The Dixie Group, Inc.
Q2 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Daniel Frierson:]

Welcome, everyone, to our second quarter conference call. With me is Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by reference to both our website and press release. Due to the COVID-19 pandemic, the second quarter was most unusual. Our first objective was to maintain the health and safety of our associates. At the same time, we wanted to continue servicing the existing business by running our plants at reduced rates, but also decrease inventories. In order to ensure our survival, we had to reduce, defer and eliminate as much cost as possible and manage our cash prudently. We actually had half of our associates not working for some period of time. Due to these actions and our bank -- due to these actions, our bank availability increased during the quarter from a low of around $8 million to the $20 million range currently. With sales down nearly 40% for the quarter, it required everyone to be part of the solution, and our associates rose to the challenge. For the second quarter, the company had net sales of $60,824,000 as compared to over $100 million in 2019. For the second quarter of 2020, net sales were down 39% as compared to the same quarter in '19. In April, sales were down 54% from the same month in the prior year as a result of the COVID-19 pandemic and related government orders that negatively impacted ours and our customers' ability to transact business. Sales recovered gradually over the quarter, with May sales volume down 40%, and June net sales down 21% from their respective months in the prior year. For the second quarter of 2020, the company had a loss from continuing operations of $6,979,000 or $0.46 per diluted share as compared to a loss of $1,181,000 or $0.07 per diluted share in the second quarter of '19. As with most companies, the COVID-19 pandemic had a significant impact on our sales in the quarter. Once 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. To minimize and prevent cases of COVID exposure in our facilities, we have taken measures aimed at sanitation and safety, including large-scale COVID testing, mandatory temperature checks prior to starting work, requirements to wear masks when unable to maintain social distancing and deep cleaning and sanitation. We limited travel for our associates, implemented work-from-home options where appropriate and limited physical contact with our customers. We reduced our running schedules in our facilities to below demand to maintain order flow to our customers while simultaneously reducing inventories to align them with our lower customer demand. In order to preserve cash, we placed a large percentage of our associates either on rotating layoff or furlough. We implemented approximately $14 million in cost cuts for the current year. These cost cuts included deferring maintenance when possible, reduced capital expenditure, instituting select job eliminations and temporary salary reductions. We deferred new product introductions and reduced our sample and market expenses for the year. We worked with suppliers, lenders and landlords to extend payments in the second quarter for existing agreements. We have taken advantage of deferral of payroll-related 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. We are still assessing the long-term impacts of the COVID crisis on our markets and operating practices. The recovery in our residential markets have been quicker than in our commercial markets, as is typical during periods of economic recovery. We're encouraged by the improvement we have seen in sales in recent weeks. But as a resurgence of COVID-19 cases has been seen in many parts of the country and as government authorities reassessed their decisions to lift the restrictions in their jurisdictions, we're cautious as to what the remainder of the year may look like. Allen Danzey will now review our second quarter financial results, after which I'll comment further on current conditions. Allen?

[Allen Danzey:]

Thank you, Dan. Our net sales in the second quarter of 2020 were $60.8 million. This was a 39.4% decrease from the 2019 second quarter net sales of $100.4 million. The decrease in sales during the quarter, as Dan mentioned, was the result of the COVID-19 pandemic and associated closures and restrictions from government mandates. The negative sales impact related to the COVID-19 pandemic started late in the first quarter and reached a low point in the second week of April, after which we began seeing a recovery throughout the end of the quarter. The gross profit for the quarter was 20.1% of net sales compared to 23.4% in the second quarter of 2019. The 2020 gross profit was negatively impacted by the lower sales volume, including the underabsorption of fixed costs. Selling and administrative costs in the second quarter of 2020 were $4.6 million lower than the second quarter of 2019. Due to the lower net sales in 2020, selling and administrative expenses as a percent of net sales were higher at 27.2% in the second quarter of 2020 compared to 21% in the second quarter of 2019. The reduction in selling and administrative expenses were primarily the result of cost-saving initiatives implemented as a result of the COVID-19 pandemic. These initiatives included reduction in samples and marketing expenses, reductions and restrictions on travel, reductions in payroll expenses through job eliminations, furloughs and temporary pay reductions as well as other expense reduction. During the quarter, we also incurred $1.2 million in facility consolidation and severance expenses. These expenses included $246,000 in residual expenses related to our property improvement plan and $1 million for severance and financing expenses related to our COVID-19 response plan. The operating loss in the second quarter of 2020 was $5.6 million compared to an operating income of $574,000 for the same period in 2019. Our total debt decreased by $11.6 million from the end of the prior quarter. The reduction during the quarter was primarily driven by working capital changes, but significantly, reductions in accounts receivable and inventory. Year-over-year debt has decreased by $48.1 million when compared to the second quarter of 2019. As a result of this decrease in debt, interest expense in the second quarter was down 21% as compared to the second quarter of 2019. This decrease in debt and interest expense year-over-year is primarily the result of the sale of our California facility in the fourth quarter of 2019 and better use of working capital. As Dan mentioned, our diluted earnings per share from continuing operations was negative $0.46. Turning to our balance sheet. At the end of June 2020, net receivables decreased $6.2 million during the quarter. The decrease in receivables was a result of lower sales volume in the second quarter as compared to the prior quarter. Inventory decreased $8.3 million in the second quarter of 2020 from the March month end balance. During the second quarter, we reduced our production in our plants to below demand, allowing us to reduce our inventories while still meeting the customer demand. Capital equipment acquisitions, including those funded by cash and financing, was $1.7 million in the second quarter of 2020. Depreciation and amortization during the quarter was $2.6 million. We anticipate capital expenditures for 2020 to be approximately $3.5 million, and depreciation and amortization of approximately $10.6 million. The availability on our long-term credit agreement is currently $21 million. We have applied for and are awaiting approval on the fixed asset loan with expectation of closing by August month end, as agreed to with our senior credit facility. Our investor presentation, including our non-GAAP information, is on our website at www.thedixiegroup.com. Dan?

