Flexsteel Industries Lytham Partners Fall 2026 Investor Conference

All right. Hello, everyone, and thank you all for continuing to join us throughout the day here at the Litham Partners Fall 2026 Investor Conference. Again, my name is Robert Bloom, Managing Partner here at Litham Partners, and up next, Derek Schmidt, Chief Executive Officer; and Michael Ressler, Chief Financial Officer at Flexsteel. We'll be taking us through the company slide presentation. As a reminder, the company trades under the ticker symbol FLXS on the NASDAQ. Derek and Michael, thanks so much for participation today. The floor is all yours.

All right. Thank you, Robert. Good day, everyone. I'm Derek Schmidt, President and CEO of Flexsteel Industries. Before we begin, our discussion today, we'd like to remind you that our dialogue does include forward-looking statements that are subject to risks and uncertainties as outlined in our Safe Harbor Statement and SEC filings. So we encourage you to certainly review those materials as our actual results may—different material—different materially from what we discussed today. From an agenda perspective, I'll first provide a high-level overview of our company and our strategy, and then Mike Ressler, our CFO, will then cover the components of our investment thesis as well as our financial outlook. Now, to start, I'd like to first summarize our investment thesis, which is really based upon five elements. So first, I think you'll see today that we've got a demonstrated track record of gaining share and feel like we're well positioned to benefit from a potential industry recovery. Second, you'll see that we've got a differentiated operating model, and it's really anchored around a deep understanding of the consumer which drives relevant innovation, which is then brought to market effectively through what we believe is an advantage execution model. I think you'll also see that we've successfully driven margin expansion over the past several years, and we feel we've got a clear path to continue.

That improvement in the years to come. You'll also see that we've got a relatively low capital intensity model and a disciplined working capital management, which has enabled us to drive strong consistent free cash flow generation. And lastly, you'll see that we're also disciplined capital allocators. We allocate capital productively when we can generate returns above our cost of capital, and where we have excess cash, I think we've demonstrated that we'll return capital effectively to shareholders. So we'll dive in. Mike will actually dive in a little bit deeper on each of those slides, but I wanted to give you an overview. I think, you know, this next set of charts clearly outlines in a visual manner what we've talked about. The chart on the left hand, with the green bars, shows that we've got 11 consecutive quarters of growth. If you were to look at the industry during this same period of time, you'll see the majority of these periods were actually negative from an industry perspective. So we've gained share, we feel good about our capability, to do that going forward. Growth has flown here recently largely due to the uncertainty due to the Iran war, certainly some inflation from higher diesel, from fuel costs, et cetera.

But again, we feel good about our growth trajectory going forward. At the same time, you'll see the blue bars, over the last four years, we've meaningfully expanded our operating margins, and when you put together the share gains along with that margin expansion, we believe we've driven some attractive shareholder returns. You can see the results in terms of share appreciation over the last year, three years, and certainly we're committed to continuing to put up great results and create value for our shareholders. As you start to think about a company from a high-level view, on the left-hand side you'll see our financials. So a little less than a half a billion of sales is what we finished last fiscal year, 34 million in adjusted operating income at 7.5% operating margin. We generated meaningful cash, 50 million dollars almost, in free cash flow, strong balance sheet at the end of the period with 17 million of cash on the balance sheet, kind of no bank debt. And feel good about certainly our financial strength and our ability to continue to navigate what I think in the short term is going to be a difficult kind of industry environment.

Although we're only a half a billion in sales in this industry is 120 billion kind of plus, we are a top 10 manufacturer. It gives us certainly economies of scale that create an advantage. We are widely distributed throughout the United States, through roughly 2,700 different storefronts, and we'll talk to you about the expansiveness of our sales distribution. We'll also talk about our operating model. And the fact that the way we support our supply chain is a hybrid kind of formula, that consists both of our own manufactured manufacturing capabilities as well as very strong partners that we source from. In terms of thinking about our business and what it looks like, I'm going to share perspectives from three different dimensions. First, when you think about our products, and we think about our products in the form of where are they going in the house and what functionality they provide, you'll see that we have a very strong leadership position within the primary living area. Think about your family room, living room, about 83% of our sales today kind of our targeted at that space in the home. One area that's of significantly growing and we believe has tremendous amount of potential is health and wellness.

