The Dixie Group, Inc.
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

This is the conferencing center please stand by, we are about to begin. Good day everyone and welcome to the Dixie Group Incorporated Third Quarter 2015 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, Kim. And welcome everyone to our third quarter conference call. I have with me today Jon Faulkner, our Chief Financial Officer. Our Safe Harbor statement is included by reference both to our website and press release. Sales for the third quarter were flat with the year ago period but up 6.6% year-to-date in comparison to last year. Third quarter just like the second quarter started off strong and moderated as the quarter progressed. Residential product sales declined 1.5% versus the year ago period which was similar to the industry experience. Our commercial product sales were up 4.5% compared to the same period last year. We believe the industry was up low single digits. Both Masland contract and Atlas commercial brands had sales increases and we continue to see a healthy commercial market and favorable responses to our new products. The housing market appears to be improving. Housing formations in a tightening labor market should be a positive for housing and flooring products. At this time Jon Faulkner will review our financial results after which I will discuss our plans for the future. Jon?

[Jon Faulkner:]

Thank you, Dan. Looking at sales for the quarter our sales were up $108.9 million as compared to the third quarter of 2014. Total carpet sales were up 0.6% while the industry was down slightly we believe. Commercial products were up 4.5% while the industry was up in very low single digits. Residential products were down 1.5% while the industry was down in the low single digits. For the quarter, gross profit was 25% of net sales as compared to 24.4% for the third quarter of the prior year and 26.7% for the second quarter of 2015. Gross profit improved relative to a year ago as a result of improved operations and reduction acquisition related expenses. Relative to the second quarter of 2015, however margins were lower due to an unfavorable product mix, primarily in our residential business, continued quality expenses from production made during the consolidation and favorable adjustment in the prior quarter related to our prior period acquisition expenses. SG&A for the quarter was 23.2% of net sales as compared to 21.8% for the same quarter of 2014. Our selling expenses were higher relative to a year ago primarily due to higher sampling expenses in both, our residential and commercial businesses. These higher sampling expenses should decrease in 2016. We have begun operating our new Atmore distribution center and have moved the majority of the finished goods to this facility. We still have to consolidate our rented Saraland Alabama rug operation into a company-owned facility in the same location by the end of the first quarter of 2016. Our corporate office consolidation plan is complete for our primary headquarters with smaller facilities being moved in the fourth quarter of 2015. From the incorporate and facility consolidation expenses, we estimate it to be $1.2 million and are to be complete by the end of the first quarter of 2016. These plan charters are detailed in our press release. Operating income was $1.3 million for the quarter as compared to $832,000 in third quarter a year ago. Our interest expense for the quarter was $1.2 million and we had an income tax benefit of $38,000 during -- truing [ph] up our effective income tax rate for the year. Our normal rate going forward have reasonable levels of profitability, should be in the 35% range. Diluted income from continuing operations for the third quarter of 2015 is $0.01 per share as compared to zero per share in the third quarter of 2014. On a non-GAAP basis adjusted for facility consolidation expense, our fully diluted earnings was $0.03 per share. Looking at our balance sheet our receivables declined by $303,000 during the quarter, our inventories increased more than $51,000. Capital acquisitions including those funded by cash and financing are $1.8 million for the quarter. Depreciation and amortization for the period was $3.7 million. We anticipate capital expenditures for 2015 of approximately $13 million, depreciation and amortization of approximately $14.5 million. Our debt stood at $131.2 million at the end of the quarter. Our investor presentation including our non-GAAP information is on our website at www.thedixiegroup.com. Dan?

[Dan Frierson:]

