The Dixie Group, Inc.
Q2 2016 Earnings Call Transcript

Published: 27 Jul 2016

[Operator:]

Good day, and welcome to The Dixie Group, Incorporated, Second Quarter 2016 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.

[Daniel Frierson:]

Thank you, Karen and welcome to all of you to our second quarter conference call. I have with me today, Jon Faulkner, our Chief Financial Officer who will be making a presentation momentarily. Our Safe Harbor statement is included by reference to our website and press release and investors pocket which is updated on the website. During the second quarter, sales continue to lag behind last year, but operating results improved significantly. We also completed our restructuring plan and are better prepared to continue improving our operations. Our sales at $105 million were below the second quarter of last year by 4.2%, but well ahead of first quarter sales which were $89 million. Our April orders were relatively strong, but softened as the quarter progressed. Just as in the first quarter, our commercial sales were over 8% behind the year-ago period. Residential sales were 2.3% under the prior year quarter. In comparison to the industry, we feel the residential business outperformed the industry, but we lost market share in the commercial business. Housing activity continues to improve particularly in the single-home category. We also see strong activity in the sales of existing homes, which is an indication of future carpet sales. We do believe uncertainty over the Brexit vote and concerned about our presidential election did impact consumer sentiment in the last half of the second quarter. On the other hand, the improvement of the stock market and basic demographic trends are positive for our industry going forward. Jon Faulkner will review our financial results. After which, I will have additional comments on our second quarter improvements and outlook for the current quarter.

[Jon Faulkner:]

Thank you, Dan. Looking at sales for the quarter, our sales were $105.3 million, a decrease of 4.2% as compared to the second quarter 2015. Total carpet sales were down 4.4%, while the industry was down in the low single-digits. Commercial products were down 8.1%, while the industry was down slightly. Residential products were down 2.3%, while the industry was down in the mid-to-low single-digit. For the quarter, gross profit was 26.8% of net sales and improvement from the second quarter of 2015 to 26.7% of gross profit percentage. Percentage increase was driven by improved quality costs, reduced operating expenses and lower medical cost. SG&A for the quarter was 23.1% of net sales. This compared to 23.8% for the same period in the prior year despite to lower sales volume. During the quarter, we have restructuring charges of 401,000. Our operational restructuring is now complete. Our operating profit for the quarter was $3.4 million, this compared to an operating profit of $2.2 million in the second quarter of 2016. Our interest expense for the quarter was $1.3 million, this compared to $1.2 million in the 2015 period. The higher interest expense is due to higher rates as we have long-term interest rate swaps securing higher rates for some of the ex-portion of our debt. Our tax rate for the year-to-date was 38.5% and we anticipated 35% going forward. Diluted earnings per share from continuing operations was $0.10 for the quarter, on a non-GAAP basis which excludes facility consolidation expense. Diluted earnings per share was $0.12 per share for the second quarter. Looking at our balance sheet for the second quarter of 2016, our receivables increased slightly and inventories were down $2.7 million. Capital equipment and acquisitions, including those funded by cash and financing was $1 million for the quarter. Depreciation and amortization for the quarter was $3.3 million. Anticipated capital expenditures for 2016 of approximately $5 million and depreciation and amortization of approximately $13.5 million. Our debt stood at $117.8 million at the end of the quarter decreasing by $7.8 million for the quarter. Accessible availability under our lines of credit at the end of the quarter was $19.1 million. Our investor presentation, including our non-GAAP information, is on our website at www.thedixiegroup.com. Dan?

[Daniel Frierson:]

