The Dixie Group, Inc.
Q1 2017 Earnings Call Transcript

Published: 6 May 2017

[Operator:]

Good day, and welcome to The Dixie Group, Inc. 2017 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 Chairman and Chief Executive Officer, Dan Frierson. Please go ahead.

[Dan Frierson:]

Thank you, Vince, and welcome everyone to our first quarter 2017 conference call. Jon Faulkner will also be presenting. Jon is our Chief Financial Officer. Our safe harbor statement is included by reference both to our Web site and press release. Our floor covering sales were up from the year ago period by 11.9% while the industry was flat for the same comparative period. Residential products increased by 12.7% during the quarter while the industry was up slightly for the year-over-year period. Our commercial products largely led by modular, increased 10.4% versus 2016 while industry sales appear to be up slightly. In the first quarter, we began to see the positive impact of the restructuring of our manufacturing and the reduction of the quality related expenses which we experienced during the implementation of our restructuring plan. Stronger volume and lower manufacturing costs both contributed to a much better first quarter this year than last. We were pleasantly surprised by the volume increases which we experienced in what is traditionally our weakest quarter for the year. Certainly, the growth of single family housing as well as increased sales of existing homes, coupled with an improving consumer confidence and the strong stock market, had a positive impact on the residential replacement business. On the commercial side, we continued to emphasize growth in modular products with many new introductions. Jon will review our financial results for the quarter after which I will discuss our outlook for the future. Jon?

[Jon Faulkner:]

Thank you, Dan. Looking at sales for the first quarter of 2017. Our sales were $97.5 million, an increase of 9.3% compared to the first quarter of 2016. Looking strictly at our floorcovering sales, they were up 11.9% while the industry we believe was flat. Commercial products were up 10.4% while the industry we believe was down in the low-single digits. Residential products were up 12.7% while the industry was up slightly. Gross profit for the first quarter was 25.8% of net sales as compared to 21.9% from the first quarter of 2016. Percentage increase in margin was driven by higher sales of production volume, lower quality cost and improved pricing, offset by higher medical and onetime maintenance expenses. We had a price increase during the first quarter. In addition, the industry has announced a price increase effective late second quarter. Selling and administrative expense for the quarter was 25.1% of net sales. This compared to 26.5% in same period in the prior year, primarily due to higher sales volume. We had no restructuring expenses during the first quarter as compared to $1.4 million the year before. Our operating profit for the first quarter of 2017 was $628,000 compared to an operating loss of $5.8 million in the first quarter of 2016. Our interest expense for the first quarter of 2017 was $1.4 million as compared to $1.3 million in the same period of 2016. The higher interest expense is due to higher interest rate. Our tax benefit rate for the period was 22% and we anticipate it to be 35% going forward. Our diluted loss per share from continuing operation is $0.04 for the quarter. Looking at our balance sheet at the end of the quarter. Our receivables increased by $7.6 million during the first quarter or 17%. Seasonal increase in our inventories was $6.3 million from the year end or 7%. Capital equipment acquisition, including those funded by cash and financings was $3.8 million for the quarter. Depreciation and amortization for the first quarter is $3.2 million. We anticipate capital expenditures for 2017 of approximately $9 million and depreciation and amortization of approximately $13.3 million. Our debt stood at $120.7 million for the quarter, increasing by $12.3 million for the period. Accessible availability under our lines of credit at the end of the quarter was $21 million. Our investor presentation, including our non-GAAP information is on our Web site at www.thedixiegroup.com. Dan?

[Dan Frierson:]

