The Dixie Group, Inc.
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

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

[Dan Frierson:]

Thank you, Shannon and welcome to our third quarter conference call. I have with me here Jon Faulkner, who will be participating in the call. And our Safe Harbor statement is referenced both from our press release and our website. For the quarter, our floorcovering sales were up year-over-year by 3.1%, while the industry we believe was slightly down. For the year-to-date, our floorcovering sales were up 5.9% against prior year and a market that was marginal down year-over-year. Our commercial product sales for the quarter were down 5.5% while the market was down in the mid single-digits. However, our commercial product sales were actually up 1.3% for the year-to-date relative to the prior year, while the industry we estimate was down by low single-digits. Commercial sales were strong in July, but weakened throughout the quarter as our order entry was quite weak in July and August. We've seen a pickup of our order increase starting in September and continuing through October. Our residential products were up 7.4% for the quarter, as compared with the third quarter of 2016. With the industry we estimate was up in the low single digit range. For the 9 month period in September - ending in September, our residential product sales were up 8.3% compared to the same period a year ago. While the industry we believe was up only low single digits. This time, I'll turn the meeting over to Jon Faulkner, who will review our financial results after which I'll make additional comments.

[Jon Faulkner:]

Thank you, Dan. Again looking at the sales for the third quarter of 2017, our sales were up $102.7 million, an increase of 2.3% compared to the third quarter of 2016. The year-to-date triggered [ph] our sales of $307.3 million, a 4.2% increase over the sale of $294.8 million in the year ago period. Looking at gross profit for the third quarter, it was a 24.2% of net sales, as compared to 25.8% in the third quarter of 2016. We had a price increase with effect [ph] in the third quarter and the industry has announced a price increase to be effective at the start of the New Year. The increases are offset increases in material, labor and operating expenses. During the third quarter of 2017, our gross profit was positively impacted by higher sales volume offset by higher raw material costs, the startup expenses of our new Porterville yarn operation, the completion of our Colormaster skein and beck dye expansion and the under absorbed manufacturing expenses as our production volume dropped off significantly late in the quarter due to weak order volume earlier in the period. As Dan described, our order entry volume has strengthened early in the fourth quarter. Selling and administrative expenses for the quarter was 23.4% of net sales, as compared to 23.7% for the same period in the prior year, made an operating profit of 767,000 in the third quarter of 2017, compared with an operating income of $1.9 million in the third quarter of 2006. Our interest expense for the third quarter of 2017 was $1.5 million, as compared to $1.3 million in the same period of 2016. The higher interest expense was due to higher interest rate and higher level of debt. A tax benefit rate for the period was 24.8%. We anticipate it be 35% going forward. Diluted loss per share from continuing operations was $0.30 for the quarter. Looking at our balance sheet at the end of the quarter, our receivables increased $2.9 million during the quarter. The increase in our inventories was $10.9 million from the prior quarter. Capital equipment acquisition, including those funded by cash and financings was $5.7 million for the quarter. Depreciation and amortization for the quarter was $3.2 million. Royalty Carpet Mills, and west coast competitor ceased operations in June, July we purchased the yarn processing assets and leased a quarterly yarn facility from Royalty to take advantage of the opportunities in the market. Thus we anticipate capital expenditures for 2017 of approximately $13.8 million and depreciation and amortization of approximate $13.1 million. Our debt stood at $138.5 million at the end of the quarter, increasing by $14.8 million for the period. Accessible availability under our lines of credit at the end of the quarter was $11 million. Our investor presentation, including our non-GAAP information is on our website at www.thedixiegroup.com. Dan?

[Dan Frierson:]

Thank you, Jon. Although it is difficult to quantify the third quarter sales were impacted by the hurricanes in Texas and Florida, as well as the force majeure which was declared by our largest raw material supplier. Our earnings were also negatively impacted by the startup expenses of our expanded back and skein dyeing operations in our in our Colormaster facility. The startup of our new Porterville yarn processing plant also impacted earnings, as well as the installation of a precoat line in our Atmore facility. Fortunately all of these issues appear to be behind us at this time and we - as we embark on the fourth quarter. Residentially our sales in the fourth quarter are strong for all three of our brands, Fabrica, Masland and Dixie Home and with the addition of the Porterville yarn operation we are better able to meet the service requirements of our customers, both the East Coast and West coast. The launch of our Masland and Dixie Home, Stainmaster, Pet Protect luxury vinyl flooring is off to a great start. We have placed over 1300 retail displays and have displaced our foot on the floor. We're beginning to see strong consumer acceptance. Next year this should be a significant contributor to our sales and earnings. We announced in mid-October the appointment of David Hobbs, as president of our commercial business. With this change his responsibilities will now encompass both the Masland Contract and Atlas Carpet Mills commercial brands. We will maintain the distinct sales forces of Masland Contract and Atlas and the unique style and design characteristics that these brands have been known for in the past. The organizational change we are instituting on the commercial side is similar to the successful change we made to our residential business in 2009 when we consolidated the residential management structure but maintained our three distinct brands and sales forces. The announcement regarding the consolidation of our two commercial brands, Atlas and Masland is part of the company’s profit improvement plan to improve profitability through lower cost and streamlined decision making, aligning processes to maximize efficiency. The plan includes consolidating the management of Dixie's two commercial brands under one management team, sharing operations in sales, marketing, product development and manufacturing. As we look forward in the commercial business, we think this will allow us to be more impactful in the industry. There are several changes in the industry also that have had an impact in the last several months, starting with the closing of Royalty Carpet Mills in June, followed by the bankruptcy of Beaulieu and its acquisitions recently by EIA [ph]. These changes have provided additional opportunities to improve our market penetration. Recently the announcement of a price increase in the industry should help us cover the cost increases we have experienced in 2017 in our operations. In summary, we have consolidated our two commercial brands Masland Contract and Atlas under one management, sharing operations and marketing product development and manufacturing, but maintaining distinct sales forces. We announced our profit improvement plan with a charge in the fourth quarter of $775,000 of savings in ‘18 of over $3 million. We're taking advantage of the opportunities created in the West Coast market, with added retailer and builder penetration and increased service flexibility with the acquisition of the Porterville Californian yarn facility. As some contractors launched both the new Calibre and acquired down luxury vinyl product line and they're doing very well. We have placed over 1300 displays of our Stainmaster Pet Protect luxury vinyl flooring through our Masland and Dixie Home residential brands. The fourth quarter is started off up beat with our floor covering sales up over 11% for the first five and a half weeks, as compared to the same time in 2016. Residential sales have been particularly strong and we are implementing a price increase of 46% for 2018. This time, we’d like to open up the meeting to any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Sam Darkatsh with Raymond James. You may begin.

