Flexsteel Industries, Inc.

Good morning and welcome to the Flex Steel Industries first quarter fiscal year 2027 earnings conference call. Thank you.

and welcome to today's call to discuss Flex Steel Industries first quarter fiscal year 2027 financial results. Our earnings release, which we issued after market close yesterday, Monday, October 26th, is available on the investor relations section of our website at www.flexsteel.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 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. 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'm pleased to share our first quarter fiscal year 2027 results. Despite a challenging macroeconomic environment and significant inflationary pressures across our supply chain, our team continued to execute well, delivering solid sales growth and profitability while advancing the strategic initiatives that we believe will drive long-term shareholder value. During the quarter, net sales increased 3.2% compared to the prior year, toward the upper end of our guidance range and marked our 12th consecutive quarter of year-over-year growth. Excluding the impact of our exit from the home styles ready to assemble furniture category, sales in our continuing Flexsteel branded business grew approximately 5%. Encouragingly, our growth momentum extends beyond reported sales. Orders increased approximately 5% during the quarter, and our ending backlog grew 8.2% compared to the prior year. These trends, combined with the continued performance of our key growth initiatives, reinforce our confidence in the underlying strength of our business. Our growth continues to be driven by several complementary initiatives, including new product interactions, share gains with strategic accounts and expansion in our health and wellness category. These initiatives are performing well despite continued softness in the broader furniture market, providing further evidence that our investments in consumer insights, innovation, product development, and customer experience are strengthening our competitive position. From a profitability standpoint, our results were solid, although impacted by an unfavorable foreign currency translation loss late in the quarter. reported GAAP operating margin was approximately 6% below our guidance range of 6.5 to 7%. However, our results included approximately $800,000 of unfavorable foreign currency impact related to the strengthening U.S. dollar against the Mexican peso. Excluding the 70 basis point impact, operating margin was solid and in line with our expectations for the quarter. Given the significant inflationary pressures we're experiencing, I am encouraged by our underlying operating performance and ability to largely offset these costs headwinds to maintain healthy margins. Ocean transportation rates have nearly doubled over the past six months, while domestic transportation costs have increased substantially with surging diesel fuel prices. These pressures, along with higher costs for materials and source products, are creating difficult operating conditions for our industry. Our teams continue to respond to these challenges with urgency and discipline, identifying cost savings opportunities, improving productivity, managing our product portfolio, and implementing modest pricing actions to mitigate these pressures. While we've offset a portion of the inflationary impact, these cost pressures are expected to remain a meaningful near-term challenge. Looking ahead, our outlook for the broader industry remains measured. Consumer competence continues to be weak, and households are increasingly selective about discretionary purchases as inflation and higher energy costs consume a greater share of budgets. Housing affordability remains challenging, and rising mortgage rates continue to constrain housing turnover, an important driver of furniture demand.