The Dixie Group, Inc.
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Good day and welcome to The Dixie Group, Inc. 2017 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, Crystal and welcome everyone to our second quarter conference call. I have with me Jon Faulkner, our Chief Financial Officer. Our Safe Harbor statement is included by reference both to our website and press release. For the quarter, our floorcovering sales were up year-over-year by 3.6%, while the industry we believe was flat. For the year-to-date, our floorcovering sales are up 7.4% versus prior year and versus a market that was flat year-over-year. Our commercial product sales for the quarter were flat while the market was down in the low single-digits. Further, our commercial product sales were up 5% for the year-to-date relative to 2016 while the industry, we think was down low single-digits. Our residential products were up 5.4% for the quarter as compared to the second quarter of 2016, with the industry being up in the low single-digit range. For the 6-month period ending in June, our residential product sales were up 8.7% compared to the same period in 2016 while the industry we believe was up only in the low single0-digits. The growth of single-family housing and the strength of existing home sales, coupled with improving consumer confidence and the strong stock market, has had a positive impact on the upper-end floorcovering business. This momentum has helped us gain market share in both the commercial and residential markets. For the first half, we believe both businesses performed about 7% better than the industry. We’ve taken a number of actions, which should be positive for the second half of the year and we will review those after Jon reviews our financial results. Go ahead, Jon.

[Jon Faulkner:]

Thank you, Dan. Looking at sales for the second quarter of 2017, our net sales were $107.2 million, an increase of 1.8% as compared to the second quarter of 2016. Gross profit for the second quarter was 26.5% of net sales. This compared to 26.8% in the second quarter of 2016. We had a price increase late in the second quarter and they do not meaningfully impact the quarter due to timing. Increase was to offset increases of materials, labor and healthcare. Further, we completed the installation of our back and skein dye house in our Colormaster facility as well as expenses for starting up our processing lines down in Atmore. Those startup expenses are now complete. Selling and administrative expenses for the quarter was 23.6% of net sales as compared to 23.1% for the same period in the prior year. The increased expense was largely due to the higher product launch expenses of the luxury model foreign product lines we introduced in both Masland and Dixie Home. There is no facility consolidation expenses during the quarter as compared to $401,000 a year before. Our operating profit for the second quarter of 2017 was $3.2 million. This compared to an operating profit of $3.4 million in the second quarter of 2016. Our interest expense for the second quarter of 2017 was $1.4 million as compared to $1.3 million in the same period of 2016. The higher interest expense was due to higher interest rates. Our tax benefit rate for the period was 3.2%, and we anticipate our tax rate to be 35% going forward. Diluted income per share from continuing operations was $0.08 for the quarter. Looking at our balance sheet at the end of the quarter, our receivables increased by $2.5 million during the quarter. Increase in our inventories was $8.4 million from the prior quarter. Capital acquisitions, including those funded by cash and financings, was $2.7 million for the quarter. Depreciation and amortization for the quarter is $3.2 million. Royalty Carpet Mills, our West Coast competitor, ceased operations in June. In July, we purchased the yarn processing assets and leased affordable yarn facility from Royalty to take advantage of the opportunities in the market. Thus, we anticipate capital expenditures for 2017 of approximately $13 million and depreciation and amortization of approximately $13.5 million. Our debt stood at $123.7 million at the end of the quarter. The accessible availability under our lines of credit at the end of the quarter was $22 million. Our investor presentation including our non-GAAP information is on our website at www.thedixiegroup.com. Dan?

[Dan Frierson:]