[Unidentified Analyst:]

Good morning. This is Josh filling in for Sam. Thanks for taking my questions.

[Dan Frierson:]

Hey, Josh.

[Unidentified Analyst:]

To maybe start with the gross margin in the quarter, could you quantify or rank the various headwinds that you faced?

[Dan Frierson:]

Josh, I think the largest fact in terms of the gross margin impact was the reduction throughout the quarter of our demand on the commercial side of the business. Our residential demand was fairly constant throughout the quarter, but we had a drop – a dramatic drop off as order entry was very weak in July and August for us and we believe for the industry. If you look at the other effects, of course, we did have the completion of the skein and beck dye operation, as well as startup quarter ago, both probably be for magnitude and then we also had disruption, I can't really quantify it due to having to react to the force measure from our largest fiber supplier during the time period, especially trying to rearrange production schedules to fit the flow of fibers we had coming through the system.

[Unidentified Analyst:]

And then as it relates to the savings plan for 2018, can you give us a sense of the cadence at which those savings will be realized?

[Jon Faulkner:]

It will be fully implemented earlier in 2018. So of that $3 million I expect about 700,000 in the first quarter and balance equally throughout for remaining quarters.

[Unidentified Analyst:]

Thank you. Good luck with the next quarter.

[Jon Faulkner:]

Thanks.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from John Baugh [ph] with Stifel. You may begin.

[Unidentified Analyst:]

Thank you. Good afternoon, Dan and Jon.

[Dan Frierson:]

Hello, John.

[Unidentified Analyst:]

I was curious about, I believe its California has this recycling or landfill tax on carpet and I think it's up to a buck a yard if I'm not mistaken. I'm curious is there a movement around the country or other states towards that or any kind of color you can provide on that issue?

[Dan Frierson:]

Well, first of all I think the current rate is $0.25 per yard. And as you know, that is charged to the consumer. So it is funded in that manner. Jon, do you won't comment on other things - other efforts around the country?

[Jon Faulkner:]

There are other states that have looked at similar plans, but we've not been confronted with quite the same expectations as we had in California. There are various states and we're trying to work with through the Carpet & Rugs institute Care, to the industrywide recycling group to try and deal with concerning the node. And we have a voluntary plan which the Carpet & Rug institute fund to help recyclers in the remaining states to have pick up centers and be more efficient in the recycling process. At this point in time California is unique among its particular program design.

[Dan Frierson:]

John, in summary, this is an issue that Carpet & Rug institute and Care have been addressing for some time. And I think we're most effective when working together as an industry. But it is an issue and one that we're obviously working on.

[Unidentified Analyst:]

Okay. That's helpful. And then maybe on commercial, I think you talked about a fairly choppy order pattern there and I guess kind of a two part question. What are you seeing within your carpet tile business and/or demand for carpet tile overall? And what are you hearing from your sales people or your channels of Intel [ph] about what parts of the commercial market are soft and you know, what the outlook there might be? Thank you.

[Dan Frierson:]

Well, obviously carpet tile continues to gain market share from broadloom. We do participate in some areas like hospitality that still has a fair amount of - significant amount of broadloom and less tile, but certainly corporate is going much, much higher percentage of talent and some of the other end used markets. But the way you characterize the business is choppy, is probably pretty reflective of what we're seeing. From time to time it did appear in July and August that order entry was off considerably both in broadloom and carpet tile. I would say both are up pretty significantly in September and October. So it's a little difficult for us to [indiscernible] market. We don't participate in all the aspects of the market. We do participate in corporate. We do participate in hospitality and other markets. But we are in the higher end of each of those markets as well and sometimes that’s not reflective of the entire market.

[Unidentified Analyst:]

Thanks for that. And then on that - so in corporate or hospitality, so in commercial, are you seeing LVT encroach or are you seeing your architects designers or end users you're talking to who want to you know, add that to the mix or now that's a sufficiently low priced product line that were high price carpet that we don't really run into that?

[Dan Frierson:]

I think everybody runs into that today. I don't think a carpet manufacturer and also selling luxury vinyl flooring, so it clearly is eating into that market to some degree and our Calibrè collection and [indiscernible] collection that we started about a year ago with the Calibrè [ph] collection is gaining great traction again I think in ‘18 will be a real contributor to our business.

[Unidentified Analyst:]

Thank you for answering my questions. Good luck.

[Dan Frierson:]

Thanks, John.

[Operator:]

Thank you. With no further questions in the queue. I will turn the call back to Dan Frierson for any additional and closing remarks.

[Dan Frierson:]

Thank you, Shannon and thank you all for being with us on our conference call and look forward to being with you after the end of the year. Thank you.

[Operator:]

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