The Dixie Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 2 May 2015

[Operator:]

Good day, and welcome to The Dixie Group Incorporated First Quarter 2015 Conference Call. Today’s conference 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, sir.

[Dan Frierson:]

Thank you, Melanie, and welcome everyone to our first 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 the press release. Our sales for the first quarter at 95.9 million were up 12.7% over the same period a year ago. Our total carpet sales were up over 15%. However, excluding Atlas our carpet sales increased about 5% over the year ago period. Sales volume as usual was relatively low in January but continued to improve as the quarter progress. Order entry improved faster than sales which is generally the case in the first quarter which is a favorable indicator for the second quarter. Sales of our residential products increased slightly for the quarter which we believe matters the experience for the industry. That was considerably stronger activity on the commercial side with strong order entry for both broad and modular products. Our total commercial carpet sales increased 52% for the quarter and 15% without the impact of Atlas which was acquired in late March a year ago. The good news is we have completed most of the plans structural changes in our facilities. Now with most of these moves over Atlas we are continuing expensive and ongoing training as our associates settle into a new role. As a reminder since the beginning of 2013 we have added over 50% more people in our company. This transition has taken longer and been more difficult than we originally anticipated. Therefore our financial results were less than satisfactory for the quarter. We anticipate we will see the positive benefits of our plan to expand capacity and streamline our operations in the second half of 2015. Jon Faulkner will review our financial results after which I’ll discuss the plans and investments we have made to increase our capacity and improve our profitability. Jon?

[Jon Faulkner:]

Thank you, Dan. Again, looking at sales for the year they were $95.9 million, an increase of 12.7% for the first quarter of 2014. Total carpet sales were up 15.3%. Our commercial products without Atlas were 15.7% while the industry was up in the high single digit. Our total commercial products are up 52%. Residential products were up 1.1% again we believe the industry was similar. The quarter gross profit was 24.3% of net sales compared to 21.3% for the first quarter of the prior year. The gross profit was impacted by the extensive restructuring we’ve undergone to realign operations, bank capacity to integrate the Atlas and Burtco acquisition. Product mix was within expectation, low gross profit percentage was driven by cost variances in our operations is result of the changes in profit fees and training of new people. This has been particularly higher quality in weight cost. Continue to see improvement on a monthly basis that we’ll not achieve acceptable results for the second half of the year. SG&A for the quarter was 25.8% of sales or 2.2% above the same period in the prior year primarily due to the additional efforts as well as higher capital expenses in our residential business and forward sales credit of the year. Operating loss was 2.7 million for the quarter compared to a loss of 2.2 million in the first quarter a year ago. We anticipate and added 1.25 million of integration expenses in 2015 including the cost that we have outlined in our attached document or investor presentation. So our equipment expansion is nearly complete. We have remaining the completion of Susan Street to accommodate Atlas in the middle of our commercial finished goods facility for sale in Alabama to our Atmore, Alabama carpet manufacturing facility and the move of our sale and rug operation out of a rent facility into the company owned facility. The ongoing cost of higher quality and relationship continue to drop as we go to the added training and operations and settle down those facilities detected by the disruptions of those restructuring. Our interest expense for the quarter was 1.2 million. We modified our revolving credit facility by removing our selling plan from the borrowing base financing for the 10 year fixed rate mortgage take advantage of lower long term interest rate. Our effective income tax rate for the year was 38.5% and normal rate going forward at regional level of profitability should be in the 35% range. Related loss from continuing operations for the first quarter of 2015 is $0.15 per share, compared to income $0.36 per share in the first quarter of 2014. Looking at our balance sheet our receivables increased 1.2 million during the quarter. Our inventories increased 6 million. Capital equipment acquisition, including those funded by cash, financings and capital leases were 5.7 million for the quarter. Depreciation and amortization for the period was 3.6 million. We anticipate capital expenditures for 2015 of approximately 13.5 million, depreciation and amortization of approximately 14.5 million. Our debt stood at 133 million at the end of the quarter. At quarter’s end our availability in our loan agreements was 32.8 million and is currently at 38 million. Our investor presentation including our non-GAAP information is on our website at www.thedixiegroup.com. Dan?