Thank you, Jon. At the end of 2009 as we were experiencing the great recession, we stabilized our operations and then decided to take advantage of a number of growth opportunities we saw in the marketplace. Since that time, we have grown our Company 100%, 79% through organic growth while the industry is up only 9%. In the second quarter, we completed the restructuring that was required to accomplish this growth. We realized it took more time than originally anticipated and had a greater impact on our operations and financial results than we expected or you expected. The good news is that a number of initiatives on which we embarked are beginning to have the desired impact. Although, sales were down, our operating margins in the second quarter improved slightly over the year-ago period, but improved 5% from the first quarter. Completing the restructuring allowed us to bring more production into our operations, which had a positive impact in many ways. It allowed us to lower our cost structure through better running conditions and better capacity utilization. In the quarter, we had significantly lower quality costs as our new associates became more experienced and have learned to produce product to a very high standard. We also improved material yields as a result of improved quality and lower waste. We have also experienced lower medical expenses as a result of our new plan design and increased rates. Additionally, as we have improved operations, we continue to reduce staff as productivity improves. Compared to the second quarter of last year, our selling and administrative costs decreased in total dollars by 1,871,000 and as a percent of sales from 23.8% last year to 23.1% this year. This has been due to concentrated cost reduction plan and almost all areas of sales and administration. You might say we are now feeling more comfortable in our new skin or in our new configuration. In addition to these achievements, we were able to lower debt by $7.8 million by holding down capital expenditures and improving inventory utilization. We anticipate capital expenditures will be in the $5 million range for the year with depreciation and amortization of $13.5 million. Summarizing, we have completed our facility consolidation plan, thank goodness. Our quality is back in line with expectations; our service is backed to more normal levels. We are decreasing our cost structure in response to lower demand. We completed the consolidation of our West Coast quarter operations in June lowering costs and streamlining our operations. The residential market is off modestly year-to-date. Demographic forces however should continue to improve the market for flooring. Masland Contract is launching the Calibre High Performance LVT Flooring line. This LVT line collection, Custom Run capabilities, Modular & Broadloom signature styles as well as Customs make Masland Contract a producer that can be a complete solution for the commercial specifier to create beautiful and high performance interiors. In the residential market, our Dixie Home, Masland, and Fabrica brands provide a good, better, best for consumers looking for unique quality carpets and rugs. Our investment in tufting technology allows us to provide distinctive products to support the success of our flooring dealers and interior designers. Each brand speaks to the customer and addresses their personal tastes, whether traditional, transitional or urban modern. We again have introduced this year a large number of new products which are being well received in the marketplace. Our sales over the first weeks of the second quarter are down as compared with the same period last year. We believe the entire floorcovering industry has been impacted by lower levels of consumer confidence since the Brexit vote. Our sales in July compared to last year are down nearly 12% compared to an unusually strong period last year. As we go forward, the comparisons become less difficult. Our residential business continues to perform better than the commercial business. Looking forward, we believe the opportunities for strong growth like we have experienced over the last few years will not be as great in the carpet market. So our current and future focus is on operational and financial improvements as we continue to introduce beautifully styled unique products, which can help our customers, differentiate themselves in the marketplace. We do however feel their opportunities grow in hard surface and have been focusing on this sector for some time. These products can be compatible and complimentary to our current carpet and rug products, which we offer our floorcovering customers and with whom we already have relationships. At this time, we would like to open up the conference call to your questions.

[Operator:]

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

[Sam Darkatsh:]

Good morning, Dan. Good morning Jon. How are you?

[Daniel Frierson:]

Fine. Sam, how are you?

[Sam Darkatsh:]

I am fine. Thank you. Few questions. First off, Dan you mentioned in your prepared remarks that the July comparison was particularly difficult and that August and September I think get a little easier? Can you help quantify the comparisons in August and September versus July for us?

[Daniel Frierson:]

Let me speak to it generally, I can't give you exact numbers, but last year July was our best month in the third quarter and that's most unusual. And I'm talking about from a weekly sales standpoint. Usually, we see a better business later in the third quarter. So it was a little flip around last year and that's why I think the comparison is difficult. I cannot give you a specific number however.

[Sam Darkatsh:]

To that point you called out Brexit as a possible determination for the week activity in July. Might that suggest that early July was worse than later July as things seem to have stabilized at least from a sentiment standpoint?

[Daniel Frierson:]

Well, early July for an order entry standpoint tends to be a pretty tough period around the fourth of July anyway. So I have stated - but yes, I think we see - generally see business improve after the first of July, first couple of weeks.

[Sam Darkatsh:]

Okay. Next set of questions here. Talk about pricing trends both with respect to selling prices and then also input costs, if you could Dan?

[Daniel Frierson:]

We have seen very little change in input cost in the last quarter, or for this quarter. I think in terms of finished goods pricing there probably been more movement in the very low end of the marketplace in which we do not participate then there has been in the upper end of the market. I don't think if we have seen much change in pricing in the upper end of the residential market. I will say in the commercial market it is very competitive and of course a lot of that's on a basis, so it's a little difficult to talk about price changes, but it is still very competitive. There are a lot of people competing on all projects.

