The Dixie Group, Inc.
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Welcome to The Dixie Group Incorporated Second 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, Diana and welcome everybody to our second quarter conference call. I have with me Jon Faulkner, our Chief Financial Officer. With also include our Safe Harbor statement is included by reference both to our website and the press release. Our sales for the second quarter were about 2% ahead of the same quarter last year [Technical Difficulty] overall was slightly down. Excluding Atlas which we acquired last year our sales were up 4.6% for the quarter and we believe Atlas will begin to show improvement in the quarter. Our sales of residential products declined slightly which was reflective of the weak quarter for the industry. Unlike residential we believe the commercial market grew in the low single digits. Our commercial product sales increased 6.7% compared with the same period last year led by Masland Commercial products which increased 17.7%. Atlas underperformed the market as we were unable to get new products to market last year. We have introduced several new products this year and are beginning to see order entry outperform last year. As we look at our markets going forward we’re encouraged by the moment in the commercial market. Also the housing market appears to be gaining traction with housing starts and building permits an eight year high. Home resales have increased at an annual rate of nearly 5.5 million. Household formations and a tightening labor market are helping boast demand for housing which should help increase demand for floor covering products going forward. Jon Faulkner, will review our financial results after which I will speak to our operations and expectation. Jon?

[Jon Faulkner:]

Thank you, Dan. Looking at sales for the quarter our sales were 110 million, increase of 1.9% over the second quarter of 2014. The [indiscernible] sales of our Atlas were up 4.6%. Our carpet sales were up 2% while the industry rebound slightly. Our commercial products were up 6.7% while the industry was up below single digits. Ads and commercial excluding Atlas and Avant was up 17.7%. Our residential products were down four tenths of a percent, the industry was down in the low to mid-single digits. For the quarter gross profit was 26.7% of net sales as compared to 24.7% to the second quarter of the prior year, 24.3% for the first quarter of 2015. Gross profit improved as result of improved operations as our restructuring come to a close. Income [indiscernible] 59,000 from an adjusted estimated acquisition related contingent payment offset by continued higher than normal quality training waste cost. We anticipate we will have continued improvements in weight training and waste training and quality cost in the third and fourth quarters. SG&A for the quarter is 23.8% of net sales as compared to 22.5% for the same quarter of 2014. We have higher sampling cost in both our residential and commercial businesses this year, items should decrease in 2016. Operating income was 2.2 million for the quarter compared to 588,000 in the second quarter a year ago. We had completed the facility consolidation plan on the West Coast. The only remaining significant East Coast manufacturing consolidation activities are in Atmore and Saraland facilities. We’re announcing the consolidation of three of our existing divisional and corporate offices to a single facility located in Dalton, Georgia. Corporate office consolidation plan is estimated to cost $716,000, majority of these costs relate to lease cancellation charges for the facilities we are vacating. Those planned charges, as well as the remaining costs of our manufacturing consolidation plans are detailed in our press release. Our interest expense for the quarter was $1.2 million, our effective tax rate for the period was 44%, a normal rate going forward at reasonable levels of profitability should be in the 35% range. Diluted income from continuing operations for the second quarter of 2015 was $0.03 per share as compared to loss of $0.04 per share in the second quarter of 2014. Analysts had a diluted income from continuing operations of $0.04 per share, this estimate was based on operating income of 2.2 million, and a facility consolidated charges which we beat with the non-GAAP operating income of 3.1 million as shown in our press release. Looking at our balance sheet, our receivables increased 2.4 million during the quarter, our inventories increased 4.2 million. Capital equipment acquisitions including those funded by cash and financing is 2.6 million for the quarter. Appreciation and amortization for the period is 3.7 million. We anticipate capital expenditures for 2015 were approximately 13.5 million and depreciation and amortization of approximately 14.5 million. Our debt stood at 133.8 million at the end of the quarter and [indiscernible] the availability on our loan agreements is 35.3 million. Our investor presentation including our non-GAAP information is on our website at www. thedixiegroup.com. Dan?

