The Dixie Group, Inc.
Q1 2020 Earnings Call Transcript

Published: 19 May 2020

[Operator:]

Good day and welcome to The Dixie Group, Inc. 2020 First Quarter Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to Chairman and Chief Executive Officer, Daniel Frierson. Please go ahead.

[Daniel Frierson:]

Thank you, Michelle. Welcome to our first quarter conference call. I have with me Allen Danzey, our Chief Financial Officer; and Jon Faulkner, our Vice President of Strategic Initiatives. Our safe harbor statement is included, by reference, both to our website and the press release.For the first quarter of 2020, the company had net sales of $80,578,000 as compared to $88,606,000 in 2019. For the first quarter of 2020, net sales were down 9.1% as compared to the same quarter in '19. For the first quarter of 2020, the company had a loss from continuing operations of $2,612,000 or $0.18 per diluted share as compared to a loss of $6,641,000 or $0.42 per share in the first quarter of '19.Our residential product sales were down 7.3% for the quarter with the industry, we estimate, being down mid-single digits as compared to the prior year. Our residential sales were the most impacted through our mass merchant sales channel with relatively stronger sales from our traditional flooring retailers until the crisis hit. Despite the impact of the COVID-19 pandemic, our residential hard surface sales were still up over 80% from the first quarter of last year. All brands in specialty retail were strong. Hard surface sales were gaining a lot of momentum in both TRUCOR and Fabrica Wood.Our commercial business in the first quarter was down 12.9% on a year-over-year basis, while the industry, we believe, was down in the low-single digits for the same period. Our commercial modular tile sales were more impacted than our broadloom sales for the period. Our commercial hard surface sales were up over 40% for the period relative to a year ago.The first quarter was progressing well until we began to feel the impact of the COVID-19 outbreak. Since mid-March, all markets have been impacted and all customers have had to make changes in how they do business. It has required that we focus more closely on conserving cash, continually adjusting running schedules to better service customers, while reducing inventories. At the same time, we've had to significantly reduce costs and defer or eliminate some initiatives until the timing of the recovery is more predictable.Our organization has done an excellent job putting together plans to ensure the health and safety of our associates. As outlined in our press release, we have taken the appropriate actions at all facilities to provide a safe workplace.I will now ask Allen Danzey to review our first quarter financial results, after which I will discuss in more detail the impact of COVID-19 on our current business.Allen?

[Allen Danzey:]

Thank you, Dan. As Dan commented on earlier, our net sales in the first quarter of 2020 were $80.6 million. This was a 9% decrease from the 2019 first quarter net sales of $88.6 million. We believe we began seeing the negative sales impact related to the COVID-19 pandemic in mid-to-late March.Our commercial product sales were down 12.9% with commercial soft surface product sales down 16.5%, while the industry we believe was down in the single digits. Our residential product sales were down 7.3% with soft surface product sales on residential being down 11.8% with the industry we believe being down in the mid-single digits.Gross profit for the quarter was 23.6% of net sales compared to 21.4% in the first quarter of 2019. In 2019, our cost of sales was negatively impacted by higher variances in our manufacturing operations. Our 2020 cost of sales reflected operational improvements as we expected as part of our restructuring plan in 2019 and included in our 2020 business plan.Selling and administrative costs in the first quarter of 2020 were $1.3 million lower than the first quarter of 2019. Due to the lower net sales in 2020, selling and administrative expenses as a percent of net sales were higher at 25.3% in the first quarter of 2020 compared to 24.4% in the first quarter of 2019. The reduction in selling and administrative expenses was the result of lower sales activity, reductions in planned sample activity, and other cost reductions. The operating loss in the first quarter of 2020 was $1.3 million compared to a loss of $4.9 million in 2019.Our total debt increased by $2.3 million from the end of fiscal year 2019, but it has decreased by $42.1 million when compared to the first quarter of 2019. As a result of this decrease in debt, interest expense in the first quarter was down 25.3% as compared to the first quarter of 2019. This decrease in debt and interest expense year-over-year is primarily the result of better use of working capital and the sale of our California facility in the fourth quarter of 2019. Diluted earnings per share from continuing operations was negative $0.18.Turning to our balance sheet. At the end of March 2020, receivables increased $1.1 million as compared to 2019 year-end balance. The increase in receivables was the result of higher sales volume in the month of March as compared to December and the low seasonal balance at the end of December. Our inventory increased $2.7 million in the first quarter of 2020 from the seasonal low at the end of 2019. Capital equipment acquisitions, including those funded by cash and financing, was $0.7 million in the first quarter 2020. Depreciation and amortization during the quarter was $3 million. We anticipate capital expenditures for 2020 to be approximately $3.5 million and depreciation and amortization of approximately $10.6 million.The availability under our long-term credit agreement is currently $10.7 million. On May 14th in response to the COVID-19 pandemic, we amended our credit agreement to decrease the loan commitment amount with the amount of collateralized assets currently available as well as the increased amount of credit available to the company. In addition, as part of this agreement, the company is pursuing additional borrowing under fixed asset loan. Our investor presentation, including our non-GAAP information, is on our website at www.thedixiegroup.com.Dan?

