Ron Klosterman - President and CEO Tim Hall - CFO

Vincent Stoughton

My name is Erica, and I will your conference operator today. At this time, I would like to welcome everyone for the second quarter fiscal year-to-date operating results conference call. (Operator Instructions). Mr. Hall, you may begin your conference.

Thank you Erica. And good morning everyone and welcome to our fiscal year 2008 second quarter and fiscal year-to-date operating results conference call. We appreciate your participation this morning. Joining me this morning from our corporate headquarters in Dubuque, Iowa, is Ron Klosterman, our President and Chief Executive Officer. Today during our call, we may make forward-looking statements that are subject to risk and uncertainty. A discussion of the factors that could cause actual results to differ materially from management's expectations is contained in the company's SEC filings including the most recent 10-K and the press release dated February 7, 2008 announcing the earnings for the quarter and our fiscal year-to-date. Any forward looking statements are opinion as of now and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after today's call. I have a few comments about our press release and our quarter and year-to-date results before I turn the call over to Ron for his comments. The company's reported net sales for the quarter of a $106 million, an increase of about 0.3% over the prior year quarter. Net income for the quarter was $1.9 million or $0.28 per share compared to $1.4 million or $0.21 a share in the prior year quarter. On a six-month basis, our sales were almost flat at about $207 million. Net income for the six months ended December 31, 2007 was $3.1 million or $0.46 per share, an increase of approximately 55% from the $0.30 or $2 million that we reported in the six months ended December 31, 2006. For the six months, our residential sales were up 1.1% to $130.2 million, our recreational vehicles decreased about 1% to $30.6 million, and our commercial sales decreased 2.8% to $46.1 million. Some financial working capital; our receivables have decreased about $8.8 million from our June 30th numbers. And that decrease is really related to the timing of shipments to customers and the payment terms that we provide them. Our inventories have increased about $9.3 million from the June 30th numbers and the net increase in the inventory is due primarily to timing of purchases of finished goods to meet our forecasted customer requirements and to accomplish new product introductions. At this time, I will turn the call over to Ron Klosterman for any comments if he has. Ron?

