries in this September quarter and we think that's likely. We know that it's going to continue through the December quarter and into the spring of 2012 just with the commitments that we currently have from our dealers and potential new galleries.

And we also are experiencing some out of the ordinary legal expenses. We've been named as one of many defendants in a class action lawsuit, an environmental lawsuit and we're experiencing some legal fees as discovery is done and depositions are taken, etc. And it's too early to know what the overall impact or what the length of time that this -- may be in front of us. But as we learn more and as the picture becomes clear we'll keep you up to date on that also.

I think those are all the comments that I have. As Tim mentioned, our balance sheet continues to be strong, our inventory levels at this September are about the same as last September.

So we think we're well positioned to take care of the needs of our customers as we work through the December quarter and through the winter months, which is traditionally, at least in our home furnishings business, some of the stronger times of year. Although on the other side it's normally a slower time of business for us in the RV business. So with that I'll stop my comments and we can open it up for questions if you have any.

(Operator Instructions). [Justin Rufiel], Sidoti & Company.

Congratulations on the quarter. I just had a few questions. In terms of like trade down, are we looking at any kind of trade down that's evident? I mean kind of like going down from leather to fabric or anything like that?

There's -- one of the things in the home furnishings industry over the last, I don't know exactly what period of time, but certainly over the last many quarters and perhaps the last couple of market cycles has been in some cases as leather prices have gone up and, as you're aware, a lot of the leather today and leather product comes out of Asia, some of it is being competed against by a product called bonded leather, which is a combination.

It's basically a fabric type product that has some leather composition to it in many cases. And we're seeing some of that. Later this week on -- official start date is this Saturday for the fall High Point furniture market and we certainly have some products introductions that address that product category.

I guess my other question would be, just a consumer -- the customer base overall, what -- healthwise where would you really categorize that?

Well, I think overall in most of our businesses and especially in the home furnishings business it's been several years of tough business at retail and certainly some retailers have disappeared. We believe that overall our customer base is very solid; we're doing business with the people that have survived and are likely to survive and grow going forward. We feel good about our customer base.

That's good. Then I guess one last thing. You said that the gallery updates and the refurbishments are going to end in spring. Is there -- go ahead -- okay, is there a potential to add more to that refurbishment or just openings at all going forward?

I didn't mean to imply that they're going to end in the spring. Right now we have commitments from dealers that we'll be working on through the December quarter and into the spring quarter. But we would anticipate and likely at this market, High Point market or shortly thereafter that we'll continue to get more commitments for updates and also additional new galleries.

Thank you very much.

(Operator Instructions). Irwin Michael, ABC Funds.

First of all, good quarter considering all the macro negativity out there that you must have had to face during the summer. If it's not grief it's the deficit -- the debt ceiling, etc., so good for you. I have several questions. One, most of your CapEx is for this new facility, correct?

That's correct.

What are you doing with your old plant? It's what, 50 to 60 years old plus?

Our office area that we currently occupy, actually the building was I think built in the late 1800s, early 1900s. It's attached to -- or a good part of the rest of the facility here we're using for warehousing and still some manufacturing of recreational vehicle products.

When we vacate the office area our plan is to gut the office and if it's capable of being used for some warehousing we'll do that, and if not we'll make whatever decisions might be appropriate. It's about -- current area that we're using here is about 30,000 square feet.

And how big is the building, how large is it?

The entire complex here in the north end of Dubuque is I think in the area of just shy of 800,000 square feet.

And you own the building, you own the land?

Yes.

What is it on your books for?

Not a lot. I don't have an exact (multiple speakers).

Okay, so I'm curious, is it salable?

Don't know. We're still using almost all of the facility for manufacturing and warehousing. We really haven't looked at what it might be worth if we were for some reason to decide to dispose of it.

And certainly you would have a capital gain if you sold it.

One would assume.

Okay, that's all right. Can you just highlight first, I've seen about this class-action suit that you're involved in. Can you just give me a little more (multiple speakers)?

It's an environmental issue at a location where we owned -- or one of the owners of a facility that is named as one of the defendants. We owned a facility in Indiana for, I don't know, half a dozen years or so, maybe not quite that long.

And it's pretty early in the suit yet. We don't know what -- really what the damages are or a lot of [other], other than they feel there was some groundwater contamination that someone -- someone in the group of plaintiffs may have had an influence on. And because we owned property during part of that time we're one of the defendants.

In our footnote number 11 in our 10-K there's something about it? And then when our Q comes out we'll update that note a little bit. I think it gives you a pretty good overview of what's going on there.

Sure. And you no longer own the facility, correct?

That's correct.

Interesting. You've got an incredibly strong balance sheet and I asked you this question last quarter. I see actually your working capital has increased from $15 to a little greater than that, not to say that working capital is the end-all and be-all. Any further thoughts to dividend increases or share buybacks?

Because clearly you're trading at a big discount to your book and you've done a great job in running the Company in very, very difficult times. But clearly the stock market is not giving you any respect. In fact, if I may ask you a rhetorical question as well as an addendum to that is why even public?

Well, you're right; we do have a lot of working capital. Our Board at our last meeting in September did raise our dividend from $0.075 to $0.10 per share in recognition partially because of that, but because of the confidence we have in our business going forward. And we'll take it I guess sort of one quarter at a time as to do we do -- as far as stock buybacks or additional dividend increases.

The public versus private issue, it is challenging. We are challenged to get enough interest in the public market to trade at book value or north of book value. But I think our Board looks at that as more of a longer-term strategy rather than something that we're currently focused on today.

By the way, this isn't a (inaudible) of you or your Company. I mean every smaller microcap company (multiple speakers) the same thing, it's just characteristic of the times that we're going through. And I suspect there are a lot of companies in the same boat examining as to even why they're public.

Because clearly you don't need -- you have no debt, you don't need any debt financing, so you don't need to do a stock issue right now and no one is giving you respect. I'm sure it costs you a fair amount of money to remain public, all the filing fees, whatever. So I'm very intrigued as a shareholder.

Just know that our Board has discussions regarding that topic.

Okay, that's good. And as a final note, you are retiring. Any plans and can you give us a sense of who's going to be running the show?

Well, yes, sometime next year I plan to step down as the President and CEO. And our Board has formed a search committee and we're engaging an executive search firm. And it would be obvious, our goal is to find the best qualified candidate we can to take my place and not only maintain what we have going here but improve upon it as years go by.

I've been -- I've had a long and, from my perspective, a very fine career here at the Company. I've just completed my 39th year and look forward to spending a little more time with family and friends and that sort of thing.

I congratulate you on that because very few people today are ever with a company -- forget about 20 years let alone 39 years.

Well, that's one of the strengths of our Company. I think if I took -- we have including myself eight executive officers and I think if I added up the tenure of those eight people it's -- I'm sure it's north of 250 years with our Company.

So we have a lot of tenured people certainly in management, but even just throughout our entire Company here. And I think once again it says a lot about the integrity and the values of the Company. And I've just been delighted to have the opportunity to be in a leadership position these last year's.

Now, will you stay on the Board?

I'm standing for reelection at the December Board meeting this year. My three-year term is up and, assuming I'm reelected, I would continue to serve on the Board.

Well, good for you. I congratulate you and keep up the good work.

Thank you.

(Operator Instructions). I'm showing no further questions at this time. I turn the call back over to the presenters.

Well, thank you all for joining us this morning. We're certainly not disappointed with our September quarter and we look forward to speaking with you again in early February when we report on our December quarter. Thank you and have a good day.

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