The Dixie Group, Inc.
Q2 2018 Earnings Call Transcript

Published: 4 Aug 2018

[Operator:]

Good day, and welcome to The Dixie Group, Inc. 2018 Second 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, Ben, and welcome everyone to our second quarter conference call. I have with me today Jon Faulkner, our Chief Financial Officer. Our Safe Harbor statement is included by reference, both to our website and our press release. Our second quarter sales at $106,438,000 were down 0.7% as compared to the same period in 2017. We had a loss from continuing operations of $1,972,000 million compared to a profit of $1,226,000 million in the second quarter of last year. The company had unusual expenses during the quarter of approximately $2 million. On a non-GAAP basis, the company had earnings of $182,000. This represents a major improvement from the first quarter when we had a loss of $2,584,000 million. The positive momentum of our residential business continued in the second quarter with sales up 4% over the previous year quarter, and we believe better than the industry. We have a large number of new products just reaching the market and had an excellent reception to our new Masland Energy products designed for main street commercial application. Our commercial business was down 10% with particular weakness at several end user accounts. We’re pleased with the reaction to many of our new product offerings with particular emphasis on new modular and plank offering. Jon Faulkner will review our quarterly results, after which I will comment on current conditions. Jon?

[Jon Faulkner:]

Thank you, Dan. Looking at sales for the quarter, sales were $106.4 million, a 0.7% decrease versus sales of $107.2 million the same period a year ago. Floor covering sales were down 0.7%, while the industry we believe was flat. Commercial products were down 10.2%, while the industry, we believe was down slightly. Residential products were up 4%, while the industry was up slightly. Gross profit for the quarter was 23.6% of net sales compared to 26.5% in the second quarter of 2017. During the second quarter of 2018, our sales and costs were negatively impacted by lower sales in our commercial business, contributing to under-absorbed cost in our manufacturing operation. Our gross margin was further impacted by higher-than-normal waste, purchase price variances and distribution expenses. We also were impacted by a large workers compensation claim due to an action at yarn processing facility. To address these issues, we have launched new products to our commercial brands and feel these are being well received. Further, we’ve made changes in our manufacturing operations to lower cost by better aligning staffing to demand, implemented several waste reduction initiatives and streamlining our distribution operation. Selling and administrative expense for the quarter was 22.4% as compared to 23.6% in the same period in 2017. We had an operating loss of $355,000 for 2018, as compared to an operating profit of $3.2 million in 2017. We agreed to a Memorandum of Understanding regarding the settlement of a class action litigation resulting in $1.5 million charge during the period. We had expenses related to our Profit Improvement Plan of $190,000 during the quarter.Our interest expense for the first quarter of 2018 was $1.6 million versus $1.4 million in the second quarter of 2017. The higher interest expense was due to higher interest rates and higher debt levels. We had a tax benefit of $26,000 to the federal and state refundable credits. Diluted loss per share from continuing operations was $0.13 for the quarter. Looking at our balance sheet, at the end of the quarter, our receivables increased by $1.5 million during the second quarter period. Increase in our inventories was $5.4 million for the second quarter of 2018. The increase in the inventories was seasonally driven. Capital equipment acquisitions, including those funded by cash and financing was $745,000 for the period. Depreciation and amortization for the quarter was $3.2 million. We anticipate capital expenditures for 2018 of approximately $6 million and depreciation and amortization of approximately $13 million. Our debt stood at $138.2 million at the end of the quarter increasing by $3.5 million for the period. Accessible availability under our lines of credit at the end of the quarter was $10.3 million. Our investor presentation, including our non-GAAP information, is on our website at www.thedixiegroup.com. Dan?

[Dan Frierson:]

Thank you, Jon. We continue refining the consolidation of our two commercial brands Masland Contract and Atlas under one management team. Our new products presented at NeoCon in June were well received and these new products -- as these new products move into the field, we expect increased momentum with the commercial design community. We continue to find new opportunities to add to our Profit Improvement Plan, which we anticipate will have productions of over $3 million. The movement into the LVF market, Luxury Vinyl Flooring by our commercial sales force has gone well and continues to gain strength. Both the Calibre and - product lines continue to grow. Our residential business continues to gain market share with all three brands growing year-to-date. The numerous new carpet products we have introduced this year will help us maintain a position as a leader of style, design and color in the floor covering business. Masland and Dixie Home have successfully launched their new StainmasterPetProtect luxury vinyl flooring lines and are currently adding additional products. Fabrica is in the process of launching a new wood line that is worthy of the Fabrica brand. The Fabrica collection features both flooring and companion wood wall coverings. While we were not pleased with our second quarter financial results, we are beginning to experience operating improvement and cost reductions from our profit improvement plan. As a result, our gross margin improved from 28 – excuse me 21.8% in the first quarter to 23.6% in the second quarter. And our SG&A was reduced from 23.4% in the first quarter to 22.4% in the second quarter. We continue to develop and implement programs to improve our operations, with particular emphasis on cost and waste rugs an improvement in the quality of our products. Our people cost continue to increase, which is a reflection of the low unemployment environment. Raw material costs also continue to increase. As a result of these increases, we have announced a price increase in mid third quarter on our residential products. We still anticipate our capital expenditures, as Jon pointed out, of $6 million for the year, which will be about half the amount of our depreciation and amortization. Sales for the first four weeks of July are following the pattern of the second quarter. They are down approximately 2%, with residential sales up and commercial sales down. In this environment improved results will come from the reduction of waste, improved quality and reduced staffing in line with sales. Obviously, the announced price increase will have a positive impact by the end of the third quarter and going forward. At this time, we will open the meeting up for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Josh Wilson of Raymond James.

[Josh Wilson:]

A couple of questions here. First, regarding the purchase price variances that you called out on gross margin, could you give us a little more color on that?

[Jon Faulkner:]

Josh, primarily related to fuel and transportation costs as we have rising freight rates coming from both internal movement of goods, as well as movement of goods to customers.

[Josh Wilson:]

Got it. And then, regarding your commercial business, do you have a sense of -- I mean, I recognize the industry was down this quarter, but any sense of when you might expect to start growing sales in that business again?

[Dan Frierson:]

Obviously, we don’t give projections, but I do think the reduction was concentrated in a few, large end user customers. Our territory sales or other sales were about like the industry. Maybe a look down a little bit more, but not much.

[Josh Wilson:]

Got it. Thanks and good luck with the quarter.

[Operator:]

Thank you. [Operator Instructions] With no other questions in the queue, I will turn the call back to Dan Frierson for any closing remarks.

[Dan Frierson:]

Thank you, Ben. And thank all of you for your participation. Look forward to speaking with you at the end of the third quarter. Thank you.

[Operator:]

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