Flexsteel Industries 17th Annual Midwest IDEAS Conference

Okay, we're going to go ahead and get started with the next presentation. First off, thank you everyone for joining us today here in person in Chicago, as well as those who are joining us virtually via the webcast. My name is Joe Noyons. I'm with Three Part Advisors. Up next, we have Flexsteel. Flexsteel is traded on the Nasdaq under the symbol FLXS. Many of you are probably familiar with their products, but may not be as familiar with the equity story today. So excited for you to learn more. Presenting on behalf of the company today is going to be Derek Schmidt, the CEO, and Michael Ressler, the Chief Financial Officer.

Thank you. All right. Good morning, everyone. Appreciate your interest in learning more about Flexsteel. We'll try to keep the presentation to about 20 minutes and then certainly leave ample time for all of your questions. The obligatory slide on forward-looking information, we will talk about some perspectives here. So what we're going to cover today, I'm going to give you an overview of our company strategy, specifically talk about what we believe our competitive advantage and our differentiation in the market is, what's going to continue to drive our growth going forward. Then Mike is going to come up and talk to you about our investment thesis and certainly financial outlook. So I'm going to start with the investment thesis here, and it's five-fold.

One, we're going to talk about the operating model that we built, why we've continued to outperform the market, gain share, and what gives us our confidence to continue to do that. Mike will show you that we've got 11 consecutive quarters of year-over-year growth in a fairly challenging, difficult furniture industry environment over the last couple of years. Certainly, the bullish case on the medium to long term is furniture is heavily tied to housing turnover, consumer sentiment. For those astute investors in the room, I'm sure you're all aware that housing industry has been challenged. Consumer sentiment is certainly at decades lows. There is kind of a bullish case here, certainly when those dynamics turn around, and we believe we're well positioned to continue to gain share.

Number two, we do believe we have a differentiated operating model, and we'll talk about it starts with deep consumer research, understanding targeted consumers, who they are, how they shop, what their problems are, and then taking that insight and driving relevant innovation to meet their problems better than anybody else. Then executing the operating model flawlessly to create value both for consumers and certainly our retailers. Third, Mike will talk to you about where we're at today, where we've been. There's a pretty compelling story in terms of the margin expansion, and we have confidence we're doing the right things to continue that margin expansion here in the mid and long term. Fourth, this is a model that generates a lot of cash. It's not a capital-intensive industry. We spend less than 1% of our revenues on CapEx.

We've got ample capacity to support future growth, and we've been very disciplined in terms of working capital management with opportunities to continue to improve going forward. Lastly, business generates a lot of cash, and we're deploying it responsibly. Mike will talk about our capital allocation priorities, but we do have a demonstrated history that if we can't invest it with a return above our cost capital, we will responsibly return that capital to shareholders. So that's the investment story. A little bit of a visual. You see here 11 consecutive quarters of growth in the green. A little bit of slowdown here recently, largely due to macroeconomic factors. In March, when we went to war with Iraq, we saw retail traffic and consumer shopping significantly dip following that, and it's been sluggish since.

I would attribute the slowdown to macro factors, still feel really confident about our internal strategy and prospects going forward. You see the margin story in the middle, where we came from, where we're at, 7.5% operating margin today. We believe there's still room for expansion. Ultimately, the results we've delivered have translated into shareholder value. So you see the stock returns over the last year, last three years. We're certainly pleased with the stock's performance, but we believe we've got a lot of value to create for shareholders going forward. In terms of our company, you see the financial numbers up here. I think attractive financial dynamics. Even though we're relatively small at a half a billion dollars of sales, we are one of the top 10 manufacturers.

We do business with a very broad set of distribution, over 2,700 storefronts, primarily sell through the U.S., and our geographical breadth largely resembles the U.S. population. Mike will talk a little bit about, we do have a hybrid sourcing model. So we manufacture our own products, and we source our products. We've learned from the challenges and tribulations through COVID, and we've built a much more agile, resilient operating model, I think, to navigate future disruptions if they were to occur. In terms of what our business looks like, you can look at it from three dimensions, our products, our sales distribution, and consumers we target. From a product perspective, you see that 80%+ of what we sell is squarely in the living room. It's been our bread and butter. It's been our core. There's an opportunity both to continue to innovate and grow.