[Dan Frierson:]

Thank you, John. The good news is that we’re well along the way with our restructuring plans to increase our capacity and better service our customers. Implementation has had an adverse impact on our financial results as we realigned our plans. There were short term impacts on our productivity, quality and waste as well as unusual training cost as we brought additional associates on-board. Although the restructuring is not totally complete, we’re beginning to see the operational improvements which help improve our gross margin to 26.7% for the second quarter compared with 24.7 in the same quarter a year ago and 24.3% in the first quarter of 2015. Our plan is to continue to improve cost through emphasis on training and process improvements thus returning to the quality and waste levels we had prior to restructuring. Two other areas of significant impact during the quarter were high medical cost and high sampling cost. We continue to experience higher medical cost associated with our self-insured group medical plan. We have made changes in plan design, implementing incentives to better utilize disease management services and are implementing additional rate increases all of which we believe will help mitigate future cost. We will also introduce a new self-insured plan in 2016. Sample cost have been larger than we would normally expect. The planned launch of new Atlas products in 2014 was delayed by the acquisition and the delivery of new technology. Therefore we have a robust offering of new products this year. But essentially we have an unusually higher sample expense due to our record number of new products and several national product launches with key customers. On the positive side we have experienced some cost reductions as a result of the price of oil and natural gas. The oil prices have helped reduce some of our raw material prices and the natural gas prices have had a positive impact on some of our processing cost. So far in the third quarter we have experienced year-over-year improvement in order entry for both residential and commercial products, both show improvement in the mid to high single digits. Sales of carpet to-date this quarter are up 6% compared with last year. We see specific opportunities in the growth of our [indiscernible] businesses, Stainmaster, PetProtect products and the continued development of beautiful patterns to service the upper-end residential market using our new ColorPoin and iTuft technologies. The commercial market, and especially the hospitality sector, continues to gain momentum. We also show solid growth in our modular tile offerings in both the Masland Contract and Atlas brand. We are pleased with the activity we are experiencing in Masland Hospitality as we leverage our investment in custom computerized yarn placement tufting technology. The new products at Atlas are being well received and July sales have improved from last year in Atlas and improved from the first quarter. Our efforts in the third quarter will be focused on continuing to improve our gross margins by improving operations with specific emphasis on quality, waste and cost. This time we would like to open up the call to any questions.

[Operator:]

[Operator Instructions]. And we will take our first question today from Sam Darkatsh with Raymond James.

[Josh Wilson:]

This is Josh Wilson filling in for Sam. Starting with the scrap training and waste in the second quarter. Could you quantify the impact and describe maybe how - compared with the first quarter?

[Dan Frierson:]

I would say the, I don’t have a specific quantification but the impact was in-line with the impacts we had in the first quarter in terms of they were improved but instead of it being more of operational quality cost, it was more in the area of returns and allowances as we were getting additional kind of pushing that through the pipeline and so the improvements we expect in the third and fourth quarter are going to be affecting top-line as well as bottom-line. We expect our returns and allowances rates to come down as well as our additional quality cost to come down.

[Josh Wilson:]

And can you give us a sense of the facing or how much improvement we might see in the third quarter versus the fourth quarter?

[Dan Frierson:]

We don’t break out forward projections on that, Josh. So we don’t release - but I would say - we still have improvement in gross profits we achieved where we’re today.

[Jon Faulkner:]

All the measurements we have of product quality related items have continued to improve throughout the second quarter and will be significantly better in the third quarter than they were in the first half.

[Josh Wilson:]

Okay. And I know you talked a little bit in the press release about demand trends during the quarter and then what we have seen in July, could you dive in just a little deeper into what you saw month to month and--

[Dan Frierson:]

Sure Josh, on the commercial side really was strong throughout the quarter. On the residential side, April started out relatively strong but it seemed to sputter a bit in May and June. I would say we have seen some improvement in July. Obviously our order entry in sales have improved some. So, whether this was a temporary pause or a trend we are not sure.