It's not necessarily a room in your house, but it's an area where consumers are increasingly they value their health and wellness, and so we're finding again, unmet underserved consumer needs, and we're bringing relevant solutions in the form of furniture, and we're having success. You'll also see there's other there's bedrooms and dining where we've got a significant or relatively insignificant portion of our sales, but we've made meaningful investments around product, marketing, and we believe we have the potential to grow significantly our presence in those rooms in the home. So again, we've got a leadership position in one space, but we clearly have an opportunity to expand our penetration in other areas of the home beyond the primary living room. When you think about our sales distribution, we do have strong broad omnichannel sales distribution today, but we are heavily concentrated in independent retail. So the good news there is we've got 4,400 different partners across the US, strong brand awareness and affinity, we are having success with large regional players that we call strategic accounts. We have developed a value proposition for them that we believe is unique and is allowing us to grow exponentially faster with those retailers.

At the same time, we want to make sure that our brand is everywhere where consumers want to buy furniture, both today and the future. And that consists of national accounts that are growing their share and growing their importance with the consumer. So that includes large kind of e-tailers like Amazon, Wayfair, as well as Big Box, retailers like Costco and Macy's. So again, again, this is an opportunity for us to continue I think to grow with leading independent retailers, but at the same time grow our presence with national accounts. And then lastly, I want to talk a little bit about how the Flexsteel brand and our portfolio brand is positioned. When you think about the furniture market, we clearly play in the middle as it relates to price points. But I would describe our positioning within the middle at the upper end, and we really we compete on superior comfort, quality, and durability. And that's what the Flexsteel brand is known for. At the same time, I'll talk about we're doing increasingly more consumer research. We're identifying specific consumer needs, and we're building sub-brands underneath kind of the Flexsteel brand umbrella that are tuned and tailored to meet those specific consumer needs.

So sub-brands like Pulse Decliner Zen, we'll talk a little bit about those, but the way we go to market is through brands and brands that are tailored to specific consumer needs, and we believe that methodology allows us to compete and win effectively. Now, I mentioned earlier about our operations. We do have a unique hybrid operation model where see on the right-hand chart, we have to have our own domestic operations. So we've got three manufacturing facilities and we're as Mexico. That actually produced about a third of what we sell. And then we have distribution capabilities. You'll see here DCs in Pennsylvania, Indiana, Kansas, and then transfer points in other areas of the country so that we can actually service customers throughout all kind of 50 states effectively. At the same time, we've got really strong capable partners primarily in Asia, that we also source from. The majority of that is coming from Vietnam. And then having this dual capability of both global sourcing capabilities in North American manufacturing distribution, really has allowed us to really be more agile and responsive to external changes and potential disruptions in our supply chain. So we see this really as a competitive advantage both now and the future.

When you think about our team, what I will tell you is we've got a phenomenal team. They bring diverse experience both within the furniture industry and outside of the industry. I also highlight the fact that this leadership team is stable. We've been together the majority of us for four or five years, so again, very results-driven executives. It's stable. It's effective, and I feel like again, it's really part of our competitive advantage in what's allowing us to win. We are a values-driven company, and our values really kind of shape how we operate. So I'll talk about strategies here in a minute. But the values that we emphasize are we've got to be consumer-driven. We have to be agile. We're results-driven. We think about empowering our people, really executing as one team, and then constantly thinking about innovation and how we create solutions that solve real consumer problems. And I think it's those values, again, that allow us to deliver and execute our strategies extremely well. At the same time, I think it's important for us to convey that we are also a responsible business partner. So we're make sense economically. We're doing the right things from a sustainability, responsible material sourcing, recycling.

