Flexsteel Industries, Inc.

Good morning, and welcome to the Flex Steel Industries third quarter fiscal year 2021 earnings results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. 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' third quarter fiscal year 2021 financial results. Our earnings release, which we issued after market close yesterday, Monday, April 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 the call to your questions. Before we begin, I'd 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 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 reconciliation of GAAP to non-GAAP measures. And with that, I will turn the call over to Geri Dittmer. Geri?

Good morning, and thank you for joining us today. Despite ongoing industry challenges related to supply chain, we executed well and delivered on continued strong demand for home furnishing products during our third quarter. We reported net sales growth of 20% to 118.4 million in the current quarter, compared to 98.8 million in the prior year quarter, and organic sales growth of 33%, compared to the prior year quarter with growth in virtually all product categories. Sales results in home furnishing products sold through retail stores were especially strong with year-over-year growth of 34% in the quarter. We're competing very well, gaining retail placements, and taking market share. Year-over-year order growth for retail sales was a phenomenal 131% in the third quarter. This builds on the strong year-over-year order growth momentum from the second quarter of 49% and the first quarter of 60%. Even more encouraging, third quarter orders grew 22% sequentially from an already strong order performance in the second quarter. This positive momentum gained traction throughout the third quarter as total company orders in March set a monthly historical record high for our home furnishings business. As a result, our backlog for retail sales finished the third quarter at a record level of $140 million, up 314% from the prior year. I'm proud of our team's performance and remain confident in our ability to sustain this growth momentum going forward, despite the myriad of supply chain challenges facing the industry, which I'll elaborate on later. Sales in our Homestyles product, which are sold through e-commerce channels, also had strong performance with growth of 23% versus prior year. E-commerce continues to be a key strategic growth area for the company, and we are investing aggressively in new digital capabilities and product innovation to expand our business in this channel. Our near-term outlook for the market remains bullish. The economy is building momentum, employment conditions are improving, and and the recent government stimulus has infused additional consumer spending. Based on these macroeconomic conditions and what we are hearing from customers, we expect overall consumer demand for home furniture to likely remain strong through the bulk of the calendar year 2021. In the near term, our biggest obstacle to achieving our full sales growth potential is overcoming the global supply chain challenges which our entire industry is currently battling. The biggest supply chain impediments which we face right now are material availability, namely foam, and the ocean container availability and transit speed. Let me first start with a shortage of foam, which is having a crippling impact on the furniture industry as well as many other industries, including automotive. We've been fighting foam shortages since last fall due to the imbalance between strong consumer demand and available materials. Until recently, we've been effectively managing the foam allocation situation by leveraging multiple strategic suppliers, improving forecasting to suppliers, and utilizing alternative specifications where acceptable. However, the recent harsh weather that caused a deep freeze in Louisiana and Texas, where most of the key chemical inputs for foam are produced, has significantly aggravated the material shortage. Unlike some furniture manufacturers who were forced to temporarily shut down operations in recent weeks due to the form shortage, we have been able to keep our manufacturing plants running and stable, albeit at reduced levels, due to proactive planning. However, the worsening situation with foam has constrained our production and, unfortunately for furniture consumers, has extended lead times for manufactured products. Despite our longer lead times, we are still advantaged versus our competitive alternatives in the market. The second big supply chain challenge is availability of ocean containers, which has been an issue for almost a year. The shipping industry is still trying to catch up with demand, but the mixture of low container inventories, congestion at U.S. ports, and increasing consumer demand due to the economic recoveries in the U.S. and Europe have extended the shortages, which are expected to continue. As a reminder, roughly 65% to 70% of our sales are derived from products that are sourced globally, so the container shortage has an outsized impact on our business. That said, we have taken aggressive steps to navigate the challenging environment to keep containers flowing as best as possible. We've doubled the number of carriers we utilize and expanded our network of freight forwarders. We are also leveraging our suppliers' networks, pursuing alternative container routes and ports, and transloading shipments. While the container situation remains highly fluid, it did improve in March, and as a result, we had a significant amount of inbound inventory in the ocean at the end of the third quarter, which gives us optimism with our ability to support higher sales late in our fourth quarter and to start our fiscal year 2022. Given the shortages in ocean containers and key materials, it's not surprising that we are seeing cost inflation. But the magnitude and frequency of these cost increases is unprecedented and unlike anything I've experienced in recent history. Ocean container rates remain more than three times higher than rates prior to COVID-19 and have spiked recently close to historical highs. Costs on several key materials in our home furnishings products have risen by as much as 60 to 100 percent, with substantial cost increases realized specifically in the third quarter. While we attempt to pass cost increases to the markets whenever reasonably possible, there is an inherent lag between when we realize cost inflation versus price increases. This cost price lag is putting considerable pressure on our gross margins in the near term. It's not clear if and when these cost pressures may subside, but we remain agile in our pricing and vigilant with our cost controls. In response, we are prudently managing discretionary SG&A expenditures to partially offset the gross margin pressures until price realization catches up to cost increases. In summary, these supply chain challenges are frustrating as they are limiting our near-sales potential and, more importantly, our ability to provide exceptional service to our customers. But our team is doing an exceptional job at problem-solving the situation and seeking out alternatives to best support our customers wherever they can. Our sales team is hungry to grow the business, and we are sprinting to ramp up capacity in all areas of our supply chain to support aggressive profitable growth. I remain confident in our ability 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.