Thank you, Jon. As we reviewed previously, since 2009 our sales are up over 100% and the industry has had very modest growth with sales up approximately 12%. To accommodate this growth we had to make major changes in our facilities which impacted our operations last year and this year. Since the beginning of 2013 we have added over 50% to our employment base which has been more difficult and time consuming than we anticipated, and has had an adverse impact on operations. The good news is that these changes are basically behind us and we have seen and are seeing improvements. It is not just -- it is just not as fast as we had planned. The more significant impacts for the restructuring related to training, quality and waste, we anticipate these costs will drop as the training process comes to an end and our associates become more proficient in their duties. We are seeing a decline in quality related costs for production subsequent to our restructuring. We will continue to improve costs through emphasis on training and process improvements, and will return to the operating levels we had before restructuring. As I mentioned last quarter, our medical costs and product sampling costs are higher than we would expect on an ongoing basis. We raised medical premiums again in the third quarter on our self-insured medical plan and will introduce new medical plans for 2016. Our sample costs have been extremely high this year. The residential business has introduced a record number of new products and has had several national product launches with key customers which we do not expect to repeat next year. Obviously we anticipate the new products and samples should generate additional business in the future. In our commercial brands we have also invested heavily in new product. Atlas is introducing a robust offering of new products which is already having an impact on sales. We have seen some cost reductions as a result of lower price of oil and natural gas. These reductions have largely been offset by higher employment costs and other factors. Although our capital expenditures this year will be less than our depreciation and amortization, we continue to invest in new technology to maintain our position as the industry leader in style and design. We believe the introduction of new beautiful products will continue to position us as the leader in the upper end of both, the residential and commercial markets. We are optimistic for the future, our housing and commercial markets are still growing. Our upper end residential market continues to have favorable conditions with an improved economy and increased consumer confidence. Our old products, particularly at Masland are showing great growth. New Stainmaster products of pet protect, true self and luxury [ph]; these new introductions are being well received. Also our Stainmaster partnership to expand retail coverage is working well. The commercial market is growing especially in the hospitality segment. Masland hospitality is growing with new tufted and custom computerized yarn placement offerings from our Berco acquisition. Atlas is growing with new products using the new vision weave technology and new modular towel offerings. And Masland contract has expanded its modular tile collections as well. Over the last several years we have added extensively to our sales forces and we are leveraging our expanded sales forces going forward and our internal operations are showing the benefits of our restructuring. Our sales in the first four weeks of the fourth quarter are very similar to the third quarter with residential sales down slightly and commercial sales up mid-single digits. However our order entry is outpacing our sales so far in the fourth quarter. As we move forward our operational improvement should continue to improve our profit margins. At this time we would happy to open up the conference call to questions.

[Operator:]

[Operator Instructions]. We do have a question that comes from Josh Wilson from Raymond James.

[Josh Wilson:]

I wanted to get a little bit more color on that last comment about the last four weeks you said are shipments down slightly in resi and commercial up mid-single with outpacing, does that orders comment apply to both resi and commercial?

[Dan Frierson:]

More to commercial than residential I would say. Our commercial business dropped off in July, began increasing again in August and September and has continued.

[Josh Wilson:]

Okay, and then in terms of the puts and takes on gross margin, could you quantify the impact of the quality issues in the third quarter and maybe give us a sense of how much of it should be fixed in the fourth quarter.

[Dan Frierson:]

The third quarter had impact, we’re estimating around 1% and that impact should diminish in the fourth quarter, we won't know until we see later on in the quarter how trends are coming in. It's almost all related to production during the periods when we are doing the restructuring and so therefore it's more effective, the gross to net numbers in terms of our top line impact as higher claims have continued to come through. This is like primarily relative to the residential business and our first impact was no deliveries which -- those deliveries have all been fixed residentially and so we are actually delivering very good rates, have been all summer and really this is just lingering impact of claims and waste primarily.

[Operator:]

And we will hear next from Tom Lewis from High Road Value Research.

[Tom Lewis:]

First question kind of following up, in talking about how the sales residential sales in particular weakened in the quarter went on -- do you view that as strictly a macro or seasonal issue or is it possible that the quality issues that you were just referencing may have been a factor in that as well.

[Dan Frierson:]

First of all we did perform a little bit better than the industry. We think the retail replacement business was weaker than the industry was overall because new housing and multi-family housing were relatively strong compared to the retail replacement business. So we believe we continue to outperform the industry. As we went through our restructuring the first impact we had was on the service in terms of getting product to customers, on time and quickly. We had some issues there, we've overcome those issues, overcame them earlier in the year and so that is no longer an issue whereas the quality has been an issue and I'm certain that it did impact to some degree our residential business, but we think we can continue to outperform the industry going forward on the residential side as well as the commercial side.

[Jon Faulkner:]

Tom, to follow up. The rate of sales impact on the gross line was better than on the net sales line primarily because of these higher quality cost that we have had to pass through during the period. So we did perform on a gross sales basis a little better than that, and As Dan said we still outperformed industry slightly but clearly if we hadn't had those issues, it was the headwind we wouldn’t have dealt with, we probably would have done better on our top line sales overall.