Thank you, Tim and good morning. I would like to just provide a little bit more detail about primarily the six months year-to-date and then some general comments about what we see going forward. For the six months, as Tim indicated, our topline is about flat between $206 million and $207 million. And although we are never pleased when we don’t see topline growth considering the difficult environment that we have been working in our dirtiest furniture businesses, residential and RV in particular, we are not greatly disappointed with a flat topline at this point in time. I think it stands up pretty well against most of what other publicly-owned furniture companies have been reporting during the last half of calendar year 2007. While our topline is flat, the company has been working very hard to control our costs and utilize our manufacturing capacity. We have made efforts to tighten physical space to eliminate non-value added handling of materials in our factories and in our warehouse operations and with that we have seen some nice improvement in our margins in spite of the flat sales. Along with that, we've also had the benefit of some modest changes and product mix that have allowed us to enhance our margins slightly. In the SG&A area, those costs have gone up from a year ago, although we are not greatly alarmed at the level that we are currently running. Part of that is in selling expenses and marketing expenses and they were planned expenditures that we hade, revising some of our catalogues, the introduction on the Flexsteel side of the Wrangler program, which had some initial costs associated with that. And also in the administrative area, our bad debt expense is up from to where it was a year ago. And to further comment on that, it's really we have not had any extraordinary bad debt expenses or large expenses this year. We are really running at a fairly normal rate of loss on a historical basis. It's just that we are comparing it against the year, last year where we really had very minimal bad debt expenses in the first two quarters of our fiscal year. With those changes in margin and SG&A, we feel reasonably good with having the net income increase from the current quarter and also the year-to-date that we have had with our year-to-date net income being -- our earnings per share being $0.46 versus $0.30 a year ago, we think a very respectable increase on flat sales. So, I think it is once again a further reflection of the efforts that our management team and all of our associates here at Flexsteel are doing at controlling costs. I would like to comment a little bit really about not necessarily our fiscal results, but the calendar year 2007 -- the last four quarters for our company. And once again, what's being going on in a very difficult residential market with most public companies reporting high single digit to even double digit sales declines and an overall downturn in the recreational vehicle market between these two and our company. It represents well over three-fourths of all of our volume. During this time period of calendar year 2007, we basically had a top flat line at, if you will, $425 million in calendar year 2007 versus $430 million the year before. So we are off about 1%. I think, once again, how hard the company has been working to control our costs and take advantage and execute the blended strategy that we've put in place over the last 18 months to two years, during that year with sales being off 1% or if we want to call it relatively flat. We had net income -- I am going to talk about a number here that exclude some extraordinary items that we have during the year. And by the way, all of those extraordinary items were gains. We had e no restructuring charges or any other extraordinary negative charges to income during the calendar year. Our net income from operations, if you will, increased by about 38% from a little over $5 million to about $7.2 million or earnings during the last four quarters without any extraordinary items increased from $0.80 a share to a $1.09 or a $0.29 per share increase. So, just to give you a little background our eye is focused more on what' s happening in the current quarter and the current fiscal year-to-date, but I think looking back we all know in the businesses that we participate that calendar 2007 throughout the year has been challenging and I think we have held up fairly well. What we do see looking ahead. Well 2008 appears as if it's shaping up to be a very challenging year. There is certainly talk every recession. There is a lack of consumer competence and so on, all the things that we all read in the paper everyday. All these present strong headwinds for most of the product categories and the distribution areas that we participate in. So in general, we think we are not going to get a lot of help from the economy as a whole. Looking at our areas little bit more specially in residential furniture, we did just come back from the January Las Vegas furniture market and overall the market was nicely attended and we were pleased with our results for both our Flexsteel seating products as well as our Wynwood case goods products. We saw the customers that we needed to see. We wrote a reasonable amount of business at the market and we anticipate writing some more orders as our sales force gets back and calls on some of the larger accounts. But the product was nicely received and as I said attendance was good. On the downside at the market, as we talked with many of our dealers and most retailers, they indicated that their traffic in their stores continues to be light, maybe modest at best. And don’t know what kind of catalysts who is going to be out there that’s going to turn that around. I think it is an indication of some of the challenges that we will face certainly in the first half of calendar year 2008. For our RV business, the first six months of ’08 will certainly be difficult. Just recently several of the OEMs that we do business with and the major players in the industry, public companies have announced cutbacks in production levels and also layoff of employees. So that will certainly then as they produce less units mean that we are going to be shipping them less seating products. Hopefully, well, may be a brighter side of the general economy shows an improvement during the second half of calendar 2008. Normally, the RV industry is somewhat of a leading economic indicator, and although business in RVs go down quickly, they also recover quickly as the economy begins to turn. So if we would see some pickup in the economy in the last half of 2008, we would certainly be prepared to participate in that. Our commercial office orders are holding up nicely versus last year’s levels. And as we look ahead, we think that our business will be flat, hopefully, some modest sales means for the balance of fiscal year ’08. Our hospitality business has declined from the very robust levels that we experienced last year. And with that, we have lower backlogs than we had a year ago. And we do anticipate some lower shipment levels in that business as we look into the spring of the year versus what we experienced last year. Overall, as the economy begins to improve in the second half of calendar ’08, we believe that we are well positioned to take advantage of any upturn that might be there. We believe that we will bring some market share in the residential furniture area. We have more retail floor space, which is always critical to turning our product overrun on our dealers’ floors. We’ve maintained our product placements in the motor home and travel trailer businesses that we participate in and have actually made some gains with new placements in the marine business. So once again, if the economy turns, we believe we will well position there. And our commercial account piece continues to be solid, and offers opportunities for longer term growth. So we are not overly concerned about our position in any of the businesses that we participate in. We do have concerns about what the impact of the overall economy might be. So far we have weathered things reasonably well. And we believe that will position to do that as we continue through 2008. That concludes my comments at this time. And we would answer any questions that you may have.

(Operator Instructions). We will pause for just a moment to compile the q-and-a roster. Your first question comes from the line of [Vincent Stoughton].

Hi guys. Good quarter. My question is, how sustainable do you believe the margin improvements you guys have seen are in the future?

We’d hope that this -- the level that we are at now that we think we should be able to maintain at somewhere in that area. Obviously, if we would have some significant topline decline, it will be hard to absorb a lot of the fixed cost to jive in, in margin and maintain there. But if we can maintain our volume levels close to where they are at, we think that we should hold in there pretty good on the margin line. We are seeing some material cost increases that we’re working to mitigate, and where we can have some modest sell price increases to offset those. But frequently, there is a lag time between when you experience a cost increase and can pass them through. So there could be a little modest down drain there. But we feel reasonably confident with where we are at right now.

Okay. And in terms of industry, are you seeing at your competitors exiting business, going out of business or is there -- comparatively what is happening?

Well, and we don’t have any retail stores. We are certainly well aware of retailers that have grown out of business. On the manufacturing and distribution side, I would suspect that there is less domestic manufacturing going on. We know of companies that have either diminished or eliminated their domestic manufacturing. Some of them have actually filed bankruptcy, but they seem to emerge from bankruptcy and many of them are now sourcing product overseas and still selling product to some of the same retailers they were before. So I have a hard time judging how much of our direct competition has gone away.

And given your relative strength, you know, relative to the industry, would you consider acquisitions at this time? Are you looking at that or --

We have our eyes open. If there is something that would be a strategic fit, we’ll certainly take a hard look at it. Sometimes in a challenging business environment opportunities present themselves. So we are not closed about it, but, also when things are challenging we like to stick to our knitting and not get too carried away on what we might be doing.

Okay. Thanks guys. Great quarter.

Thank you.

Thank you.

(Operator Instructions). There are no further questions at this time.

Well, thank you for your interest in Flexsteel and with that we’ll conclude our call this morning. Thanks for listening in and we look forward to meeting with you and talking with you at the end of our March quarter. Have a good day.

This concludes today’s conference call. You may now disconnect.