Flexsteel Industries, Inc.

Good morning and welcome to the Flex Steel Industries second quarter fiscal year 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your 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 second quarter fiscal year 2022 financial results. Our earnings release which we issued after market closed yesterday, Monday, January 24th 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 would like to remind you that the comments on today's call will include forward-looking statements, which can be identified using 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 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.

I'm encouraged by our continued strong sales performance. We delivered growth of 18.9% during the quarter, despite the ongoing supply chain challenges. And it was our sixth consecutive quarter of double digit sales year over year growth. I feel we're well positioned to continue growing and gaining market share longer term. While our top line performance has been solid, We're contending with several global supply chain challenges, which are putting intense pressure on near-term profits. Most noteworthy are ancillary costs associated with ocean container logistics, such as demurrage, detention, and chassis charges. As a reminder, almost 70% of our sales are supported by globally sourced products, which require us to import thousands of containers each quarter. Given our strong growth combined with concerns about ongoing global supply chain disruptions from COVID and other issues, we imported a record number of containers in the past seven months to support our growth trajectory and strategically build inventory to protect our service levels. Unfortunately, the ramp up in imports coincided with worsening supply chain conditions as severe congestion at ports and railroads left our containers stranded for days or weeks, incurring ancillary fees. At the same time, the trucking industry is in crisis given the widening gap between demand and supply of truck drivers. For us, the lack of truck drivers to pick up and return containers has further compounded the number of days our containers are waiting and incurring ancillary fees. All this disruption has also emboldened logistics firms to increase per diem rates, in some cases by three to four times pre-COVID rates, while also tightening other terms. The result? Ancillary charges, which used to be a negligible item on our P&L, unexpectedly ballooned to over $15 million in the recent quarter. The magnitude of these costs is not acceptable going forward. and we have deployed a variety of strategies to aggressively manage these expenses, which Derek will expound on in his comments shortly. The other significant issue we're navigating is cost inflation. As I noted, global imports are a large portion of our business, and we are exposed to ocean container freight rates, which continue to climb to new highs due to supply and demand imbalances. We are also seeing inflationary cost pressures from other areas of our supply chain, including materials and domestic transportation, where we've recently experienced double-digit increases and wages, notably in Mexico, which recently increased by 22%. We are implementing price increases to pass along these higher costs to the market where we can, but the lag in price realization will negatively impact gross margins near term. Though much uncertainty remains in the global supply chain and cost conditions could worsen, we are taking actions to assertively manage costs and address margin pressures where possible to return the company to profitable levels for the remainder of fiscal 2022. 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.