We support our communities and certainly we keep our employees safe. So we deliver results, but we deliver it in a responsible way. That considers all of our various stakeholders. Now, next I want to turn to our strategy. And our strategy can probably be summarized through kind of four strategic pillars. As I mentioned earlier, it starts with the consumer. We're spending more and more research and investment dollars around understanding consumers, their needs, their unsolved problems, and again, we're using those insights then to drive industry-leading innovation that solves real consumer problems that they're willing to pay for. And once we have those innovations, we have a disciplined execution model that we believe delivers those solutions with the right service level, speed, and financial outcomes that drive value. And at the end of the day, we talk about probably our most important pillar is exceptional people and culture because the other three don't happen. Without having very talented people that are empowered and can make a difference every single day. Now, I talked a little bit about differentiation, but again, the way we position the Flexsteel brand, we are really delivering value through unmatched quality comfort and durability.

And we tell that story in a powerful way through innovation and compelling design. One of the examples I'll give you several years ago, we did research and we discovered that 7% of US adults can't consistently sleep in their bed at night. And that might be due to a host of different issues: sleep apnea, acid reflux, health issues, et cetera. And where do they sleep? They sleep in their couch or their recliner, which was never designed to sleep in comfortably. And so we use that insight then to go back and actually create and design a chair that was specifically built to sleep in comfortably for eight hours plus a night. And we call that Z-Cliner. We put some really powerful marketing around it, and we're having tremendous success kind of with this product. And this is a great example of how we're trying to replicate this through a lot of the other sub-brands that you noted earlier. But this is a great example of how we go to market and how we try to differentiate ourselves through the consumer research and innovation. Now, we also have clarity around sources of growth. So we've got a balanced portfolio of growth initiatives that both encompasses where we operate today, our core markets, but also positions Flexsteel to grow in new or expanded markets.

And visually, you see here that we can think about core and expanded markets through three dimensions. Product categories, sales distribution, and consumers. So the exciting thing is that our growth isn't dependent on one area. We actually have a very finite set of exciting growth initiatives and we've been able, I think, to pull these levers and drive the consistent growth of the last or 11 consecutive quarters that we have. With that, I'm going to turn it over to Mike. He's going to talk about our investment thesis.

Thanks, Derek. So overall, the investment thesis is relatively straightforward. So it starts with Derek highlighted our ability to outgrow the market and gain share. That's really been driven by the differentiated operating model that Derek's built out, centered around understanding consumer, what are those unmet needs, and then bringing innovative solutions to market to address those needs and then operating at an exceptional level across kind of the entire value chain. Through that process, in addition to growth, Derek highlighted margin expansion potential. So we've significantly improved margin. Over the last several years, we believe that we have clear levers to what it's going to take to continue to expand margins in the future. And then when you add sales growth leverage, operating margin, as well as kind of disciplined working capital and capital discipline, generate strong cash flow. And then that gives us flexibility to look for opportunities to reinvest back in the business and/or return excess capital to shareholders, which we'll go into each one of these areas. So what gives us confidence that we're gaining share and that we are outperforming the market? This slide kind of summarizes it. But if you look at the chart on the left, US retail furniture sales year over year growth, you can see since the COVID furniture demand boom that the overall market's been pretty challenged.

Despite that, the chart on the right, which you've seen earlier, just illustrates we've been able to deliver 11 consecutive quarters of growth. So we believe that our operating model's working and we're well positioned to continue to outperform the market even if condition remains challenged or if we're well positioned if we see some type of improvement in the industry. Near term, we're not expecting a significant improvement in industry conditions, but long term, we are bullish on the prospects for an industry to improve. And there's kind of two things. Starting with housing. So housing's been relatively depressed since the COVID demand boom with existing home sales at 75% of pre-COVID level. There's a lot of pent-up demand there. And we're expecting at some point in time that demand will get unleashed. And when there's housing churn, it creates churn for furniture purchases and we're well positioned there. The second one is just when you look at the demographic of consumers. So as younger consumers enter different life stages and they're purchasing power increases, we believe we're well positioned to meet those evolving consumers and service them. From an operating margin perspective, you can see we've improved operating margin from just above 1% in fiscal year 2022 to 7.5% in our most recent fiscal year in, which ended in June at 7.5%.