Thank you, Jon. Our capital expenditures late last year and early this year have been focused on further improving our operation. For the residential business, we have been modifying our Colormaster facility to add beck and skein dyeing capability to our existing continuous dyeing and space dyeing. This effort has increased our costs in the first quarter but should be complete by the end of the second quarter. By combining our internal and external dyeing into one facility, this will give us the ability to better service our customers and improve our cost position. Similarly in our Atmore, Alabama plant, we have expanded yarn processing to lower costs and improve service. By internalizing these activities, we should improve our response time and lower the cost of our made to order production model in our commercial business. These changes largely took place in the first quarter and will be complete in the second quarter. Our medical costs for the quarter were above plan but appear to be moderating from the peak in February. Early in the quarter, we had a price increase to offset the raw material price increases we experienced before and during the quarter. These raw material increases are continuing and we have announced another price increase for late May. Hopefully, this will offset the raw material and other cost increases we are experiencing. With our floorcovering sales up 11.9% for the quarter, our facilities operated at more normal operating levels, which positively impacted our operating margins. Both residential and commercial products were up double digits, which led to better operating efficiencies in most facilities. For the remainder of the year, we don't expect to continue with such large increases over the year ago period. However, due to the normal seasonality, we should be operating at higher capacity levels going forward. For the first four weeks of the second quarter, our floorcovering sales are up mid-single digits as compared to the same time in the prior year after adjusting for the Easter holiday. Likewise, our total sales are up low single digits due to our exiting the sales of yarn to outside customers as our demand increased and we utilized that production in-house. At Surfaces, the annual residential show, we saw positive results from our new product line up for 2017. Notable in this was the launch of Stainmaster's LiveWell brand, the first carpet and cushion system designed to reduce dust and allergen particle buildup without adding steps to the cleaning routine. Made with kid and pet-safe AllerShield technology, it helps reduce the bonding of allergy-aggravating particles to the carpet fibers. When allergen particles release easily from the carpet fibers, more of them end up in the vacuum. This product lineup meets the needs of today's more educated consumer who desires healthier products and lifestyle solutions. We announced our entry also into the residential luxury vinyl tile market during the quarter and have been very pleased with the response to our introduction of Stainmaster PetProtect luxury vinyl tile under the Masland and Dixie Home brands. We have been pleased by the number and quality of floorcovering dealers signing up for our LVT offerings. Further, our commercial line of Calibrè luxury vinyl tile products is beginning to gain traction with larger installations being ordered as we have now had time for the specification process to yield results. Looking forward, we're hopeful we can continue gaining market share in the residential market and in the commercial market, grow our sales with modular products. Our LVT products will be additive as we gain placement in the marketplace. The price increase we have announced for carpet products will offset cost increases which we are experiencing. At this time, we would like to open up the call to questions. Vince?

[Operator:]

[Operator Instructions] Our first question is from Sam Darkatsh of Raymond James. Your line is open.

[Unidentified Analyst:]

This is Josh filling in for Sam. To start with, could you quantify the benefit to Easter in the first quarter? Was it like maybe a couple of points?

[Jon Faulkner:]

Benefit of what?

[Unidentified Analyst:]

Of the shift in Easter that hurt April.

[Jon Faulkner:]

Yes. If you looked at the difference between sales increase with and without, basically we were about 2.5 points difference.

[Dan Frierson:]

He's talking about the first quarter.

[Jon Faulkner:]

I'm sorry. I'm talking about really the first four weeks of the second quarter. So, yes, it would be -- they actually picked up [indiscernible]. So it would be up a couple of points [indiscernible]

[Unidentified Analyst:]

Okay. And then you talked about price increases going in to offset the raw materials. Can you maybe quantify what the negative net effect was of raws versus pricing in the quarter? And I assume that will be fully offset not until the third quarter. Is that the right way to think about?

[Dan Frierson:]

Josh, the price increase was an industry wide increase early in the quarter. Obviously, it takes a while for that to work its way through. The next one is in late May. It will take a while for that to work itself through. It will be the third quarter before it's fully in effect.

[Unidentified Analyst:]

Okay. And then the medical costs you called out that were moderating some. Was that largely a unique thing, there wasn't a change to the structure of the plan or anything like that?

[Dan Frierson:]

We changed plans a year ago and also increased our premiums internally twice last year. First quarter does seem to be an aberration. We had an abnormal number of very large cases and that seems to be moderating as we go forward. And I think the impact was somewhere north of $0.5 million.

[Operator:]

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

[Dan Frierson:]

Josh, I'd like to just go back to your point. On the first quarter, we had one more shipping day. That is one day out of 13 weeks, whatever that number works out to be which is one out of 60 something shipping days. Again, thank you all for joining us. We appreciate your interest and being on the call and look forward to talking with you next quarter. Thank you.

[Operator:]

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