[Operator:]

And we will take our next question from Keith Hughes with SunTrust.

[Keith Hughes:]

Couple of questions, it's nice gross margin improvement in the quarter specifically in raw materials. Is that something that will add more to gross margin, what you’re understanding in the third or have you seen the full impact?

[Dan Frierson:]

Keith, that’s a hard thing to answer, obviously pricing is very volatile. We don’t know what forward pricing is going to be but we would anticipate that it would be in the same level as second quarter if not a little further but that could change pretty rapidly.

[Keith Hughes:]

And then second question on the specific commercial, a real nice quarter in commercial. You better than the industry. I guess one industry question, I was a little surprised the industry was not more than that. Number two, specifically where do you think you’re taking share in what kind of end user markets?

[Dan Frierson:]

That’s a difficult question to answer, obviously we’re in the corporate market and that’s an area of concertation. Hospitality has been particularly good for us as you will recall. We had a false start with our [indiscernible] arrangement last year but I think it has helped us focus more on hospitality and we have seen real improvement there this year. So I would say and primarily in those areas.

[Keith Hughes:]

And was the commercial demand consistent through the second quarter?

[Dan Frierson:]

I would say fairly consistent. As you know commercial tends to come in lumps, so it's a little difficult to be smooth like the residential order entry but I would say it was pretty much the same throughout the quarter. But let me add, of course Atlas was weak in the second quarter, in the beginning of the second quarter but then improved toward the end of the quarter and as I’ve stated earlier we’re seeing much stronger order entry in sales there than we saw previously.

[Operator:]

[Operator Instructions]. We will go next to Alex Silverman with Special Situations Funds.

[Alex Silverman:]

I was wondering if you could help us with the East Coast consolidation and sort of what the timeline looks like?

[Dan Frierson:]

Yes Alex, in terms of the remaining work we have to do the consolidation of the distribution center is actually to be primarily completing it up and running in August. We will continue to move products who will have some expenses continuing in the fourth quarter as we are moving product. At the same time, sorry in the fourth quarter into the first quarter we will be consolidating rug [ph] operation in our Saraland facility, near Mobile, Alabama. That’s the reason why we expect that all these charges will be concluded by the end of the first quarter 2016 when we completely vacate that facility. So the distribution center should be up and running by fourth quarter and - those cost over and run consolidation between the fourth quarter and the first.

[Alex Silverman:]

Just to skip around, can you quantify at all what the high sampling cost might have cost you in the quarter year-over-year?

[Dan Frierson:]

I would say looking forward, a better way of looking at it is our sampling cost going forward. we would anticipate on an annual basis a drop between $1 million and $2 million in actual, absolute sampling cost going forward.

[Alex Silverman:]

Starting in the third quarter or starting when?

[Dan Frierson:]

In 2016 leveled our sampling cost throughout the year because they occur, they are lumpy fashioned but the level of the samples in dollars in 2016 we expect it to be down again $1 million to $2 million.

[Jon Faulkner:]

Usually the expenditures this year which hopefully will add to the top line.

[Alex Silverman:]

And then in terms of your medical cost, can you quantify that all for us?

[Jon Faulkner:]

I would say our medical cost in year-to-date we have run in an excess of a $1 million of what we would have planned--

[Alex Silverman:]

For the first half?

[Jon Faulkner:]

The first half of the year. And obviously when you’re self-insured there is a less certainty because you actually experience whatever the cost are and the reason we implemented these changes or response to a spike in cost of which we believe are due to a variety of factors between Obama Care and other factors.

[Operator:]

[Operator Instructions]. We will go next to [indiscernible].

[Unidentified Analyst:]

Notwithstanding the commercial - the good results of the commercial side of the business, did you see any evidence of project delays impacting your business?

[Dan Frierson:]

Robin, there is always delays let me say that but not in a major way, no.

[Operator:]

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

[Dan Frierson:]

Thank you, Diana and thank all of you all for being with us on the second quarter conference call and look forward to talking to you at the end of the third quarter.

[Operator:]

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