[Dan Frierson:]

Thank you, Jon. During the first quarter on a monthly basis we experienced improved operating results and improved sales for both residential and commercial products. Sales for the first four weeks of April are up over 6% with strong growth and maximum commercial products and continued strong demand for modular as well as broad lane products. Our residential sales are up in the mid-single digits which is an improvement from the first quarter. Residential sales improvement is being driven by our wall business and our growth in Stainmaster products. The utilization of new tufting technology with ColorPoint and the [indiscernible] machines has enabled us to continue introducing new residential products which help separate us from the competition. In April all of our residential brands Fabrica, Masland and Dixie Home are performing better than the year ago period. We’re pleased with the commercial business as it continues to be strong. Modular growth continues as does our Masland hospitality business as we leverage our investment in Burtco and its unique position and custom computerized the yarn placement technology. Our Atlas business is down slightly from the year ago due to delayed introduction of several new products. These products are now reaching the market. We expect better results at Atlas later in the year. As we’ve mentioned before 2014 was a challenge from an operational standpoint due to the mainly initiatives on which we embark in order to catch up to our sales growth. We probably ask more of our team than we were capable of delivering. During the first quarter we saw continued improvement on a monthly basis and we’d expect second quarter’s performance to be significantly better, which should lead to a much improved second half of the year. We anticipate continuing to invest in new and differentiated equipment this year and we’ll probably spend about the level of our depreciation and amortization which is a big change from the year ago. We will invest more in new products and samples this year as we ramp up the Atlas product introductions and participate in several major resets of offerings for some of our larger customers. This should position us well to continue our sales growth for which our facilities are prepared and allow our sample budget to decline in 2016 and beyond as a percentage of sales. Although we have begun to experience some raw material reductions we have also incurred additional cost in several areas. Medical care cost have continued to increase over the last year or so and we have experienced wage increases in our facilities. Our second quarter business today is running about 11% over our first quarter activity level which means our facilities are producing at a more normal rate. We believe the residential market will continue to improve as the year progresses and the commercial market will maintain the momentum we have seen today. Raw material cost will be volatile which should be a plus during the remainder of the year. At this time we would like to open up the call for questions.

[Operator:]

[Operator Instructions] We’ll go first to [indiscernible]

[Unidentified Analyst:]

Just a couple of questions, one, are you still hiring or do you now the staff level that you thought.

[Jon Faulkner:]

I think we’re fully staffed at this point. There will be turnover typically but we’re fully staffed.

[Unidentified Analyst:]

And the training process, the learning curve with respect to the new hires where do you think you stand in that early one midway?

[Jon Faulkner:]

I would say at this point in time we’re probably midway through in most of our facilities except our [indiscernible] facility we’re still I think probably more like five or six months down the road. One is a brand new facility and has the newest staff of all.

[Unidentified Analyst:]

And then my last question, you noted in the release that you’ve removed one property from the security for the revolver I think it was the [indiscernible] plant, I was curious whether the removal of that property caused any other material changes in the revolver, material terms in the revolver to change like covenants, interest rates those kinds of things.

[Jon Faulkner:]

No, there was no change to the revolver document. We just merely removed it from the asset base and got a 10 year mortgage on that facility.

[Unidentified Analyst:]

Okay.

[Jon Faulkner:]

It does increase availability but there is no term change.

[Unidentified Analyst:]

You say, increase or decreases in availability?

[Jon Faulkner:]

Increases available because the borrowing base is higher under the mortgage been it would have been under the revolver.

[Unidentified Analyst:]

And was the rate on the mortgage much higher than revolver I imagine somewhat.

[Jon Faulkner:]

Little bit 4.3% and the revolver is basically 2% at this point in time.

[Operator:]

We'll go next to Howard Rosencrans with VA.

[Howard Rosencrans:]

It's good to see we’re making progress after slow start to the year. Historically or in the last three, four, five, six years, you have done substantially better than the industry on the residential side certainly the high end economy continues to perform better than the rest I'm wondering why you didn’t make market share gains in the first quarter and what your expectations are for the balance of the year and then I have a follow regarding Atlas. Thank you.

[Dan Frierson:]

I would say there are a couple of reason first of all first quarter is our weakest quarter and we don’t tend to perform as well as the industry because the industry does a lot of sales of stock items and we do not, 97% of what we sell is cut. So a lot of times we don’t perform as well against the industry in the first quarter as we do in subsequent quarters. I would also say this year due to some service issue we had late last year and some quality issue that John refer to that we did not see as biggest period between us in the industry as we normally would expect. We have a full complement of introductions this year and we would expect to continue to outperform the industry going forward.

[Howard Rosencrans:]

In terms of the Atlas I guess the second quarter will be the first quarter your comp against it and understandably you remove that in your comments about commercial. You haven’t said it point blank but it's clear it didn’t get of the gate great immediately after the acquisition. Do you feel like you’ve really alleviated the majority of issues associated with Atlas and that will see some pretty good comps on that business I understand it will probably consolidated with commercial generally. But how are you feeling about that business in particular?

[Dan Frierson:]

Howard your observations are correct it did start out somewhat slowly. We did not introduce new products in a timely basis last year due to several reasons. One just a distraction of the transaction and the consolidation of the warehouses on the West Coast which really was completed later in the year. And new technology which we had on order with later coming in than we anticipated. So the combination of those three things meant that we did not introduce many products last year. We did begin introducing in late fourth quarter new products and have introduced several this year. So we would anticipate later this year that we would show a much better top line performance there than we have so far. We'll say however though we have done an audit of that transaction and its still has been a very good transaction for us.

