Flexsteel Industries, Inc.

Good day and welcome to the Flex Steel Industries first quarter fiscal year 2026 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal 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 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 first quarter fiscal year 2026 financial results. Our earnings release, which we issued after market closed yesterday, Monday, October 20th, 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 and then we'll 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 using words such as estimate, anticipate, expect, and similar phrases. Forward-looking statements by their nature involve estimates, projections, goals, forecasts, and assumptions. 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 GAAP measures. The press release, available on the website, contains the financial and other quantitative information to be discussed today. And with that, I'll turn the call over to Derek Schmidt. Derek?

Good morning, and thank you for joining us today. I am pleased to share with you our first quarter results. We continue to execute well and delivered strong sales growth and sizable year-over-year profit improvement in the quarter. While industry demand remains lackluster due to challenging macroeconomic conditions, we continued our growth momentum and delivered 6.2% sales growth in the quarter, which represents our eighth consecutive quarter of year-over-year growth. Encouragingly, the sources of our growth remain diverse and balanced across our core market initiatives and new and expanded market efforts. In our core, new products and share gains with strategic accounts continue to drive growth. In new and expanded markets, Growth is primarily driven by ramping sales in both our case goods and health and wellness product categories. We feel confident that our growth strategies are working and will continue to drive future sales increases propelled by focused investments in consumer research, new product development, innovation, and marketing. While I'm pleased with the success of our consistent top-line growth over the past two years, particularly considering industry headwinds, I'm also especially pleased with our progress driving meaningful year-over-year profitability improvement. Operating margin was 8.1% in the quarter, up 230 basis points compared to 5.8% in the prior year quarter, and represents our 10th consecutive quarter of year-over-year adjusted operating margin improvement. The levers driving our consistent profit improvement are unchanged and working well. and include benefits from sales growth leverage, effective cost control from strong operational execution and productivity gains, and disciplined product portfolio management, including improved margin profiles from new products. As we look forward to the remainder of our fiscal year 2026, our outlook for industry demand in the broader economy is restrained. While the U.S. economy remains resilient, and the prospect of additional Fed interest rate reductions and the relatively strong labor market, albeit slowing, provide some optimism for economic growth, a weak housing market combined with shaky consumer confidence are expected to be headwinds for the industry near term. Based upon feedback from our retail partners, weekly consumer traffic and sales were especially uneven during the recent quarter. suggesting that consumer sentiment remains fragile given mounting concerns about inflation and slowing employment growth. Additionally, tariffs present a major risk to U.S. furniture demand near term. While we successfully took pricing and cost reduction actions to largely mitigate the adverse impact of the reciprocal tariffs announced in August, On September 29th, the White House issued new and larger Section 232 tariffs on imported timber, lumber, and their derivative products, including upholstered furniture. Although the new Section 232 tariffs will not stack on top of the existing reciprocal tariffs, they will be larger and have a broader impact on Flex Steel's business than the previous reciprocal tariffs. For context, In recent quarters, the sourcing mix of our sales was roughly 70% from Asia, largely from Vietnam, which are mostly subject to a 20% reciprocal tariff, and the other 30% of our sales mix was manufactured at our facilities in Mexico and was exempt from tariffs, as our product is USMCA compliant. Under the new Section 232 tariffs, there is no exemption for USMCA compliant product So all of our upholstered furniture, sourced both from Vietnam and Mexico, will be subject to the new 25% tariff effective October 14th, which will subsequently increase to 30% at the end of the calendar year. Over 90% of our sales are currently classified as upholstered furniture under the harmonized tariff schedule code. So most of our portfolio will eventually be subject to the 30% tariff. While the new Section 232 tariff will have a dramatic impact on Flex Steel's business, it is also expected to be highly disruptive to the entire U.S. furniture industry. While sourcing mix between furniture imports and domestic production varies by product category, it is generally estimated that imports comprise 65 to 70 percent of total U.S. furniture consumption. The availability of skilled labor in the U.S. produced furniture is already lacking, so scaling domestic production will be challenging near term, in our opinion. As such, we anticipate the tariff change to result in broad price increases for furniture in the U.S., dampen consumer demand, and compress industry margins in the short term for suppliers, manufacturers, and retailers. As a company, we've had to adjust to major external shifts several times over the past few years. For example, when 2019 tariffs were implemented on China, when upheaval occurred in global supply chains during the COVID pandemic, and when furniture demand dived following a remarkable pandemic-driven surge. As we've demonstrated in the past, our company is agile and ready to respond to major shifts in market dynamics while remaining steadfast in our execution of our growth strategies and key investments to continue gaining market shares. We entered this tumultuous period with a solid balance sheet, healthy profitability, and a strong competitive position, and we are well situated to navigate this challenging environment