The Dixie Group, Inc.
Q1 2018 Earnings Call Transcript

Published: 5 May 2018

[Operator:]

Good day. And welcome to The Dixie Group, Incorporated’s 2018 First Quarter Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Chairman and Chief Executive Officer, Dan Frierson. Please go ahead.

[Dan Frierson:]

Thank you, Sabrina, and welcome, everyone, to our quarterly conference call. Jon Faulkner is with me who is our Chief Financial Officer. Our Safe Harbor statement is included by reference both to our Web site and press release. For the first quarter of 2018, the Company had net sales of $98,858,000 as compared to $97.5 million in 2017. For the quarter, 2018 net sales were up 1.4% as compared to the same period a year ago. The Company had a loss from continuing operations of $2,884,000 or $0.18 per diluted share for the first quarter of 2018 as compared to a loss of $575,000 or $0.04 per share in the first quarter of 2017. Our residential sales were up 7.3% for the quarter with the industry we estimate being flat as compared to the prior year. Our residential sales had solid growth with all three brands showing high single-digit improvement during the quarter. Residential sales benefited from the successful launch of our Stainmaster PetProtect luxury vinyl flooring line by our Masland and Dixie Home brands. At our industry's annual show, SURFACES, our residential group continued to focus on developing and marketing differentiated designs and styles for the high-end residential market. We launched over 150 new products for 2018, a record high. That includes 67 carpet styles and 86 hard surface designs. We're especially excited about our new Masland Energy in-store display with 20 new exciting main street commercial products. Our high-style main street category was developed by Masland in the mid-2000s, and we are reinvigorating this line with new products, designs and an updated selling vehicle. Our commercial sales in the first quarter were down over 9%, while the industry we believe was down in the mid-single digits. Our commercial broadloom sales were impacted more than our commercial modular tile sales. We did benefit from the reorganization of our commercial business this past fall with lower selling and administrative expenses. Our commercial team, led by David Hobbs, has a number of new offerings for 2018 with particular emphasis on new modular carpet tile offerings, along with our Calibrè LVT line. Our gross profit for the first quarter of 2018 was 21.8% of net sales as compared to a gross profit of 25.8% in 2017. During the first quarter of 2018, our sales and costs were negatively impacted by severe weather, which affected several of our East Coast facilities in January. In addition, the launch of numerous new difficult-to-manufacture residential products severely impacted the throughput of our manufacturing operations in January and February, resulting in unabsorbed fixed costs. In addition, we had higher waste and off-quality issues as a result of the intensive effort to launch these new products during the quarter. We were further impacted by the changes in investments in our dyeing facilities, which began in the fourth quarter of 2017 and completed in February of 2018. These changes require the reformulation of all dye formulas to improve color consistency through our continuous dye facility. Finally, our commercial sales were slow during the quarter. Therefore, we had unabsorbed fixed costs through those facilities. In spite of these issues, our financial results improved throughout the quarter, returning to profitability in March. By the end of the quarter, the first quarter price increase was also impacting our results. Jon Faulkner will review our quarterly results, after which I'll comment on current conditions. Jon?

[Jon Faulkner:]

Thank you, Dan. Again, looking at sales for the quarter, sales are $98.9 million, a 1.4% increase over sales of $97.5 million a year ago. Our floor covering sales were up 1.4%, while the industry was down slightly. Our commercial products were down 9.4%, while the industry was down in the mid-single digits. Our residential products were up 7.3%, while the industry was flat. Gross profit for the quarter was 21.8% of net sales compared to 25.8% in the first quarter of 2017. The drop in gross profit was primarily driven by bad weather resulting in low manufacturing output, operational congestion due to high number of new products, reformulation of our dye formulas to improve quality and weaker sales of our commercial products. We had a price increase that took effect at the start of [2018] and the second one announced for May. The increases were to offset increases in material, labor and operating expenses. Selling and administrative expenses for the quarter was 23.4% as compared to 25.1% in the same period of 2017. We had an operating loss of $1.5 million for 2018 as compared to an operating profit of $628,000 in 2017. We had expenses related to our profit-proven plan of $216,000 during the quarter. We had a vendor settlement and other insurance income of $403,000 during the period. Our interest expense for the quarter of -- first quarter of 2018 was $1.5 million versus $1.4 million in the first quarter of 2017. Higher interest expense was due to higher interest rates and higher levels of debt. We had a tax benefit of $166,000 due to the federal and state refundable credits. Diluted loss per share from continuing operations was $0.18 for the quarter. Looking at our balance sheet, at the end of the quarter, our receivables increased by $1.4 million during the first quarter period. The increase in our inventories was $3.3 million for the first quarter of 2018. The increase in inventories was seasonally driven. Capital equipment acquisitions, including those funded by cash and financing, was $752,000 for the period. Depreciation and amortization for the quarter was $3.1 million. We anticipate capital expenditures for 2018 of approximately $6 million and depreciation and amortization of approximately $13 million. Our debt stood at $134.7 million at the end of the quarter, increasing by $1.4 million for the period. Accessible availability under our lines of credit at the end of the quarter was $12.3 million. Our investor presentation, including our non-GAAP information, is on our Web site at www.thedixiegroup.com.