Thank you, Jon. As you know, the industry had a price increase in the first quarter and a second price increase late in the second quarter. We implemented the increases to offset higher people-related costs, including medical costs and higher raw material costs. In addition, during this time period, we had over $1 million of startup expenses for our Colormaster dyeing and Atmore yarn and coating operations. These expansions are now fully operational. The Colormaster expansion completes the centralization of all of our East Coast internal and external dyeing needs into a single facility. The completion of our expanded yarn and our pre-coat operations at our Atmore, Alabama facility improves on our response time by lowering the cost to make our – lowering the cost of our made-to-order production model. The implementation costs are behind us and the lower operational cost and better service are ahead of us. In addition to addressing operational opportunities, we also have been very active in the marketplace. We have aggressively added product to our residential and commercial offerings. At SURFACES, we introduced a number of additional Stainmaster and PetProtect products and launched 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 line meets the needs of today’s more educated consumer who desires healthier products and lifestyle solution. We also announced our entry into the residential luxury vinyl flooring market during the quarter and have been very pleased with the response to our introduction of Stainmaster PetProtect luxury vinyl flooring under the Masland and Dixie Home brands. We have been pleased by the number and quality of floorcovering dealers signing up for our luxury vinyl flooring offerings. Further, we now have placed over 1,150 displays and are beginning to experience positive results. Our commercial line of Calibrè luxury vinyl towel products is beginning to gain traction, with larger installations being ordered as we have now had time for the specification process to yield results. To date, the luxury vinyl flooring has – sales had been insignificant to our total, but certainly we think in the future will add to our sales, particularly in 2018. We have also witnessed some changes in the marketplace, which offer opportunity. Royalty Carpet Mills, a West Coast manufacturer, chose to cease operations in June. We’re taking advantage of this opportunity to increase our presence by placing additional displays and product with select retailers with all three of our residential brands, Fabrica, Masland and Dixie Home. Interestingly, Royalty also had three residential brands. We have recent agreement to purchase Royalty’s yarn production equipment and lease their manufacturing facility. On Tuesday, we started the plant up to support our carpet yarn – our carpet manufacturing on the West Coast and our Fabrica and Atlas facilities. In addition, we purchased some tufting equipment from Royalty. These machinery purchases will increase our capital expenditures to the $13 million range, which is about our depreciation and amortization level, as Jon pointed out. Beaulieu has announced their Chapter 11 bankruptcy in July. It is too soon to know the impact in the market. Suffice it to say, there is more opportunity to gain momentum and we will work diligently to further gain profitable market share. As we stated in our press release, our floorcovering sales for the first 4 weeks of July are up over 9% from year-ago levels. The sales improvement is about the same in both commercial and residential products. At this time, we will open up the meeting to questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Sam Darkatsh from Raymond James. Your line is open.

[Sam Darkatsh:]

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

[Dan Frierson:]

Fine. How are you?

[Sam Darkatsh:]

I am well. Thank you for asking. Just a couple of questions. It appears that the home center business was up pretty significantly in the quarter. Can you talk about what’s happening there? Is it something – you are doing something they are doing, easy comps, what’s the backdrop or reasoning behind that outsized growth as best you can tell?

[Dan Frierson:]

Well, first of all, we can leave out easy comps. I think from what we can tell, the big boxes with their free installation have gained market share from – have gained market share during the last year or so and we haven’t had increased business there and have had additional or more offerings than we have in the past. So I’d say it’s a combination of their gaining market share and our having more product in their showrooms.

[Sam Darkatsh:]

Do you anticipate the growth maintaining at its current pace in the back half of the year?

[Dan Frierson:]

Probably the further you go, the harder the comps get. So, it depends on how you mean and how you want to measure that, but I would think from a percentage standpoint, it will become more difficult to have the kind of increases that they have shown in the first half.

[Sam Darkatsh:]

Got it. And then the second question and Dan you alluded to this in your prepared remarks, but the Beaulieu bankruptcy announcement, might this be – would there be assets you could look at? What’s the opportunity to potentially pick up some business and what’s your capacity – if there is orders to pick up, what’s your capacity to let’s take advantage of that?

[Dan Frierson:]

Sam, that’s an excellent question and very difficult to answer, but I sort of look at it with Royalty ceasing operation and Beaulieu going into bankruptcy, it certainly creates opportunity in the marketplace whether we have similar products or not. In the case of Royalty, we have very similar products. It’s been much easier to gain floorspace and so forth with their ceasing operations. With Beaulieu, we tend to be higher end they tend to be lower end. But I think the reduction of major suppliers in the industry always creates opportunity for getting closer to retailers, doing a better job for them and increasing our business, but – and there may well be some assets that we would want to look at it sometime, but I think it’s too early really to properly assess the Beaulieu situation.

[Sam Darkatsh:]

Thank you very much. I appreciate it.

[Dan Frierson:]

Thank you, Sam.

[Operator:]

Thank you. [Operator Instructions] Thank you. And I am showing no further questions in the queue. I will turn the call back over to Dan Frierson for any closing and additional remarks.

[Dan Frierson:]

Thank you, Crystal. As Sam’s question indicated, the industry is in a very interesting period with a lot of turmoil in the marketplace, which hopefully will translate into opportunity – profitable opportunity in the future. Also, our movement into hard surface, which has begun in a very aggressive way, the first half of this year, should bode well for our sales, particularly in 2018 and beyond. We continue to think the upper end of the market is outperforming the market in general and that is one of the reasons that we continue to gain market share, particularly on the residential side. Thank you for joining us and we will look forward to you joining us again next quarter. Thank you.

[Operator:]

Ladies and gentlemen that will conclude today’s conference. Thank you again for your participation. Have a great day.