[Daniel Frierson:]

Thank you, Allen. In the second quarter, sales of our commercial products were down 42% on a year-over-year basis, while the industry, we believe, was down close to 30% for the same time periods. Our commercial hard surface sales were up over 20% for the period relative to a year ago. We anticipate the market for commercial products will recover more slowly than the residential business. Recently, we've gotten great response to our most recent product launch, Living Series. However, orders for the specifications we're generating are not likely to be ordered or shipped until the first half of 2021. We're also gaining traction with our innovative Sustaina modular tile backing system. The Sustaina modular tile backing system is a PVC and polyurethane-free cushion carpet tile backing with very high recycled content. The product is breathable and able to be installed in high-humidity situations. We have recently received NSF 140 platinum certification on certain products, but the backing can be applied to all of our modular products. Sales of our residential products were down 38% for the quarter with the industry, we believe, around down 30%. The residential business has recovered more quickly than originally anticipated when the initial impact of COVID-19 pandemic became apparent in mid-March. Our specialty retail segment was down by 50% in April, recovered to being down 35% in May and was down less than 10% in June. By the end of June, we saw positive sales comparisons versus last year, and July has started off above prior year in sales and order entry. Our EnVision 6,6 program continues gaining traction in the market. And our new EnVision 6,6 introductions for 2020 are off to a very good start. In less than 2 years, EnVision 6,6 has quickly become a strong platform for growth across all of our residential divisions and provides us with a strategic diversification needed in our residential portfolio. In the home center channel, our order entry returned to pre-COVID-19 levels in mid-June. While our home center sales are lagging behind last year, we have placed new products as part of a reset, which began in late June. The early indicators on these products are positive and -- as we are seeing sales and orders on many of these styles within the first few weeks of the reset. We anticipate increasing sale rates in the home center channel throughout the second half of 2020. We have continued to focus on growing our luxury vinyl flooring business. Our hard surface programs are continuing to gain traction in the market. Through June, our hard surface sales were greater than 60% ahead of last year, and our new products for 2020 have just begun to reach retail stores. A new product we're especially excited about is TRUCOR Tile IGT, integrated grout technology. With 12 stone and tile visuals and a locking system, which provides a realistic grout visual. We're also excited to introduce TRUCOR Prime XXL. At 10 inches wide and 84 inches long, it is the widest and longest WPC plank on the market in 8 colors that are on-trend with today's design and consumer tastes. Lastly, we're introducing 2 new collections of our Fabrica Wood program, which is gaining momentum with sales well ahead of last year levels. We have hired 7 salespeople focused exclusively on hard surface. This group has made a notable impact on our market penetration and sales in their respective territories. We expect to continue expanding our hard surface sales team going forward. We're also hiring sales resources in the key growth markets on the soft surface side of our business. Reflecting on the second quarter, we're proud of how our associates pulled together as the impact of COVID became apparent. At every level in the company, the appropriate actions were taken to help ensure our success. Even though our facilities were operating on reduced schedules, our operation control was strong. We experienced excellent results from a safety, quality, waste and cost standpoint, which meant we were able to continue providing our customers outstanding service in a very uncertain period. We had no idea as we entered our 100th-year anniversary that we would be confronted with a worldwide pandemic and social unrest in this country. The values that have permeated our company for the last 100 years are the values that will help ensure our success in the future. Our company stands for inclusion and for the dignity of every individual. We've also tried to build people as we build our business by providing opportunity for all. Looking forward, while it is not clear when our economy and country will return to more normal times, I believe with the reduction of debt of $48 million in the last year and the responsiveness of our organization that has been shown through the rapidly changing environment, we're in a position to continue growing our business. I have been impressed with the resiliency of our customers. They have adjusted to changing conditions quickly and have been able to continue attracting potential customers to their stores and make them comfortable with the purchase and installation of flooring products. Consequently, the upper end of the residential market has regained momentum, and we believe we're poised to gain market share. At this time, we would like to open up the call to questions.

[Operator:]

[Operator Instructions] Our first questions come from the line of Barry Blank with JH Darbie.

[Barry Blank:]

Dan, You did very well in this quarter. I'm really pleased with the results that you have. I have a few questions, though. In the quarter that we had, there's got to be a lot of smaller companies that didn't fare that well and are having financial troubles. Do you have the wherewithal and the capabilities of trying to go out and find some of these companies? And is that something that the company is looking to do?

[Daniel Frierson:]

Barry, first of all, thank you for being on the call. Obviously, we've had our heads down pretty much looking at operations and doing everything we can to ensure a bright future. However, I think you're correct. There will be a number of companies that will have problems, and I think as we move forward, we'll be looking at those.

[Barry Blank:]

My next question is how do you see the hard flooring business picking up compared to the carpet business in the next quarter.

[Daniel Frierson:]

Barry, as you know, we're relatively new in the hard surface business. Therefore, we're operating from very low base, and therefore, we're showing very, very high percentage growth, and the acceptance in the marketplace has been great. So we see that as a real strong growth initiative for us as a company. Much stronger obviously than carpet, where our base is so large. But many of the customers we're dealing with today are customers we're also selling carpet, and we're getting great response to our new products.

[Operator:]

With no further questions in the queue, I'll turn the call back to Dan Frierson for any additional or closing remarks.

[Daniel Frierson:]

Daryl, thank you, and thank all of you for being on our call this quarter. It was a most unusual quarter and hopefully one that we will never have to go through again. But as we look forward, we are excited about the future and see great opportunity. Thank you for being with us.