Flexsteel Industries, Inc.

Good morning and welcome to the Flex Steel Industries third quarter fiscal year 2025 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 for you 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 has been recorded. I would now like to turn the conference over to Mike Ressler, Chief Financial 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 2025 financial results. Our earnings release, which we issued after market closed yesterday, Monday, April 21st, is available on the investor relations section of our website at www.flexfield.com under news and events. I'm here today with Derek Schmidt, President and Chief Executive Officer. On today's call, we will provide prepared remarks. We will then 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 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 gap 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 gap to non-gap measures. And with that, I'll turn the call over to Derek Schmidt.

Derek? Good morning, and thank you for joining us today to discuss our third quarter results. We continue to execute well and delivered strong results in the quarter. Our growth strategies are working and enabling us to continue our solid sales momentum as we delivered sales growth of 6.3% compared to the prior year quarter, which represents our sixth consecutive quarter of mid-single to low double-digit year-over-year growth. Encouragingly, the drivers of our growth remain broad-based. as we grew in both our core markets and in our new and expanded market initiatives. Within core markets, we continue to see significant success from new product introductions that bring increasing value to consumers and from continued share gains with large strategic accounts, where we continue to enhance our advantaged customer experience. Our focus on new and expanded markets remains an important growth contributor led by continued market penetration with our ZCliner lineup and ramping orders of new case goods product. April High Point Market begins this week, and we have an exciting lineup of new product to showcase. That includes 25 new groups spanning all areas of our business. We are expanding our ZCliner lineup with additional SKUs, adding new bedroom, dining, and occasional groups to our case goods offering, and adding a plethora of sleek, stylish products with improved functionality to our stationary and motion soft seating portfolio. New product has been an underpinning to our growth story over the past several years, and we remain aggressive in continually bringing fresh looks with improved value to our retail partners. I'm also especially pleased with our continued profitability improvement and strong cash generation. Our adjusted operating margin of 7.3% in the quarter represents our eighth consecutive quarter of year-over-year improvement and our second highest quarterly adjusted operating margin over the past seven years. The levers driving our consistent profit improvement are unchanged and working effectively and include sales growth leverage, strong operational execution and productivity, and product portfolio management. Additionally, we delivered operating cash flow of $12.3 million in the quarter and bolstered our ending cash to $22.6 million. Our strong financial position is a competitive advantage in this period of heightened economic uncertainty. As we look forward to the remainder of our fiscal year 2025, we enter our fourth quarter under a very tough economic backdrop with substantial uncertainty, following the release of the proposed U.S. reciprocal tariffs on April 2nd. In the near term, we are assessing and developing responses to three key risks. First, the impact of tariffs on our business, including margins, pricing, and supply chain design. Second, the short-term volatility in demand, largely influenced by tariff and economic uncertainty. And third, the midterm outlook for the U.S. economy, consumer spending, and ultimately, consumer demand for furniture. I'll elaborate on each of these individually, beginning with tariffs. As we've shared previously, we have completely moved out of China for finished good product sourcing, and our primary tariff exposures now reside in Vietnam and Mexico. Currently, Vietnam production supports roughly 55% of our revenue, and our Mexican operations support almost 40% of sales. While we have seemingly avoided tariffs on Mexico for now, our products sourced from Vietnam are impacted by the 10% tariffs, which took effect on April 5th and remain in effect as the two sides negotiate a new trade agreement. Should the initial 46% reciprocal tariff rate that was announced on April 2nd, but subsequently delayed 90 days, ultimately go into effect on Vietnam goods, it will have wide-reaching implications, both on Flexfield's business and the overall U.S. furniture industry. As context, Vietnam was the primary beneficiary of replacing China-made furniture after the U.S. increased tariffs on China in 2019. and is currently the largest exporter of furniture to the U.S. at 37% of furniture imports in 2024. While we have taken steps to identify alternative sources in other countries beyond Vietnam, the other major furniture exporters, like Cambodia, Thailand, Indonesia, and Malaysia, have similarly large proposed reciprocal tariffs, leaving the overall industry heavily exposed to tariff risk. Our current belief is that long-term 46% tariff on Vietnam is untenable for both countries, and that the parties will negotiate a lower rate, although the timing of such a deal is difficult to predict. Exports make up a large percentage of Vietnam's GDP, and the U.S. accounts for roughly 30% of their total exports. So Vietnam has significant incentive to negotiate. They have already expressed a strong desire to make a deal with the U.S. and took preemptive actions to cut tariffs on U.S. goods and increase commitments to purchase more U.S. goods and services. While we await clarity on a potential U.S.-Vietnam deal, we have taken several steps to minimize our short-term tariff exposure. Most notably, we have implemented modest tariff surcharges on new orders for some parts of our business effective April 9th. although these surcharges do not completely offset the 10% tariff on Vietnam imports. Furthermore, we have and will continue to look for cost efficiencies and other savings to partially offset the impact of tariffs. If Vietnam tariffs are implemented at significantly higher rates than the current 10% for an extended duration, we will take the necessary steps to realign our sourcing. While reconfiguring our global supply chain would not be easy or fast, and tariffs could have an adverse impact to margins in the short term, I do feel confident that we are prepared to swiftly optimize our network if required. The second risk mentioned is short-term demand volatility. Even prior to the recent tariff announcements, many of our retail partners noted considerably slower traffic which likely reflects the sharp drop in consumer confidence over the past several months. As a result, we've seen a slowdown in incoming orders from retailers since the tariff announcement and even some large order cancellations. While we started the fourth quarter with a healthy backlog of $78.3 million that would normally give us strong confidence in continuing our momentum of year-over-year sales growth, the risk of continued muted retail orders and additional order cancellations only grows the longer the uncertainty around tariffs persists. As a result, our forecasted range of growth for the fourth quarter is broader than usual. The third risk, and likely the most significant, is the midterm outlook for the U.S. economy and consumer spending. As a result of the new tariffs, many economists now expect significantly higher U.S. inflation for the next year, along with slower economic growth and even a likelihood of a recession if the higher proposed tariff rates are eventually implemented and sustained for an extended period. While we remain hopeful the U.S. administration can successfully negotiate with its trading partners to reduce or eliminate the reciprocal tariffs and minimize the impact on the U.S. economy, Our outlook for the industry over the next year is moderately pessimistic given the external challenges to consumer spending. As such, we are prepared to navigate multiple demand scenarios. And as we've demonstrated over the past few years, we can deliver share gains even in challenging industry conditions. To summarize, we are executing well on what we can control and remain confident that our strategies are working and we remain well-positioned to continue gaining share. I'm encouraged by our financial performance and believe that our financial strength will enable us to effectively navigate near-term market choppiness while continuing to smartly invest in key growth enablers like exceptional talent, product development, innovation, customer experience, and marketing, which are all critical to our continued industry-wide performance, and long-term shareholder value creation. I'll be back momentarily to share my closing thoughts. With that, I'll turn the call over to Mike, who will give you some additional details on the financial performance for the third quarter and the financial outlook for the fourth quarter.