Flexsteel Industries, Inc.

Good day and welcome to the Flex Steel Industries fourth quarter fiscal year 2022 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 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 a touch tone 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 Alejandro Huerta, CFO. Please go ahead.

Thank you, and welcome to today's call to discuss Flex Steel Industries' fourth quarter and fiscal year 2022 financial results. Our earnings release, which we issued after market closed yesterday, Monday, August 22nd, is available on the investor relations section of our website at www.flexsteel.com under news and events. I am here today with Jerry Dittmer, President and CEO, and Derek Schmidt, Chief Operating 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. 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'd like to start by welcoming Alejandro. His addition to our team aligns with our strategic focus of building talent across the organization, and we are glad to have him as part of the FlexDeal team. We performed solidly in the fourth quarter, given challenging conditions, which included slowing consumer demand, exasperated by a glut of retail inventory, continued inflationary pressures, most notably fuel and intensifying competitive pricing pressures. I am encouraged by the fact that we adjusted to these challenges and were able to deliver sales for the quarter of $124 million, which was within the range of our guidance of 120 to $135 million. Why sales have slowed revenue from our ongoing residential furnishings business is still ahead of pre pandemic levels. In addition, we prudently managed our spending to deliver operating income of $3.6 million for the quarter. While near-term challenges may create choppiness in our first half fiscal year 2023 earnings, we remain committed to delivering long-term profitability. Reflecting on fiscal 2022, it was a year of significant challenges but also many successes. We navigated major disruptions in the supply chain, quickly responded to extraordinary ancillary shipping charges, and adapted to surging inflation while making important strides in advancing our strategic agenda. I am very proud of and grateful to all our dedicated employees around the world. Their agility, resilience, and commitment led to us achieving record home furnishing sales of $544 million an increase of over 13 percent from the previous record set last year. And while full-year profit results fell short of our expectations due to the exceptionally high ancillary shipping costs and inflationary pressures, I am encouraged by our ability to return to positive operating income in the second half of the fiscal year. We remain committed to focusing on profitable growth over the long term. Notable achievements in advancing our strategic agenda included continued investment in our digital abilities and product content to grow our omnichannel sales capabilities. At the same time, we continued to invest in new and innovative product development. We believe these investments will allow us to effectively compete across retail and e-commerce sales channels by offering high-quality products consumers want with an ability to conveniently purchase them where and how they would like. We made meaningful investments in our capacity and supply chain by opening a third manufacturing plant in Juarez, Mexico. In addition, we opened a new distribution center in Greencastle, Pennsylvania, to service our customers in the Northeast and created stronger partner alignment to support both domestic and global transportation. The capacity and supply chain investments allowed us to improve our customer service levels, reduce lead times to three to five weeks, which are advantaged compared to many of our competitors, and build a solid foundation for the future. While I am encouraged by our progress and the foundation we have created, there are a few major headwinds that we face entering fiscal year 2023 which may create a drag on sales and profits in our near-term outlook. One significant headwind is slowing consumer demand for the furniture, which we believe is driven by several factors. First, in the fourth quarter, we began to see consumer demand 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. The second factor influencing demand is macroeconomic uncertainty, especially regarding inflation and fears of an economic recession, which have driven down consumer confidence. The surge in food and gasoline prices are clearly taking a toll on consumer spending habits. At the same time, Actions taken by the Federal Reserve to combat inflation have led to an increase in home mortgage rates, slowing the purchase of new homes, as well as tempering the pace of new construction, which are often a catalyst for purchasing new home furnishings. 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. For furniture manufacturers like Flexsteel, slowing demand is being further exacerbated by retailer inventories that remain stubbornly high. Many retailers have warehouses full of inventory ordered to support the post-COVID demand that was delayed due to supply chain disruptions. Until retailers are able to move some of this product, they won't have room to replenish their Flexsteel inventories in the short term. Another significant headwind is cost inflation as we continue to feel cost pressures across all areas of our business, including materials, domestic and global wage rates, and all forms of transportation. While ocean container rates have begun to fall, they are still well above historical rates, and the decline is being offset by rising domestic transportation costs due to surging diesel prices and a shortage of truck drivers. We've been largely successful at offsetting these pressures through price increases to both our retail and e-commerce channels, but as consumer demand falls and retail inventories remain high, our pricing power may be squeezed as we look to maintain competitive pricing in the market. As always, our goal is to continue providing customers with products of superior quality, comfort, and durability at attainable prices. Finally, Disruptions in the supply chain and logistics have eased somewhat but continue to be a challenge for our industry. We have adjusted to overcome many of these challenges and will remain focused on mitigating our supply chain risk and be ready to adapt quickly to changing market conditions. While current conditions present some near-term challenges, I remain encouraged by the steps we have taken to create a foundation for growth and we are committed to profitably growing the company over the long term. Now I'll turn the call over to Derek to discuss our operational priorities before Alejandro takes you through further details of our financial results. I'll be back at the end of the call with some closing comments on what we see ahead.