The Dixie Group, Inc.
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Welcome to The Dixie Group, Inc. First Quarter 2016 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, Karen and welcome, everyone, to our first quarter conference call. I have with me, Jon Faulkner, our Chief Financial Officer. And our Safe Harbor statement is available both, on our website and press release. After several years of strong growth, the first quarter was disappointing from both the top-line and bottom-line perspective. Our sales at $89 million were down 6.96% from the previous year. And our loss from continuing operations was considerably greater than the first quarter of last year. Sales of residential products decreased 4.8% in the first quarter. Which we believe was representative of the industry's performance. Our commercial sales which were strong last year, were down 8.5% this quarter. And we believe the industry was down slightly. However, our commercial backlog improved during the quarter and ended the quarter up 24%. Our production in the quarter was down significantly, for several reasons. With only modest growth in the fourth quarter, we entered the new year with higher inventories than normal. In order to feel the sales impact of new products earlier in the year, we accelerated new product introductions which also had a negative impact on manufacturing operation. Our production was down 17% during the quarter which was much greater than our sales decrease. The resulting unabsorbed fixed costs from lower production had a major impact on our results. We also experienced higher than normal waste costs during the period as we continued the process of evaluating our inventory manufacture during the restructuring period. We're reaching the end of this process and we did see a reduction of customer-related quality costs during the first quarter. Jon Faulkner will now review our financial results. After which, I will comment on current conditions.

[Jon Faulkner:]

Thank you, Dan. Looking at sales for the quarter, our sales were $89.2 million, a decrease of 6.9% compared to first quarter of 2015. Our total carpet sales were down 6.2%, while the industry, we believe, was down low single digits. Commercial products were down 8.5%, while the industry, we believe, was down slightly. Residential products were down 4.8%, while the industry, we believe was down a similar amount. For the quarter, our gross profit was 21.9% of net sales declined from the first quarter of 2015 at 24.3% gross profit percentage. This decline was driven by significantly lower sales, resulting in reduced operating efficiencies, fixed cost absorption. Further, our production levels were impacted by higher new product development activity and entering the quarter with higher levels of inventory than desired. In addition, we continue to have higher than normal quality-related expenses, particularly in [indiscernible] to have been deemed as not up to our product quality standards. SG&A for the quarter was 26.5% of net sales compared to 25.8% for the same period in the prior year. Our dollar costs were actually lower in the 2016 period, as compared to the first quarter of 2015. But our sales came in much lower than anticipated. During the first quarter, we have restructuring charges of $1.4 million. The majority of which was due to reserving for the requirement to add costs for the shutdown of our wastewater treatment plant in Atmore, Alabama. We have some restructuring expenses that were completed early in the second quarter and we have scheduled these in our press release. Operationally, our restructuring plan is largely complete. Our operating loss for the quarter was $5.8 million, compared to a loss of $2.7 million in the first quarter of 2016. Our interest expense for the quarter, of $1.3 million, compared to $1.2 million in the 2015 period. The higher interest expense is due to higher rates. We had an income tax benefit rate of 33.7% for the quarter. Diluted loss from continuing operations was $0.30 for the quarter. On a non-GAAP basis, adjusting for the facility consolidation expenses, fully diluted loss of $0.25 per share for the first quarter. Looking at our balance sheet for the first quarter of 2016, our receivables decreased by $5.1 million. Our inventories were down by $6.3 million. Capital equipment acquisitions, including those funded by cash and financing, was $1.2 million for the quarter. Depreciation and amortization for the quarter was $3.5 million. Anticipated capital expenditures for 2016 of approximately $5 million and depreciation and amortization were approximately $13.5 million. Our debt stood at $125.6 million at the end of the quarter, slightly below the $126 million we had at the end of 2015. Our accessible availability at the end of the quarter was $11.2 million. And currently is approximately $13.4 million. Our investor presentation, including our non-GAAP information, is on our website at www.thedixiegroup.com. Dan?

