The Dixie Group, Inc.
Q4 2016 Earnings Call Transcript

Published: 6 Mar 2017

[Operator:]

Good day and welcome to The Dixie Group Inc 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.

[Dan Frierson:]

Thank you, Liz, and welcome everyone to our fourth quarter and year-end 2016 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 the press release. Our carpet sales for 2016 were down 6% from 2015 on a comparable 52-week basis, while the industry we believe was down in the low single digits. In the fourth quarter, our total carpet sales were down 7.7%, while the industry was flat. Sales of our residential products were down approximately 3%, while the industry was down a similar amount. Our commercial product sales on a year-over-year basis were down over 11%, while the industry was down slightly, all on a 52-week equivalent basis. In the fourth quarter, not only were sales down, but we also significantly reduced our inventory, thus negatively impacting our cost absorption. In addition, we had significant negative inventory expenses during the quarter, as we dropped a number of older products and increased several reserves. Needless to say, for the quarter and the year, our results were unsatisfactory. Jon will review our financial results after which I will discuss a number of actions, which are underway to improve our operations. Jon?

[Jon Faulkner:]

Thank you, Dan. Looking at sales, the year of sales were $397.5 million, decrease of 5.9% as compared to 2015. For the quarter, our sales were $102.6 million, decrease of 4.8% as compared to 2015. We did have 53 weeks in this fiscal year. The extra week which occurred in our fourth quarter had $5.4 million in sales; so for a comparable 52-week period our sales were down 7.2% year-over-year. Our total floorcovering sales were down 6%, while the industry was down low single digits on a comparable basis. Our commercial product sales were 11.5%, while the industry was down slightly; and our residential products were down 3%, while the industry was down in the low single digits. The divergence between our floorcovering sales and total sales, the deal was exiting the external yarn sales business to utilize production capacity internally. For the fourth quarter on a comparable 13-week basis, our sales were down 9.8%. Our total floorcovering sales also on a comparable basis were down 7.7%, while the industry was flat. Commercial product sales were down 16%, while the industry was down slightly. The residential product sales were down 3%, while the industry was up slightly. Gross profit for 2016 was 24% of net sales, as compared to 25.1% in 2015. Percentage decrease in margin was driven by very low production volumes in the first and fourth quarters as we reduced inventories by $17.9 million or 16% during the year. Our productions in the first and fourth quarters were below the level sales significantly, thus creating the shortage in cost absorption. In addition, we had unusually high inventory expenses, including high level of drop products and reserve adjustments to reflect the lower average selling price of our distressed good. Selling and administrative expenses for 2016 was 24.4% of net sales as compared to 2.8% for the same period in the prior year, primarily due to lower sales volume. The reduced selling and administrative expenses were $3.4 million or 3.4%. Our total restructuring expense for the year was $1.5 million and our operational restructuring is now complete. Our operating loss for 2016 was $3.4 million as compared to an operating profit of $2 million in 2015. Our interest expense for 2016 was $5.4 million, compared to $4.9 million in 2015 period. The higher interest expense was due to higher rates. Our tax benefit rate for the year was 41%, we anticipated it to be 35% going forward. Diluted loss per share from continuing operations was $0.33 for the year. Looking at the balance sheet for the end of 2016, our receivables decreased by $7.2 million or 14%. Our inventories decreased by $17.9 million or 16%. Capital equipment acquisitions, including those funded by cash and financings, was $5.3 million for the year. Depreciation and amortization for 2016 was $13.5 million. We anticipate capital expenditures for 2017 of approximately $8 million and depreciation and amortization of approximately $13.3 million. Our debt declined to $108.4 million at the end of the year deceasing by $17.7 million for the year. Accessible availability under our lines of credit at the end of the year was $29.1 million. Our investor presentation including our non-GAAP information is on our website at www.thedixiegroup.com. Dan?