[Sam Darkatsh:]

Last question if I could. Jon, you mentioned I think $5 million in expected CapEx for this year. When we get into 2017 and beyond what do you peg is a either a normalized CapEx or what your CapEx expectations are either based on what you think demand might look like and your capacity utilization efforts and what have you?

[Jon Faulkner:]

It’s preliminary, but I would anticipate would be in the $10 million range. We obviously haven’t finalized plans for next year. And it would be primarily oriented towards cost reduction projects.

[Sam Darkatsh:]

Thank you, gentlemen.

[Daniel Frierson:]

Thank you, Sam.

[Jon Faulkner:]

Thanks, Sam.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Tom Spiro from Spiro Capital.

[Tom Spiro:]

Yes. Tom Spiro, Spiro Capital. Good morning.

[Daniel Frierson:]

Good morning, Tom.

[Jon Faulkner:]

Good morning.

[Tom Spiro:]

Dan in your commentary you mentioned that you - you think we've lost share on the commercial business. I was curious, one, why we may have lost it and two what we are able to do to regain it?

[Daniel Frierson:]

Well, those are both very good questions. I think the fact that a smaller percentage of our business is modular and the industry has something to do with that. Part of it just has to do with timing of new introductions and so forth, but we have - we did not introduce as many tile products quite honestly in the last year. So as we really will be introducing in the next year or so. So I think that's primarily the issue. We do believe also having LVT along with our - in our commercial business will enhance our position with carpet as well. I was going to say, it makes us some more full service supplier to these folks.

[Tom Spiro:]

I see. That actually leads to my second question which is the LVT announcement. I don't think you guys have done much of anything in the hard surface area and now you seem to be moving in that direction. Am I right?

[Daniel Frierson:]

That is correct.

[Tom Spiro:]

That's next kind of a major change in your thinking I suspect. What do we bring to hard surfaces? How do we compete in hard surfaces? I guess we're going to source it from someone else?

[Daniel Frierson:]

Yes, we are. But let me comment that we have been looking at this for sometime. We've actually looked at opportunities to acquire companies over the last couple of years. We've looked at a lot of different ways to enter the hard surface market particularly LVT. We will later be announcing that we're doing something similar on the residential side, but yes, initially we will be sourcing product. However, the product - the bulk of this product will be sourced in the United States, but we feel like, we are providing interior designer with multitude of surfaces which a product both rugs, custom, carpet, signature type products as well as the ability to provide really well-styled beautiful LVT will certainly enhance our position. But you're right, it is a departure, we've looked that into the past. We simply could not find the right vehicle other than buying product from elsewhere at this time and we feel like it will be a great way to enter the market, understand it better and so forth. I will also say as we were expanding our carpet business, we really did not have the dollars, the capital and/or the people to expand hard surface at the same time.

[Tom Spiro:]

Thank you. That’s very helpful. And Jon just a question or two for you. The press release notes the credit availability at the end of the quarter under our line was about $19 million. I was kind of curious, what was the low point in the quarter just ended, number one and where is it today?

[Jon Faulkner:]

I don't have the numbers in front of me for today, but…

[Tom Spiro:]

[Indiscernible]

[Jon Faulkner:]

Yes. Low point, it was probably in the $14 million range and that's all function kind of incoming purchases and timing of stock build-ups. Currently, I think we’re in the $14 million, $15 million range.

[Tom Spiro:]

And as we move forward through the rest of the year, do you expect the availability to stay in that range to grow or shrink?

[Jon Faulkner:]

No, it usually improves throughout the rest of the year.

[Tom Spiro:]

Okay, okay. Very helpful. Thanks much.

[Daniel Frierson:]

Thank you, Tom.

[Operator:]

Thank you. And that concludes our question-and-answer session for today. I will now turn the call back to Dan Frierson for any additional or closing remarks.

[Daniel Frierson:]

Karen, thank you very much. Again, we're very excited to have our restructuring plan finished and behind us and look forward to talking with you at the end of next quarter. Thank you.

[Operator:]

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