Flexsteel Industries, Inc.

Good morning and welcome to the Flex Steel Industries second quarter fiscal year 2021 earnings conference call. All participants will be in listen-only mode. Should 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 second quarter fiscal year 2021 financial results. Our earnings release, which we issued after market closed yesterday, Monday, January 25th, is available on the investor relations section of our website at www.flexdeal.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 forward-looking statements. Such risks and uncertainties include but are not limited to those that are described in the 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 reconciliation of the 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.

Despite facing a multitude of headwinds created by global supply chain disruptions related to COVID-19, we performed well in the second quarter, delivering strong top-line results of $119 million, which represents year-over-year organic growth of almost 26% and solid gap net income of $8.5 million and non-GAAP net income of $5.9 billion. Overall, demand for residential furniture remains very robust, and we are gaining market share due in part to our lead time performance relative to competition. The actions taken at the end of fiscal year 2020 to refocus our organization solely on home furnishings and to reduce operational complexity through skew rationalization have made us stronger and nimbler to meet recent surging consumer demand for furniture. Sales results in home furnishing products sold through retail stores were especially encouraging with year-over-year growth of almost 29% in the quarter. Year-over-year order growth for retail sales was a blistering 60% in the first quarter And that momentum carried into the second quarter with order growth of 49% versus prior year. As a result, our backlog for retail sales finished the second quarter at a record level of $101 million. Our teams are working feverishly to expand both manufacturing and sourcing capacity to meet this strong growth. And I'll elaborate on our capacity initiative later in the call. Sales in our Homestyles product, which are sold through e-commerce channels, grew double digits, but the pace of growth at 11% during the second quarter was notably lower than the growth performance in the first quarter of fiscal year 2021 and the fourth quarter of fiscal year 2020. The reduction in growth this quarter was largely a result of global supply chain disruptions which constrained our inventories and ability to support higher sales. E-commerce continues to be a key strategic growth area for the company, and we fully expect growth through e-commerce channels to accelerate once these supply chain challenges dissipate, hopefully over the coming few quarters. Based on market and customer feedback, we expect overall consumer demand for home furniture to likely remain strong through mid-2021. Obviously, the economic fallout of the pandemic, combined with the ability of the federal government to mitigate that impact through both fiscal and monetary stimulus, will play a determining factor in the sustainability of consumer demand throughout 2021. While it is predictable that consumer demand will likely wane at some point when vaccines are widely distributed and consumers begin to return to normal activities outside of their homes, we are working on exciting new products and other growth strategies to more than offset such anticipated demand softening so that we can continue driving long-term profitable growth for the company. In the near term, our biggest obstacle to supporting continued growth is overcoming a flurry of global supply chain challenges which are currently facing. We are dealing with three major supply chain impediments right now. First, availability of ocean containers. The reduction of ocean vessels, which occurred at the onset of COVID-19, combined with surging demand for numerous imported consumer products, has significantly disrupted the flow of containers globally and there is an extreme shortage of empty containers in Asia at the moment. As a reminder, roughly 65% to 70% of our sales are derived from products that are sourced globally, so the container shortage is having an outsized impact on our business near term. Many of our Asian suppliers who have ramped up capacity recently to meet our growing production order demand now find themselves with warehouses full of Flex Seal products which cannot be shipped because of container shortages. In some cases, our suppliers have been forced to stop production as they have no place to store product because their warehouses are already full. As you can imagine, the supply chain imbalance for containers is also creating an egregious spike in ocean freight prices, which negatively impacts our gross margins short-term. In some instances, we are now paying three times the amount of ocean transportation that we did prior to COVID-19. Unfortunately, this is a global issue and not just one that is confined to just FlexDeal or our industry. It's also not clear how soon the supply chain imbalance for containers may be resolved, and as such, may pose a significant risk to our third and fourth quarter sales growth outlook. We are working very closely with our international freight partners to secure as much container capacity as we possibly can in the short term. The second supply chain challenge is availability of key materials and components. Production at our North American manufacturing facilities was suboptimal during the second quarter due to a limited availability of key input items. Many of the mechanisms in our motion furniture are sourced from Asia, and the flow of these items to our factories has been interrupted by the same ocean container shortages that I mentioned earlier. Polyfoam, which is used in all of our seeding products, has been on allocation from suppliers since the beginning of the second quarter. These material constraints are expected to continue throughout the third quarter and will restrict our ability to increase manufacturing production significantly in the near term. The third big supply chain challenge is labor availability. notably in the U.S. Despite high unemployment and recent wage rate increases across Flexfield's production facilities and distribution centers, we continue to encounter challenges in recruiting qualified candidates for our locations and for driver positions supporting our dedicated transportation fleet. Another item which we noted during last quarter's earnings call And it's worth mentioning again is uncertainty in US trade relations with Vietnam. The US Trade Representative's Office recently completed its Section 301 investigation of Vietnam practices and concluded that unfair acts, policies, and practices related to currency manipulation by Vietnam have harmed US workers and businesses. However, the U.S. government has stopped short of implementing any tariff or punitive measures thus far. It's not clear how the incoming Biden administration will handle the situation with Vietnam. While the situation with the global supply chain that I just described may seem quite dour in the near term, our team is not deterred by the adversity and is working all available options to best support our customers. We are cautiously optimistic that these conditions will not persist beyond the next six to nine months, so we continue to aggressively invest for longer-term growth in anticipation of normalized global supply chain conditions to support such growth. In summary, I'm pleased with our first half performance in fiscal year 2021. I'll see we are competing well, are managing the short-term global supply chain headwinds, as effectively as we can and are well positioned to deliver strong sales growth and financial results longer term. Now I'll turn the call over to Derek to discuss our financial and operational results, and I'll be back with some closing comments on what we see ahead.