The Dixie Group, Inc.
Q3 2018 Earnings Call Transcript

Published: 9 Nov 2018

[Operator:]

Good day, and welcome to Dixie Group, Inc. 2018 Third 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 Chairman and Chief Executive Officer, Dan Frierson. Please go ahead, sir.

[Daniel Frierson:]

Thank you, Demetrius. Welcome, I have with me, Jon Faulkner, our Chief Financial Officer. And welcome to our third quarter conference call. Our safe harbor statement is included by reference both to our website and press release. For the third quarter of 2018, the company had net sales of $101.5 million as compared to $102.6 million in 2017. The company's third quarter net sales were down 1.1% as compared to the same period in the prior year, while the industry, we estimate, was up low-single-digits. For the third quarter of 2018, the company had a loss from continuing operations of $2,922,000 or $0.19 per diluted share as compared to a loss of $547,000 or $0.03 per share in the third quarter of 2017. On a non-GAAP basis, the results from continuing operations would have been a loss of $0.07 per share adjusted for the impact of the Profit Improvement Plan. Our residential product sales were up 5.6% for the quarter as we continued to gain market share. Our commercial carpet sales were down significantly. Because of the weakness of our commercial carpet sales, the focus of our Profit Improvement Plan has been on consolidating our Atlas and Masland Contract businesses. Most of the management was consolidated late last year and early this year. The sales forces were combined in the third quarter, and the manufacturing consolidation will be completed over the next four months. The consolidation into one commercial carpet business will significantly reduce costs and complexity. During the third quarter and through the remainder of the year, we are focused on implementation of the Profit Improvement Plan for the entire company. We closed our tufting plant in Chickamauga, Georgia in the third quarter and are phasing out tufting in our Commerce, California plant and will move that production to our plant in Atmore, Alabama. As our productivity, service and quality have improved, we are in a position to reduce staffing in many of our facilities. We began the reduction in June with our Atmore operations moving from a 7-day to a 5-day schedule. With the reductions already implemented and the ones recently announced, we will have reduced our employment by over 15% when completed early in 2019. These reductions represent a company-wide effort to reduce costs and complexity, with approximately two-thirds of the reduction coming from our commercial business and one-third from our residential business. Our improved productivity has also enabled us to improve service, while reducing inventory. Jon Faulkner will now review our quarterly financial results, after which I will comment on current conditions. Jon?

[Jon Faulkner:]

Thank you, Dan. Looking at sales, for the quarter, as Dan had iterated, our sales were $101.6 million, 1.1% decrease versus sales of $102.7 million a year ago. Floorcovering sales were down 1.1%, while the industry, we believe, was up slightly. Commercial products were down 16%, while the industry again was up slightly. Our residential products were up 5.6%, ahead of the industry, which we believe was up slightly. Gross profit for the quarter was 21.6% of net sales as compared to 24.2% in the third quarter of 2017. During the third quarter of 2018, our sales and costs were negatively impacted by lower sales in our commercial business, contributing to under-absorbed costs in our manufacturing operations. Our gross profit margin was further impacted by $963,000 in inventory expense relative to writing down inventories as a result of the decision to close our Chickamauga, Georgia and our Commerce, California tufting operations, all part of our Profit Improvement Plan. Selling and administrative expense for the quarter was 22.7% as compared to 23.4% in the same period in 2017. Other items in the period included $529,000 in direct expense and $349,000 asset write-downs, both part of our Profit Improvement Plan. This was partially offset by $845,000 in other operating income relative to asset sale during the period. We had an operating loss of $1.2 million for the third quarter of 2018 as compared to an operating profit of $767,000 for the same period in 2017. Our interest expense for the third quarter of 2018 was $1.7 million versus $1.5 million in the third quarter of 2017. Higher interest expense was due to higher interest rates and higher levels of debt with the tax expense of $82,000 in the period. Our diluted loss per share from continuing operations was $0.19 for the quarter. Looking at our balance sheet at the end of the quarter, our receivables were down $397,000 during the third quarter period. Our inventories during the period decreased $4.2 million for the third quarter of 2018. The decrease in inventories was due to our adjusting run rate to align with demand, as well as increasing our reserves by $963,000 relative to shutting our Chickamauga and Commerce tufting facilities. CapEx acquisitions, including those funded by cash and financing, was $1.6 million for the period. Depreciation and amortization for the quarter was $3.2 million. We anticipate capital expenditures for 2018 of approximately $5.3 million, and depreciation and amortization of approximately $13 million. Our debt stood at $141.3 million at the end of the quarter, increasing by $3.1 million for the period. The accessible availability under our lines of credit at the end of the quarter was $8.4 million. Currently, our debt is approximately $133 million and accessible availability is approximately $14.5 million. Our investor presentation, including our non-GAAP information, is on our website, www.thedixiegroup.com. Dan?