[Dan Frierson:]

Thank you, Jon. In response to our poor performance during the quarter, we have embarked on a number of initiatives to lower costs and improve profitability. Fortunately, in the second quarter, we will complete our restructuring program, to enhance customer service and reduce costs. We have reduced over 70 associates, as we have improved productivity and trained our new associates in their respective duties. The changes in our medical plans and premiums have lowered our medical costs significantly. We have chosen to lower capital expenditures from over $10 million to the $5 million level, for the year. On the West coast, we have combined backing operations or will be combining backing operations and vacating rented space. We have taken a number of cost-reduction initiatives and will continue reducing costs to fit our sales and improve profitability. In the residential market we have seen the normal, seasonal uptick in customer activity, relative to the first quarter. With sales up significantly from the first quarter, but down low, single digits for the first five weeks of the second quarter. In the commercial market, our sales for the first five weeks of the quarter are behind the same period last year, by approximately 10%. Our commercial backlog dollars, however, are up 27% at the end of the first five weeks, compared to year-end. And approximately the same as this time last year. Overall, our sales over the first five weeks of the second quarter are up 17% from first quarter level, but down mid-single digits as compared with the same period a year ago. Our internal production for the first five weeks of the quarter is up 29% over the average weekly production for the first quarter of this year and approximately the same as the first five weeks of the second quarter a year ago. We're celebrating the 150th anniversary of our Maslin brand with a series of anniversary sales and other promotional events. We're pleased with our 2016 offerings which are in the market earlier than usual. We continue to have success with our expanded line of STAINMASTER PetProtect products. Commercially, our Atlas brand has introduced the Metropolitan Collection. A collaboration with Robert A. M. Stern Architects. Our Maslin contract brand has successfully launched a new category of products around distress solutions, an offering for the corporate marketplace. Maslin Hospitality has released a new catalog with its fleur-de-lis collection, taking design elements from traditional to abstract. As we look ahead at the remainder of 2016, we have continued emphasis on improving our results and continuing to provide beautiful products to our customers. At this time, we would like to open up the call to questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Sam Darkatsh from Raymond James.

[Sam Darkatsh:]

Three questions, if I could. The first, the CapEx cut, I'm guessing you're looking at that as a deferral and not a permanent cut. But what sorts of projects or items are you pushing off into the future and how does that affect things?

[Dan Frierson:]

Sam, basically this is tufting equipment that we had planned to buy sometime during the year. We will be pushing it off. Obviously if demand for the products off those machines is not as great as we had thought, we don't have the need as soon as we would otherwise. But we have cut our CapEx and feel like that we can do that without impacting our sales this year, at all.

[Sam Darkatsh:]

How should we look at utilization rates? I mean, first quarter is a little funky, obviously, because of seasonality. But based on what your sales projections might look like over the next few months or so, where might utilization rates be looking like for the peak season?

[Jon Faulkner:]

Sam, we don't have any major problems that we would anticipate anywhere in terms of production capacity. And if you remember, we do have certain products that we have periodically taken on the outside if necessary. But we don't have any particular areas I see as an issue in terms of capacity.

[Sam Darkatsh:]

I wasn't thinking of bottlenecks, I was thinking of slack capacity. How significant might that look like right now?

[Jon Faulkner:]

Our production levels, currently, are right in line with where we were this same quarter last year. So in terms of utilization, we would be basically looking at a benchmark. Our square yards tufted per week are almost identical to what they were second quarter last year. So that would be an indicator of kind of, the level of utilization.

[Dan Frierson:]

There are some items that we have had tufted on the outside that will be moving inside as the appropriate equipment is in place. But that's not a major thing. But it will provide more internal production.

[Sam Darkatsh:]

So how many shifts are you running right now?

[Jon Faulkner:]

We're running our normal five-day, three shift operations. The only thing running lower is our dye house is running two shifts. Just because of -- and we've been on that for a while -- just because our productivity is at a high enough level we don't need the third shift at this time.

[Dan Frierson:]

And our yarn plant will run the typical four shift, seven day operations.

[Sam Darkatsh:]

Next question, if I could. With the recent move in oil prices, any chatter in the channel about input costs moving around a little bit? What are your thoughts there?

