Flexsteel Industries, Inc.

Hello, and welcome to the FlexTeal Industries third quarter FY 2022 earnings results conference call. All participants will be in 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 answer your question, please press star then two. Please note, today's event is being recorded. I now would like to turn the conference over to Derek Schmidt. Mr. Schmidt, please go ahead.

Thank you, and welcome to today's call to discuss Flex Steel Industries' third quarter fiscal year 2022 financial results. Our earnings release, which we issued after market closed yesterday, Monday, April 25th, is available on the investor relations section of our website, www.flexsteel.com, under news and events. I am 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 today's comments 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 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 execution in the third quarter as we delivered solid results in line with our guidance on multiple fronts. First, we grew sales by double digits for the seventh consecutive quarter, a strong indication that we are competing well. Second, we restored profitability by dramatically reducing ancillary charges from the second quarter, realizing additional pricing to offset inflationary pressures, and prudently managing SG&A expenses. While uncertainty lingers about economic growth and the trajectory of inflation, we are confident that we can sustain profitability in future periods. Third, we significantly reduced inventory without compromising service levels, and as a result, generated attractive cash flow, which enabled us to strengthen our balance sheet and reduce our bank debt by a sizable amount. These accomplishments were achieved despite navigating the supply chain and logistics challenges that continue to plague our industry. Disruptions and constraints in the supply chain have become the new normal and we remain focused on mitigating our supply chain risk and building greater agility and resilience. Investments in two additional manufacturing plants in Mexico will enable us to achieve a better balance of mix between globally sourced product and North American manufactured product. At the same time, we are growing our global supplier base both to expand capabilities and diversify countries of origin. This hybrid supply chain of mixed sourced and manufacturing capabilities across a multitude of countries provides us the ability to adjust more rapidly to changing market conditions than many of our competitors and allows us to serve our customers well even in times of disruption. Furthermore, our investments in new or expanded distribution centers brings our product closer to customers with greater logistical efficiencies, less handling damage, and a better overall customer experience. While we can't anticipate every possible supply chain disruption or surprise, the investments that we are making will serve the company and its customers well in the coming years. While I feel we're well positioned to continue profitably growing and gaining market share longer term, we are faced with two major headwinds in the near term. The first significant issue is cost inflation, as we continue to feel the cost pressures across all areas of our business, including material, domestic and global wage rates, and all forms of transportation. We've been largely successful at offsetting these cost pressures through price increases to both our retail and e-commerce channels although there is an inherent lag between the timing of cost and price realization that squeezes margins shorter term. While we continue to evaluate additional pricing actions as needed to combat inflation, we are elevating the intensity of our efforts to drive cost savings to both improve margins and maintain our pricing competitiveness in the market. Our goal is to continue to providing customers with products of superior quality, comfort, and durability at attainable prices. The other headwind is slowing consumer demand for furniture, which is being driven by several factors. First, demand is reverting to more normalized levels after an extraordinary period of pandemic-induced consumer buying for everything related to the home. We are consistently hearing from our customers that both online and retail furniture traffic has shifted downward. Although demand is slowing, our view, which is shared by many in the industry, is that consumer demand can remain above pre-pandemic conditions for the foreseeable future. The second factor influencing demand is macroeconomic uncertainty, especially regarding inflation, which has driven consumer sentiment to a decade low recently. The surge in food and gasoline prices are clearly taking a psychological toll on consumer spending habits. Third, the mix of consumer spending is shifting away from goods and back towards travel, entertainment, and services that were largely abandoned during the peak of the pandemic. This shift is likely to be evident in the coming months as summer travel picks up. For furniture manufacturers like Flexsteel, slowing demand will be further exasperated by retailer inventories, which remain stubbornly high. I had an opportunity to speak with dozens of retailers several weeks ago at our High Point Market event who consistently told me that their warehouses were full of containers of product that they had ordered six to nine months ago but just recently arrived due to supply chain delays. Until they can move some of this product, they won't have room to replenish their flexible inventories in the short term. While the near-term demand scenario depicted may seem pessimistic, we remain bullish on the long-term prospects for the industry. The next 69 months may be a bit choppy for the reasons I cited, but the longer-term horizon outlook is optimistic due to the structural factors like the purchasing power growth of millennials, strong household formation projections, and the robustness of housing demand. More encouragingly, I feel great about Flexfield's position to compete effectively and outgrow the industry longer term. The transformation the company has undergone in the past three years, combined with investments in talent, products, and processes, has positioned us to expand our addressable market and grow through new customers, new markets, and new product categories in the years to come. 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.