[Dan Frierson:]

Thank you, Jon. Despite this difficult year from a profit perspective, we have made several significant changes to improve our results this year. We completed our restructuring earlier last year, setting the stage for a more productive manufacturing environment. This completes the separation of our East Coast commercial and residential facilities. Our claims expense has declined significantly as our workforce training has taken effect, improving our quality and our costs. We refinanced our debt, pushing out the maturity until 2021. We have reduced our inventory to levels in line with our sales and reflecting the improvements in reduced waste and shorter throughput times. As the quarter ended, the industry announced a price increase based on many increases in both cost of both labor and raw material. This price increase included both residential and commercial products. Fabrica, Masland and Dixie Home launched a series of new distinctive products for the residential market in 2016. Subsequently, Masland and Dixie Home have recently launched products featuring the new Stainmaster LiveWell technology. With the introduction of many beautiful new products and the disruption of the restructuring behind us, our residential brand should outperform the industry as we have over the last five years. Our Atlas brand successfully launched our Bellissimo Collection made with our multi-color Visionweave technology. Masland Contract has a success with Lava. With its larger scale pattern, Lava can create fluid form in contemporary contract design projects. Commercially last year we lagged the industry due to our lack of growth in modular carpet tile products. To remedy this situation, we moved our Avant offering into the Masland Contract brand to give these products greater exposure and introduced a number of new modular products at Masland and Atlas. We are beginning to see the results of this effort in our current business. This year the housing market will be in the middle of two massive demographic waves, millennials and baby boomers, with both groups driving demand for at least the next 10 years. This trend should provide steady growth in the floorcovering market. We are particularly pleased with the growth in single family housing and the rate of existing home sales. We plan to capitalize on this opportunity while recognizing the dramatic change in the floorcovering marketplace as hard surface products have grown significantly faster than soft surface products over the last several years. Therefore, we are entering into the hard surface market through several initiatives in our residential and commercial brands. We first introduced the Calibrè line of luxury vinyl tile products this fall – this past fall in our Masland Contract brand. Masland Contract has brought their own unique styling to the market as they do with their soft floorcovering products. These products have been engineered to be high performance, available for quick delivery, with exceptional styling and a great value. Residentially, our Dixie Home and Masland brands are supplying Stainmaster PetProtect luxury vinyl tile which includes a Claw Scratch Shield coating to help resist scratching from pets along with the Pet Traction Action for pet paws. With its resistance to liquid absorption, the new LVT offering effectively resist pet odors and stains. Dixie Home will be offering this superior residential product line with a limited lifetime warranty while Masland will be offering a commercial grade version of the PetProtect line featuring a limited lifetime residential warranty and a 12-year limited commercial warranty, with one of the heaviest wear layers available in the industry, keeping us a step ahead of the competition. As the primary supplier with the Stainmaster PetProtect LVT product offering, we feel our residential business is carving out a high end niche that meets the needs of the more discerning customer. Finally, we are planning to launch a high end engineered wood line through our Fabrica brand that will offer more sophisticated looks and sizes to the design channels we currently serve. We feel that all of these new hard surface products reflect the image of the brand they represent. From an operations and sales perspective, we have promoted David Hobbs to lead our Masland Commercial Business, and Don Dolan to Executive Vice President of Sales. David, with a long history of supplying modular carpet to the specified design market, brings leadership skills from a career servicing in that market. Don, with a long history at Masland Contract, emphasizes our traditional strength in selling beautiful and sophisticated product to delight the design community. Paul Comiskey, Head of our Residential Business, has announced plans to retire in early 2018. To replace Paul and lead the excellent team he has built, we have hired T.M. Nuckols, formerly of Invista. T.M. brings a long history of supporting differentiated branded product in the floorcovering market. Our business plan for 2017 anticipate returning to our history of outperforming the industry, residentially this will be driven by numerous new carpet products in rows. The introduction of unique hard surface products along with outstanding service and quality as we have experienced in the past, our commercial business with greater emphasis on modular products should return to growth this year. We have a number of projects in process, which will continue to bring cost down and improve operations. For the first nine weeks of the quarter, our sales of carpet are up 8% with both residential and commercial sales showing strong improvement from last year. This is quite a contrast with this time last year when we told you sales to date were down mid-single digits. Unlike last year also our facilities are operating at a much higher level than a year ago, as we produce product to fill existing orders and prepare for the spring season. At this time, we’d like to open up the call to any questions.

[Operator:]

[Operator Instructions] We have a question from the line of Wolf Joffe with EVR Research.

[Wolf Joffe:]

Good morning. How are you?

[Dan Frierson:]

Fine. How are you?

[Wolf Joffe:]

Well, thank you. What are the growth expectations for the industry for both commercial and residential in 2017?