[Daniel Frierson:]

Thank you, Jon. The consolidation of Atlas and Masland Contract provides an exciting opportunity for us to become a greater resource to our customers in the comparative commercial flooring market. This unification also includes our creative team, which will relocate to our Design Studio in Alabama. With all these functions performed in our Alabama operations, it will give us the synergies and lower costs needed to provide outstanding product and world-class service to the industry. The combined product portfolios of our two great brands leverage a diversity in technologies, premium yarn systems and styling. Atlas Masland has now become a comprehensive resource to the commercial flooring customer. Our custom capabilities are unparalleled, providing for unlimited possibilities for our customers. Whether a project calls for broadloom carpet, modular carpet, area rugs, walk off material or luxury vinyl flooring, we have the product and expertise to service our targeted specified commercial market segments. This combined approach recognizes designers time constraints and the variety of products today's commercial projects utilize. By expanding the sales coverage of our products such as with the sustainable design of our Masland Contract's Tops Collection, incorporating Thrive by Universal Fibers solution dyed nylon with 75% recycled content and the new Atlas Antron products. We anticipate higher sales through the unified sales force. We have already benefited from the merger of the management of the two commercial brands, with lower commercial selling and administrative expenses during the third quarter of 2018. Through the quarter, we saw very strong sales in our new STAINMASTER carpet introductions, including both PetProtect and Luxerell products in the residential side. Also in the quarter, we began shipping our newly revamped Masland eNergy main street commercial product line. Masland eNergy is an upscale, modern take on the traditional main street commercial segment. Our eNergy products are well styled and feature type 6,6 nylon delivering the performance required by the most demanding segments of the commercial market. We have seen ready acceptance to our new displays by the market. Late in the quarter, we began shipment of our new EnVision 6,6 collection. This new program is an extension of our Dixie Home product line with nicely styled products at moderate price points to reach a wider range of customers - consumers. These products are made with type 6,6 nylon to ensure the highest quality and performance standards. Our movement in the hard surface continues. Masland and Dixie Home has successfully launched their new STAINMASTER, PetProtect, luxury vinyl flooring lines and continue expanding market presence and adding to the product portfolio. We have begun shipment of our Fabrica Fine Wood Flooring line, a sophisticated collection of best-in-class products. The wood product line includes French oak, maple and birch with a style and quality, consistent with the Fabrica brand promise. The fourth quarter started with the price increases with the third quarter fully implemented. These increases offset cost increases in raw material and people costs, which were experienced earlier in the year. Although our sales for the first five weeks of the quarter are down slightly, our residential sales continue to grow. As our Profit Improvement Plan matures, we will feel its impact on our results. Our capital expenditures this year had a rate of less than half of our depreciation. We would expect this level to continue into the new year. Several industry players have announced a price increase on carpet late in the year. With the oil cost increases the industry continues to face, this will probably become a reality. The tariffs on imported goods from China, both announced and proposed, if implemented, will result in higher prices for consumers. At this time, it is difficult to know how this will play out. This time, we would like to open the meeting to questions.

[Operator:]

[Operator Instructions]

[Daniel Frierson:]

Demetrius, if there are no questions, we want to thank everyone for being on our call today and look forward to talking with you at the end of the next quarter.

[Operator:]

Thank you. Ladies and gentlemen, this will conclude today's conference. Thank you for your participation and have a great day.