[Dan Frierson:]

Sam, obviously we watch that, much like you do. And at this point, there has been no movement in raw material costs. And candidly, unless we see it go much higher, I don't think there will be much.

[Sam Darkatsh:]

Last question, if I could. Interface, about a week or so ago, were mentioning that they saw the mix go down in terms of price points, for carpet tile. And I think your carpet tile underperformed the broadloom. Are you seeing that same sort of mix shift downward in the industry? And what might cause that? And how do you respond to that without impacting your brand equity?

[Dan Frierson:]

Sam, yes there has been, I think, a continual move down for the last several years. I don't think that's something that's brand new. We do tend to be very much in the upper end of the business in tile, just like we're in broadloom. It so happened in the first quarter, we, unlike the industry, did not perform that well in tile and performed well in broadloom. I would say so far in the second quarter our tile business is very close to a year ago.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Tom Lewis of High Road Value Research

[Tom Lewis:]

Basically three questions here. First off, I'm not sure that you've spoken to this backlog much in the past, if at all. And referencing it being up 27%, can you put a little light on this? What exactly does that mean? Is that sales -- I never thought of you as having a backlog, are these sales that stretch out in time? And the increase that you cited, would that be in line with a normal seasonal trend or is it or not?

[Dan Frierson:]

Tom, one reason we mentioned it, it is a little unusual this year. And if you recall, we mentioned this was with commercial products. We're not talking about residential because a backlog really is almost meaningless on the residential side. But on the commercial side, we had a number of orders for later delivery. And I think that impacted our first quarter commercial business. And just trying to point out that our commercial business, we think, we had a strong year last year. And we anticipate our commercial business continuing to be good. But clearly down from a year ago. But order entry has been better than shipped. So I think that's the best way to look at it.

[Tom Lewis:]

And I mean, it might also be attributable to having difficulty getting the product out the door in the quality it needs to be which kind of ties into one of my other questions. It sounds kind of like some of these issues around waste and customer claims are with -- are going to be with a continued -- you're making headway, they will continue to be with us in the current quarter. But what are the prospects for these issues say, being more or less completely behind us for the second half of the year?

[Jon Faulkner:]

Our expectation is that things will be largely behind us when we get through to Q2. We're still going through, reviewing all of the inventory areas we're turned with. And we're about halfway through that process. We expect to finish that in the second quarter. Likewise, as we said, customer claims continue to decline. We expect those to be in more normal levels, second half 2016.

[Dan Frierson:]

In addition to that, our restructuring should be complete in the second quarter. So that's some other noise and numbers that will no longer be there.

[Tom Lewis:]

And the cash you have to lay out to pay for this additional bit of environmental mediation, is that pretty much -- is that stretched out over time or is that all happening in the days and weeks ahead?

[Jon Faulkner:]

We reserved the entire cost upfront. It will take quite a bit of time to actually implement putting in this -- we have to put a clay cap on top of the soil that's there. But we fully reserved for the cost, already.

[Tom Lewis:]

Okay. And I guess finally and just a bit of a stab at having a revenue -- I mean yes, obviously over the years we've had revenue struggles, adverse comparisons, most of the time it was pretty understandable in terms of what was going on in the general economy. I have to wonder, reading a lot lately, indications of cutbacks in spendings in the venture capital world, particularly west coast. I was wondering if any of that's in a meaningful market to you and if so, B, have you seen, might that be a part of why your commercial sales are struggling at this point?

[Dan Frierson:]

Well I think it's clear, the corporate sector is not as strong as it was maybe a year or two ago. We're hearing that in a number of different places. But obviously, we also sell many other sectors, the hospitality area, clearly the retail store planning, a number of different other areas and I think that's had an impact, but I don't think it's a major factor for us. And corporate's probably about a third of our business or something of that sort.

[Operator:]

Thank you and that concludes our question and answer session for today. I would like to turn the conference back over to management for any closing comments.

[Dan Frierson:]

Thank you, Karen. And thank you for joining us today. And we look forward to talking to you next quarter. Thank you. Bye.

[Operator:]

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.