while continuing to invest and gain share. While we're hopeful that either Vietnam or Mexico or both reach trade agreements with the U.S. that lessen the tariff exposure to furniture, we are aggressively pursuing a multi-pronged response plan to mitigate as much of the tariff impact on our business as possible. In the short term, we increased tariff surcharges on our impacted products this month to partially offset the increased cost of tariffs. We were thoughtful in our pricing decisions to maintain our competitiveness versus other market alternatives and to minimize demand declines. We are also prudently pulling back on discretionary expenses while still funding our most critical growth investments. In the midterm, we are evaluating larger structural cost reduction opportunities and alternative supply chain sources. In the near term, we expect the net impact of the tariff change and our subsequent pricing response to adversely impact demand and dilute margins. However, I'm confident that we will identify and execute the right strategies in the mid to long term to continue our current trajectory of profitable growth and shareholder value creation. Despite the near-term turmoil from tariffs and challenging industry conditions, I remain optimistic about the fundamental drivers of long-term industry growth and Flex Steel's position to continue gaining share. We remain committed to our existing strategies and investments to pursue new growth, many of which will be highlighted at the upcoming High Point Furniture Market, which kicks off this week. We will be showcasing another impressive round of new product introductions at market, In total, we're introducing 26 new product groups and 226 unique SKUs. New product has been a significant catalyst for our recent growth, and the magnitude of introductions in this market, combined with successful new product launch at April market, will put calendar 2025 on track for a record year of new product activations. There are many elements driving our new product success, but it starts with our increased investment in consumer insights. We listen closely to consumers, and we leverage that feedback to ensure every design is shaped by real insights and proven demand. That's why our furniture connects with everyday life. It's comfortable, durable, and stylish in ways that matter to consumers right now. Those consumer insights are also driving our innovation, and there will be several new innovations revealed this week at market. We're introducing our new sub-brand, Pulse, which offers power motion furniture with a built-in immersive sound system that transforms seating into a high performance entertainment experience. With precision tuned theater quality audio and synchronized vibration integrated directly into the furniture, Pulse surrounds you in sound that you can feel. Pulse was specifically developed with innovative engineering to differentiate our solutions through superior sound quality, ease of wireless connectivity, and dynamic acoustic distribution to optimize sound by application, such as movies, music, and gaming. We also continue to innovate in the health and wellness category, where our research shows growing demand for premium, wellness-oriented seating. While we continue to expand our ZCliner lineup of solutions to address consumers' need for improved sleep, we are expanding beyond sleep to innovate in other health and wellness areas, such as restorations. We're introducing our new Zen series, which will lead the way in creating a sanctuary in the home. People today are pulled in every direction, work, family, constant noise, and they rarely have a space to reset. What makes Zen unique is that it looks and feels like a beautiful living room furniture while giving consumers a spa-like experience at home. It's our way of helping consumers find their Zen, a perfect balance of everyday style and restorative wellness. The Zen series will bridge the gap between wellness and design, positioned between massage and traditional recliners. Zen provides consumers with a place to reset in their home with a perfect blend of comfort, style, and built-in wellness technologies like heat, massage, and ventilation. Lastly, we remain committed to growing our case goods business through our Statements sub-brand, positioned for its superior quality, design, and durability. Consumer research has validated these attributes as top considerations when purchasing case goods furniture. We're introducing seven new collections at market, all developed with distinct on-trend designs and unique features, including lighting, discrete power, hidden casters, and custom finishes and hardware. In addition to our investments in consumer insights, innovation, and new products, we are also elevating our success through powerful marketing in three distinct but complementary ways. First, we are using our consumer insights to tailor marketing positioning and messaging to support product launches targeting specific consumer needs. We've seen great success in retail adoption and consumer engagement from these efforts. Second, we are investing in driving consumer traffic to the stores of our retail partners. Flexsteel has invested in paid search, paid social, and email demand generation activities to engage consumers and direct them to retail stores. We are partnering with our retailers in unique, value-added ways to capture more consumers and mutually increase sales. And third, we're investing to improve the in-store brand experience. As we drive more consumers to retail stores, we are devoting time and energy to offering stronger point-of-sale materials to support the in-store experience. Our point-of-sale items clearly display our brand and value proposition, helping educate consumers and guide their shopping journey. As a result, we've seen exponentially higher sales of products supported by our point of sale materials versus those that aren't. To summarize, I'm proud of our team's strong start to fiscal year 2026, encouraged by our outstanding execution of our growth strategies and investments, and confident in our ability to navigate the challenging conditions with tariffs near term to ensure we maintain our long-term trajectory of profitable growth. 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 first quarter and our financial outlook.