[Howard Rosencrans:]

I believe the first -- I don’t remember the exact date of the close of the acquisition.

[Jon Faulkner:]

It was March 20 of the year ago.

[Howard Rosencrans:]

March 20 so we're going be comping that business in Q2. Based on your comments just now, I wouldn’t say you'll have a -- if I was just to look at that business on an isolated basis where you have a strong comparison in the second quarter it sounds more like will be the second half.

[Dan Frierson:]

I think it will be the second half on the other hand our [indiscernible] commercial is certainly comping very well and I think our overall commercial business will be up.

[Operator:]

We’ll go next to [indiscernible].

[Unidentified Analyst:]

Thanks a lot for the color in the release with respect to the activities you've undertaken today and kind of how it's winding down as we go into the second half. I think historically you've said that the return -- I think you said in the past that a return to historical margin profiles is consistent with your strategic plan and I'm curious as these operations or restructuring wind down in the third and fourth quarter and into 2016. Can we expect some pretty substantial sequential improvement in your view and over what time line kind of do you think that the return to these profitability levels maybe in the high single digit EBIT range are possible.

[Jon Faulkner:]

First of all Jason the margin improvement, the gross profit margin improvement we expect to continue to improve throughout 2015 and I think the SG&A improvements will be more noticeable in 2016 as we get into more normal levels of spending on new products. So I would say 2016 is a very much stronger operational return, the restructurings will have the most impact in Q2, that should be decline in Q3 and Q4 should be slightly normal that was operational.

[Unidentified Analyst:]

So from those statements is it -- I know you didn’t confirm what I said about the EBIT margin. But it seems like you've been high 20s gross margin before EBIT margin you have been high single digits is there a reason we shouldn’t think that those profitability levels you can return to them and it's particularly interesting because the cyclically company a lot of companies that we invest and look at are below where they've been at prior peaks and you are substantially higher due to the asset changes and M&A. And so a return to profitability could be pretty powerful here and we're just trying to get a sense if those gross margin and EBIT margin targets are realistic over the next couple of years.

[Jon Faulkner:]

Yes they are realistic in the improvements in gross margin should continue throughout '15 and into '16 and then the SG&A improvements will really occur more in '16 as we get over this year's higher spending on new product development of residential business.

[Operator:]

We’ll go to Howard Rosencrans from VA.

[Howard Rosencrans:]

I wanted to in fact follow up on just ask prior question, I'm going to give you a chance to caveat that. What are the underlying assumptions in terms of single family it's probably more just housing starts including multi-family, but are the sorts of housing starts numbers that you think we would need to see economically wide I guess I get the expectations this year is we're going to run about one to one. Since we're talking about getting back to high singles in terms of EBIT margins do we need to see [15] or [17] or is this more a company specific story where you'll get to the high singles. And I assume we’re talking [16] not [17]. But do you want to tie a housing start number to those expectations on EBIT margins?

[Dan Frierson:]

Howard let me respond to that. Obviously housing starts has been very difficult to predict accurately over the last several years. I think all of us have overestimated what it was going to be. We have repeatedly said that we think the main drivers for our business happen to be the stock market and consumer confidence. Obviously housing starts plays in that and creates movement from houses I would sales, resales of homes is probably as important as housing starts or housing sales. But in the upper end of the business we really think consumer confidence in the stock markets are more direct co-relation. But in fact to your question obviously if housing starts were to shrink that would be an issue and I think depressing. But we don’t anticipate huge increases and don’t feel like we have to be in the [million 5] range to be success.

[Howard Rosencrans:]

Okay and is this current consumer confidence level there's many metric that people use but I think what like 90ish to pick a random number on whatever consumer confidence index somebody is looking at. Are we at a comfortable levels so we can continue to see the trajectory or do we need sort of [110] or whatever we use to get in the heat days of euphoria for you to continue this trajectory towards the high single digit EBIT margins and then my closing question is are we talking about 2016 for the high singles in EBIT margins. Thank you.

[Jon Faulkner:]

Consider conference levels we're at today in the wealth effective throughout the day are sufficient in terms of background we would expect for our business. One of the correct impact would be issues we would have concerns with, would be again forward looking upper wealth of households having an effect that are shop of any type that would indicate that they would hold on to their money as we occurred in 2008. With regards to timing we don’t give forward projections on timing. But I would say over the next several years those are reasons to target.

[Operator:]

And with no further questions in queue I will turn the call back to Dan Frierson for any additional or closing remarks.

[Dan Frierson:]

Thank you Melime and thank all of your for being with us for the conference call and look forward to being with you again at the end of next quarter.

[Operator:]

Ladies and gentlemen that will conclude today's conference. Thank you again for your participation. You may now disconnect.