[Dan Frierson:]

Thank you, Jon. The merger of the management of our two commercial brands under one operational structure is progressing well. We maintained the power of dedicated sales forces for each brand with share back office functions and support staff. This transition, which would results in our saving of over $3 million in 2018, is in place, and we're gaining synergies in our operations and sales support functions. We're excited about the lineup of new products we are introducing that leverages the design expertise of both commercial brands to give us many new and exciting broadloom and modular carpet tile products. Further, we are continuing the expansion of our Calibrè and quiet down lines of luxury vinyl flooring products through our Masland Contract brand. We have seen steady growth in this hard surface category. Our residential business continues to outperform the industry with sales up over 7% in the first quarter. Our movement into hard surface via the Stainmaster PetProtect luxury vinyl flooring in the Dixie Home and Masland brands continues to build momentum. In addition, we're in the process of launching a new engineer wood collection under our Fabrica brand. The acceptance of all these products and displays has helped us get off to a strong start in hard surface. Our residential carpet products continue to excite the discriminating customer with all 3 brands showing strong sales increases in the first quarter. As the second quarter began, we announced a price increase beginning in May for our carpet products. This increase should not only help us improve our gross margin but cover additional anticipated people costs. We have an unusual number of beautiful new products, which we're getting to market. This should help us maintain a strong top line momentum. In the first four weeks of our second quarter, our sales of residential and commercial products have continued the trends of the first quarter with sales up 1.4% driven by strong residential sales and weak commercial sales. However, orders quarter-to-date for both residential and commercial products has shown significant improvement and are up low double digits compared to the year ago period. With this sales momentum, the operational improvements we have seen and the price increase, we look forward to improvement in our financial results. At this time, we'll open the meeting to questions.

[Operator:]

[Operator Instructions] And our first question will come from the line of Sam Darkatsh with Raymond James.

[Sam Darkatsh:]

First off, you listed a number of headwinds to gross margin in the first quarter, be it weather, be it unabsorbed costs from new product intros, be it waste and off-quality dye formulas, all that stuff. Can you help quantify what you think is either one-off or kind of transitory cost and one -- what sorts of issues might linger for a period of time?

[Jon Faulkner:]

Sam, first of all, the weather, obviously, is a onetime event. Basically, our new products now, we've settled down, and we are back to running our operations normally. They started to get back to normal in February and finally got the pace back fully normal in March. Also, as Dan alluded to, our commercial business, although sales have been slow up until fairly recently, quarter backlog is now built, and we anticipate the order backlog to be more normal throughout the rest of the second quarter. In terms of the other changes that the dye has, most all of those changes were completed sometime mid- to late February. So really, from March forward, we feel like we're on a normal operating -- operational basis.

[Sam Darkatsh:]

So ballpark, what were gross margins in March and April?

[Jon Faulkner:]

We're looking at about 3% to 4% better than what they were for the quarter. So related to (inaudible).

[Sam Darkatsh:]

And would May be better once the price increases go through? Or how do we look at gross margins from here?

[Jon Faulkner:]

We won't really feel the effect of the price increase until June for the residential business and probably closer to July for the commercial business. So a longer time frame before we feel those full effects.

[Sam Darkatsh:]

I think you mentioned that March should turn profitable. Are you anticipating turning a profit in the second quarter?

[Jon Faulkner:]

Yes, we are, Sam.

[Sam Darkatsh:]

And then final question for me before I'll defer to others. Could you help quantify the size of your LVT business here and the anticipated growth rate therein? And what the margin profile of that sourcing businesses versus the fleet average?

[Jon Faulkner:]

The LV tile program, obviously, is just getting off the ground, and so it's still relatively small at this point in time. But we are sourcing the residential products directly from Invista via the same master program. And we have several sources for our Calibrè line, all international.

[Operator:]

[Operator Instructions] With no further questions in the queue, I will turn the call back over to Mr. Dan Frierson for any additional or closing remarks.

[Dan Frierson:]

Sabrina, thank you very much. And thank you, all, for being on our call. As we answered Sam, we do expect second quarter to be a profitable quarter. Our business order entry is better. Our gross margins are looking better, and we look forward to our conference call at the end of the second quarter. Thank you.

[Operator:]

Ladies and gentlemen, that will conclude today's conference. Thank you again for your participation.