Flexsteel Industries, Inc.

morning and welcome to the Flex Steel Industries first quarter fiscal year 2021 earnings conference call. All participants will be in a listen-only mode. If you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one, on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Derek Schmidt, Chief Financial Officer and Chief Operating Officer for Flex Steel Industries. Please go ahead.

Thank you, and welcome to today's call to discuss Flex Steel Industries' first quarter fiscal year 2021 financial results. Our earnings released which we issued after market closed yesterday, Monday, October 26th, is available on the investor relations section of our website, www.flexsteel.com, under news and events. I'm here today with Jerry Dittmer, President and Chief Executive Officer. On today's call, we will provide prepared remarks, and then we will open up the call to your questions. Before we begin, I would like to remind you, that the comments on today's call will include forward-looking statements, which can be identified by the use of words such as estimate, anticipate, expect, and similar phrases. Forward-looking statements by their nature involve estimates, projections, goals, forecasts, and assumptions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Such risks and uncertainties include but are not limited to those that are described in our most recent annual report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q and other SEC filings as applicable. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Additionally, we may refer to non-GAAP measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliations of GAAP to non-GAAP measures. And with that, I will turn the call over to Jerry Dittmer. Jerry?

Good morning, and thank you for joining us today. The COVID-19 pandemic continues to adversely impact the global economy and many aspects of our business operations. First, I would like to thank all our Flex Seal employees for their dedication to our company and commitment to taking care of our customers and each other during these unprecedented times. I'm proud of our team and how they have responded in this difficult and dynamic environment. In response to COVID-19, we accelerated many strategic decisions and took bold actions to transform our company over the past six months. While many of these decisions were difficult, they were necessary and have made the company much stronger and better positioned for long-term profitable growth. We exited several non-core product lines to sharpen our focus on competing in markets where we feel we are advantaged. We significantly reduced operational complexity by rationalizing our product offering to what is most relevant to today's consumers. and we aggressively reduce structural costs and optimize our network footprint to become nimbler, better serve our customers, and expedite our return to profitability. While we are an organization dedicated to continuous improvement and there is still much work to be done, I feel we have achieved a major milestone in our transformational journey and now have a solid foundation for the future growth, which is reflected in the strength of our first quarter performance, most notably double-digit organic growth and return to operating margins, which are near historical peak levels. While we reported net sales were up 5% in the first quarter, more importantly, our organic sales growth was 18% when excluding the impact of the vehicle seating and hospitality product lines we exited last year. The sales strength was broad-based, spanning both the Flex Steel and Homestyle brands, all our sales channels and geographic regions, and nearly all our product categories. From a macro viewpoint, the industry has seen a surge in demand for household furniture since June, as consumers spend more time at home and shift discretionary spending from travel and entertainment to home goods. No one, including myself, anticipated the enormity of the rebound in consumer spending on furniture when retailers began reopening their stores in late May and early June. Our restructuring efforts have made us more agile, and we've been able to capitalize on this positive shift in consumer spending for furniture sold both through retail and e-commerce channels. Our retail home furnishing sales were up 15%. and e-commerce sales grew almost 40% during the quarter. Orders in retail home furnishings were even stronger than shipments, with 60% year-over-year order growth in the quarter. Order demand was consistently robust throughout all three months in the period, and October orders appear to be sustaining that same strength as month-to-date orders are up roughly 60%. As a result, our backlog ended the first quarter at a historical record high of $89 million. To support our customers and the strength of the backlog, we added several new production lines in the first quarter at both of our North American manufacturing facilities, and we intend to build additional capacity in calendar year 2021. As we do this, We continue to adhere to strict social distancing guidelines and sanitation best practices to protect the well-being of our valued employees. We are also working feverishly with our global supply partners to secure additional capacity and build inventory to support continued strong consumer demand. While demand trends have certainly been a pleasant tailwind to the business in the near term, there are a multitude of headwinds related to supply delays, disruptions and price increases that we are currently navigating at the same time. First, global supply availability. Most offshore furniture suppliers reduced capacity at the beginning of the COVID-19 pandemic as their orders declined or were canceled. Despite these best efforts to quickly ramp up, U.S. furniture demand continues to significantly outpace global supply capacity. Closed borders due to the COVID-19 have further exaggerated the situation as many offshore suppliers do not have access to the workers outside of their home countries, which are needed to ramp up capacity faster. The downstream supply chain for materials like leather and components is also stressed, given heightened demand, which has further extended lead times for some globally sourced items. We anticipate the supply-demand imbalance to linger through mid-2021, but are working diligently with our offshore suppliers to secure required capacity. Second, ocean container availability. Ocean vessel capacity was reduced early in the pandemic and has not been brought back to pre-COVID-19 levels yet. With a sharp rebound in U.S. consumer spending across multiple categories, demand for imported products has surged and spot rates for ocean containers have more than doubled with no line of sight to returning to normal levels near term. Third, material inflation. We are seeing significant price increases in key raw material categories. Plywood has seen massive price increases due to strong housing demand, home improvement spending, and furniture demand. We are also seeing double-digit increases in foams. Recent hurricanes in the Gulf region have disrupted petroleum-based supply chains, including the production of TDI, which is a major component of the foam used in all our seating. Inflationary pressures in packaging and other materials are also starting to bubble up. Fourth, labor shortages and wage inflation. Despite relatively high unemployment, the market for both skilled labor used in upholstery manufacturing and warehousing labor remains tight. As a result, we have increased hourly wage rates this quarter across multiple manufacturing and distribution facilities to improve hiring effectiveness and worker retention. Fifth and lastly, uncertainty in global trade relations. When tariffs were imposed on imported furniture items from China, the change was highly disruptive and costly to the global furniture supply chain. like many furniture companies, pivoted quickly to reduce its exposure to China by reallocating production to other Asian countries, most notably Vietnam. The U.S. Trade Representative's Office recently announced that it was investigating Vietnam for currency manipulation and exporting wood products containing illegally harvested timber into the U.S. If the investigation confirms these allegations to be true, and the U.S. subsequently imposes sanctions or punitive measures on Vietnam, it will have a similar disruptive and costly impact to the U.S. furniture industry as China tariffs. Our team is responding to these challenges and is working multiple plans to mitigate and manage these headwinds wherever possible to ensure that we can continue supporting our customers and do so profitably. In summary, I'm pleased with our performance to start the fiscal year. I feel we are competing well are managing short-term headwinds effectively, and can continue delivering strong sales growth and financial results going forward. Now I'll turn the call over to Derek to discuss our financial and operating results, and I'll be back with some closing comments on what we see ahead.