I think our core living room collection, more importantly, we've got opportunities where we're under-penetrated and feel like we can gain share. So a couple areas here, this health and wellness, you'll see prospectively, we're estimating to be about 12% of our revenue. Three years back, it was zero. So a lot of our effort around strategy and how we differentiate is focused on this health and wellness. You'll also see bedroom and dining. That's what we call case goods. It's an area where we have a right to win. It's a challenge category, but we're making strides. We believe it has long-term potential and strategic relevance to us. There's a couple other categories there to the right-hand side.

Less about really internal organic growth and potentially represents some opportunities for us to think about future acquisitions. The point here is, while we've got a concentrated position in the home, there are opportunities for us to expand, certainly our wallet share of where people spend money in their homes. And we've got the distribution and the retail relationships to leverage in order to position ourselves in those categories. As you start to think about how we go to market, and how we sell our products, we do not sell direct to consumers. We do have our own sites, but that's more to present our brand and build brand awareness. About 95% of our sales go through what we call the independent retail channel. Depending on your geography, if you wanted examples, I can share them with you later. But this has been our core.

Opportunity for us here is, this is an area where there's a lot of players, but again, there's consolidation happening. And where we've been successful for the last several years and we've got lots of opportunities is there's big regional players here that understand how the landscape is changing. They started with brick and mortar, but they're evolving their digital capabilities. They're engaging consumers. They're building out, certainly, their e-commerce capabilities, and they're formidable players. And we're building a differentiated value proposition for how we service these large regionals, and we're gaining share, as a result. So they're growing, and we're growing even faster. There's also an opportunity for us to broaden, certainly, our distribution footprint beyond independent retailer. We do have relationships with Amazon, Wayfair, Costco, Macy's. Again, this is a channel that there's growth to be had.

It's important for our brand to be represented to build broader consumer brand awareness. But we're after long-term sustainable profit growth. As we look at this channel, we're balancing certainly how fast we grow and still maintain the profitability expectations that we want for the business going forward. As you start to think about our positioning, we are not a low-cost brand, but we're also not a high-end, designer-driven brand. Where we compete is really just a sliver above the middle of the market. So premium branded, we're known for our superior quality, comfort, durability, and increasingly, we're bringing more innovation around functionality and helping consumers solve relevant problems. The way we go to market, primarily with our Flexsteel brand, but we also have and will continue to develop, I think, relevant sub-brands that are tuned and tailored to meet specific consumer needs.

For example, up there you'll see a brand called Zecliner. That is specifically a sleep solution targeted towards the 7% of U.S. adults that don't sleep regularly in their bed at night. You'll see a brand up there called Zen. That is around restorative. So think about individuals who maybe they're fitness geeks. They run marathons. They want a really attractive piece of furniture in their house, but they want something that helps them restore themselves. So think about cooling, heat, massage. We'll talk about, hear a story around how we're identifying these unmet, underserved consumer needs, and how we're innovating and then building sub-brands around these potential solutions. So that's where we're positioned and how we go to market. A little bit about our supply chain. We have this hybrid supply chain. We source about two-thirds of our product globally in Asia, primarily Vietnam.

We have no exposure to China. At the same time, the other third of our business, we actually manufacture through our own factories in Mexico. What we learned through COVID is, have as much agility and resilience as possible. So having a diversified set of suppliers in Asia, combined with our own factories in Mexico, gives us at least that ability to maneuver and optimize our supply chain, if there's future disruption. Then we have warehouses and distribution centers across the U.S. to support physical distribution of our product to all geographies. The executive team, what I'll tell you is, stable, well tenured, good mix of experience, both within furniture as well as outside furniture. So this is a team that's highly results-oriented, acts with urgency, and really proud of the team we put together and what we've been able to accomplish.

When you think about how we operate, our values, you see them up here, there's six of them. You'll see consumer-driven. You'll see innovation, results-driven, agility. These things, again, guide how we operate as a company and are the foundation of, I think, our current success and our future success. We don't talk a lot about all the good things we do, but I think it's important, certainly as investors, for you to understand that Flexsteel is committed to doing business responsibly, whether that's using sustainable materials, recycling, contributing back to our community, certainly keeping our employees safe. There's a lot of things that we do. It's important that we deliver results, but we do it the right way. Okay? Next, I'm going to talk a little bit about our operating model, why we believe it's working, why we believe it's differentiated.