[Daniel Frierson:]

Thank you, Allen. We had a slow start to our sales in January, but sales significantly improved in February before finally seeing the slide in sales due to the COVID-19 crisis impact us the last three weeks of the quarter. Our low point in orders occurred around the Easter holiday and have improved each week since that time.As the extent of the COVID-19 pandemic became apparent, we implemented our continuity plan to maintain the health and safety of our associates, preserve cash, and minimize the impact on our customers. We have had some cases of COVID-19 exposure in our operations for which we took appropriate cleaning and safety measures, including large scale COVID-19 testing, mandatory temperature checks prior to starting work, and deep cleaning and sanitation. We limited travel for all our associates, implemented work-from-home options where appropriate, and limited physical contact with our customers.We have reduced our running schedules for most facilities to one shift, just beneath our shipping levels, so we could maintain order flow to those customers for which we still had requirements, while simultaneously reducing inventories to align them with our lower customer demand. In order to preserve cash, we have placed a large percentage of our associates, either on rotating layoff or furlough.As the severity of the COVID-19 pandemic became more apparent, we quickly reviewed appropriate actions and implemented approximately $14 million in cost cuts for the current year. These cost reductions included cutting non-essential expenditures, reducing capital expenditures, select job eliminations, and temporary salary reductions. We also deferred new product introductions and reduced our sample and marketing expenses for 2020.We have worked with suppliers, lenders, and landlords to extend payment terms in the second quarter for existing agreements. We're taking advantage of deferral of payroll taxes under the CARES Act as well as deferring payments into our defined contribution retirement plan. We have modified our senior credit facility to provide additional flexibility with regard to loan availability during this uncertain period. This bank amendment to our senior credit facility has increased our borrowing costs slightly, while reducing the size of the lending facility to better fit our reduced borrowing base as we continue to reduce our inventories to improve liquidity.The company's current availability, as Allen mentioned, is $10.7 million. Though we are not certain with regard to the long-term impacts of the COVID-19 crisis, we do not anticipate any long-term effects to our markets or operating practices. We look forward to our markets returning to normal as we see many of our customers opening back up across the country as states are loosening the restrictions on retail and construction sectors of our economy.When the virus began to spread in China, we became concerned that our suppliers there would not be able to service our rapidly growing LVT business. Fortunately, that has not proven to be the case, and we've been able to support the growth of our hard surface business. At the beginning of the pandemic, our orders and sales declined dramatically in late March and early April. The first few weeks of April were impacted the most, and our sales and orders decreased over 50% for the month of April. However, since the second week of April, our sales and orders have continued to improve, and in May we anticipate sales and orders being down in the 35% range but continuing to improve sequentially. Many of our customers are opening up and beginning to generate business. We would expect to continue improving and be at more normal levels later in the year.We are excited to celebrate a 100 years in business at Dixie. Over our 100-year history, the company has transformed itself again and again. Just as the Second World War required we adapt to change, we are adapting to the issues confronting us in the current pandemic. I'm proud of how quickly our entire team has made changes to help mitigate the impact of the COVID-19.As we have in the past, I'm certain we will emerge from this crisis a better and stronger company. We're proud of our history and heritage, and we're excited about starting the next 100 years as a company.At this time, we will open up the conference call to questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Barry Blank with J.H. Darbie & Company. Please proceed with your question.