[Dan Frierson:]

Well, obviously, everybody has a little different opinion on that. Thank you for talking about carpet only on the residential side, probably very modest growth. Commercially maybe a little higher but all in the – obviously in the single digits, the floorcovering business overall should grow somewhat more than that during the year.

[Wolf Joffe:]

Okay. And I guess given the performance over the past year. Can you embellish a little bit us to why you have confidence that you should keep pace with the industries both commercial and residential. But why you should keep pace with them at the very least?

[Dan Frierson:]

It’s based really on our history since the downturn of 2008 and 2009. At that time, the industry was off about 40% in 2009 from its peak and we were off about 40% from higher peak. Subsequent to that, we have grown some 98 odd percent and the industry is growing about 10% or 12%. It was based on a lot of beautiful new product, obviously service in our customers well. As we went through the restructuring two years ago, in particular we did have some service issues and quality issues we feel those are behind this today, we are servicing our customers as well as ever and our quality is improved dramatically. So that along with the new products as well as the new categories that we’re entering are really the reasons we think we can continue to outperform the industry. We believe the upper end of the industry which we service is growing faster than the industry general. And that obviously is part of our thought process.

[Wolf Joffe:]

Okay. Okay, I appreciate walking through that. If we just – I guess given the performance in the SG&A line this year. You said that SG&A dollars were down in part because sales were down. If we just pretend that your sales in 2017 are 5%, when do you think the SG&A dollars would be up?

[Jon Faulkner:]

Normally the selling component is really the only thing that moves significantly. So you’re looking at selling cost as a function of the total SG&A line out of third of that would be the increase.

[Wolf Joffe:]

Okay. And I guess given what happened with the gross margins this year. Obviously, you walked us through your management of inventory contributed to the gross margin decline that’s really well understood, and we appreciate the color around that. What has to happen for your gross margin for the full year of 2017 not to get back to say 26.5% or more?

[Jon Faulkner:]

Basically couple of things as we mentioned earlier, the first quarter our cost of goods produced was about 10% below our cost of goods sold and in the fourth quarter, it is about 15% below our cost of goods sold where the two middle quarters were pretty much in line. Now we’ve got our inventories down and that we have basically worked through the excess inventories because our first time quality was significantly better and our production throughput is significantly higher. Basically if we can maintain the sales rate in anticipation of some growth this next year, then we ought to be approaching those numbers. The other major issues we had with in terms of older product lines that we dropped those are hardly related to prior acquisitions and partly related to product lines that we really just were in the normal course. So there was a combination there. Those are pretty much behind us. So at this point in time, we will be shifting able to operate it much higher levels in the period. Now, the first quarter as you know is always our lowest sales period of the year. The first period is always most difficult the other three quarters always we operate much better just because our sales are typically lower in the first quarter that they’re in the last three quarters in the year.

[Wolf Joffe:]

So if I take your gross margin in Q2 and Q3 of 2016 and averaged them together that’s close to 26.5%. You sort of view that as being kind of a floor for the full year and this year with the opportunity to do better.

[Jon Faulkner:]

Yes.

[Wolf Joffe:]

I’m sorry, I interrupted you.

[Jon Faulkner:]

Yes, great.

[Wolf Joffe:]

Okay. And last question I appreciate your patience. I assume there will be some costs pertaining to your entry into the luxury vinyl tile segment. Is that an SG&A cost, is that further cost to goods.

[Jon Faulkner:]

It’s mainly a selling cost for the launch of new samples and sample vehicles into the marketplace. So that costs will flow through this year part of it we flow through fourth quarter with the commercial launch, the residential products will be this year primarily. But that will be some more of an impact in the first half of the year; we expect to have sales activity in the second half of the year to help offset that. But we will not have any significant sales at first half of the year.

[Wolf Joffe:]

Okay. Is there a way to quantify, I’m not sure how significant that is?

[Jon Faulkner:]

We don’t typically quantify our sample expense.

[Wolf Joffe:]

Okay.

[Jon Faulkner:]

But it would generally be in the range of at $1 million.

[Wolf Joffe:]

Okay. Thank you, gentlemen. Have a good day.

[Dan Frierson:]

Thank you.

[Operator:]

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

[Dan Frierson:]

Thank you, Liz and thank all of you all for being with us for this call. We look forward to 2017 and look forward to meeting with you again quarterly. Thank you.

[Operator:]

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