[Tom Lewis:]

Okay, and I guess my other question would be you don't seem to be the only company out there that is finding it harder than maybe any of us would have expected you know looking back two or three years ago to find, train and hang on to the sort of people that you need running your equipment. Do you feel like you're making any real progress on this and then if so how do you do that? It just seems like it's -- wherever the unemployment stats are nationally speaking. I think you know what I mean it's harder to track and retain the people that you need.

[Dan Frierson:]

Several large corporations have announced increases which is pretty interesting unilaterally in order to maintain their workforce and to put it in perspective in 2010 and 2011 we could go out and hire and had usually trained associates that could come in and be productive almost immediately. As we got into '13 and '14 particularly that really became difficult to do whether it was in Georgia or Alabama or California wherever. So it has been more difficult. It does take more time to train people but we have been at the same employment level now for some time so we have pretty well -- hired the number of folks we want and have been in the process of training them and I would say we're in a much better position today than we were a year ago. But clearly it takes time for these people to work as efficiently and professionally as somebody who's has been doing the same job for an extended period of time.

[Tom Lewis:]

Okay, well I know it's a tough piece that would have been hard to see come in a few years ago but it sounds like you are making some genuine headway on rising on to this yet another challenge. So thanks a lot.

[Operator:]

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

[Unidentified Analyst:]

Just kind of a question about your residential it sounds like you've some quality issues and that you're correct in and you've had delivery delays. If I was a sales person in a local [indiscernible] store seems like that lack of reliability on the delivery would cause me to want to sell some other products from some other brands. But that's actually seems like a good problem that can be pretty easily corrected once you get your deliveries, consistent on time no delays. With that then perhaps cause sales people to say, all right we can count on these guys could that be part of what be holding it back in residential.

[Dan Frierson:]

Mark, I think you are correct part of that has been a result that I want to reiterate though from a service standpoint we are delivering on time and doing well since the start of second quarter of this year. We have had continued to have some quality issues which really were created during the restructuring period. We have gone and done a lot of things to mitigate that and make sure it didn’t get to the customer. But you can't be successful doing that a 100%. So yes I think it has impacted us, remembering that what we sell is style and design and beautiful color. And therefore I think many of the people that sell our product, really want us to be successful and I'm convinced if we can convince them that we are making a quality product and delivered on time that our sales will reflect that.

[Unidentified Analyst:]

But do you think you're on track to by the end of the fourth quarter to have productivity and quality issues up to normalized levels or is that being pushed back out to maybe the first quarter or the second quarter of next year.

[Dan Frierson:]

I think it will probably be in the first quarter. We will be closing the fourth quarter but it doesn't have them over nine, there is a lot of work going on to improve it, it has already improved dramatically. But to get back to the levels that we think where we all are be it would be sometime early next year.

[Unidentified Analyst:]

And then what was unfavorable about the product mix in the third quarter that hurt gross margin?

[Dan Frierson:]

If you look at the summer the product mix was just slightly weaker on the residential side, anticipate that coming back in the fourth quarter to be more normal than what we had like in the second quarter of this year. It was just between the high end and low end in terms of some product categories we just had a little bit more and some of the lower margin products. It's just we have such a diversity of products in terms of price point and in product categories that we have the shifts that occur time to time and we had one during the summer expect that to come back more normally in the fourth quarter.

[Unidentified Analyst:]

Okay. And then looking at the product rollout at Lowe's. Do you know by what date that finally got completed. And then where do you stand with the CCA new products going to that buying group?

[Dan Frierson:]

The Lowes roll out as I understand was really fully completed in August and CCA I don't know the exact day when it was -- it depends on which product category you're talking about at CCA, there are different product categories but the Lowes was during the third quarter and completed in the third quarter. And then I think you'll -- CCA we have number of products that are getting out as we speak.

[Unidentified Analyst:]

And that's a complete overhaul at CCA, correct?

[Dan Frierson:]

Yes. There was a complete overhaul of their offering, their vehicle and that was something we participated in and it's been many years since they've done.

[Unidentified Analyst:]

Are you getting feedback from them that this is causing perhaps a disruption in sales and then once that gets fully implemented perhaps things get back to more normal from those thousands of retailers?

[Dan Frierson:]

No, Mark I don't think. I think our sales with them have done well.

[Operator:]

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

[Dan Frierson:]

Kim, thank you and thank all of you for being with us in our third quarter conference call and look forward to speaking with you next quarter.

[Operator:]

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