[Barry Blank:]

Good morning, Dan.

[Daniel Frierson:]

Good morning, Barry.

[Barry Blank:]

Couple of questions. The first one is because of this pandemic a lot of companies have been severely hurt and in financial trouble. This may be an opportunity for Dixie Group to possibly pick up other companies in the industry and possibly in the hard flooring industry. Have you been looking at this? And is there any prospects out there for you at this time?

[Daniel Frierson:]

Barry, I think right now our concentration has been more internal than external, and it will depend on how long the pandemic lasts and how much it impacts business. But obviously, if there are opportunities that would make sense for us, we would like to take a look at them.

[Barry Blank:]

Okay. My second question is how much government assistance -- I know you mentioned something about the payroll thing, but I'm not sure exactly how much you're able to get and what programs are open for you at this time.

[John Faulkner:]

Barry, this is John Faulkner.

[Barry Blank:]

Yes, John.

[John Faulkner:]

At this point in time, we're taking advantage of the deferral of payroll taxes which we can defer through the end of the year and then repay over the next two-year period. We have looked at, but we do not qualify into the payroll protection plan and the Main Street Lending Program has really not been opened up yet by the banks. We have looked at it on the surface, and we are still investigating opportunities there, but the banks are still going back to the Fed on various questions on that program. So, we will still consider opportunities for that program if they fit our financing needs, but at this point in time, we have not yet made the application.

[Barry Blank:]

Okay. Thank you very much.

[Daniel Frierson:]

Thank you, Barry.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Barry Gertner with City Stables [ph]. Please proceed with your question.

[Unidentified Analyst:]

Good morning, guys. Congrats on the quarter. In light of COVID, quite surprising. And as usual, you managed to keep things moving. My question, I think Jon got to it a couple of minutes back is on the governmental assistance side, we're seeing some sort of guidance around the fact that companies that have engaged in buybacks in the last 12 months we will not have access to some of the Federal Reserve programs. Have you encountered anything similar or is that something that you take into consideration when looking towards that sort of financing?

[John Faulkner:]

Everything we've investigated so far, it does not matter in terms of whether we've purchased stock in the past. It does -- all of them appear to put restrictions on any future purchases during the period in which you have the loan as well as for up to a year thereafter. And again, that will be one of those items we would consider. But at this point in time, since we have not yet taken advantage of the Main Street Lending Program because of this lack of clarity from the Fed on certain items of it. Until we get those questions answered, we would not -- we have not made any decision one way or the other. But obviously, it is a consideration during the review of those opportunities.

[Unidentified Analyst:]

Got it. Thank you. And then one more quick question. You mentioned in the released 8-K earlier today that the companies that hired students for the hard cover side of things, but at the same time, obviously, you've partially laid off or furloughed a bunch of employees. Is that [indiscernible] thinking about as it relates to sort of bifurcating which employees it makes sense to grow out this staff of while keeping some on furlough as you're not running at full capacity?

[Daniel Frierson:]

Barry, this is Dan. We did hire earlier in the year a number of associates that would -- at our sales people for hard surface products only. They're doing very well. We have obviously not cut back on sales people during this environment and particularly in hard surface sales people. So we continue to see that business improving over last year despite the fact of the COVID-19 impact. So we're very pleased with it, and we'll continue to invest in.

[Unidentified Analyst:]

As you should be. Thanks, Dan. Numbers on the hard cover were surprisingly even better than what we had modeled. So I understand that. Thank you so much. Have a great day.

[Daniel Frierson:]

Thank you.

[Operator:]

Thank you. With no further questions in the queue, I will now turn the call back over to Dan Frierson for any closing or additional remarks.

[Daniel Frierson:]

Michelle, thank you very much. And for all of you on the call, thank you for being with us. We're all going through a most unusual period. Our company is 100 years old. This is the first pandemic we've gone through. We certainly hope to come out the other end a stronger company. Thank you, again. Talk to you next quarter.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect your lines and have a nice day.