The Dixie's (DXYN) CEO Dan Frierson on Q4 2017 Results - Earnings Call Transcript

The Dixie Group, Inc. (NASDAQ:DXYN) Q4 2017 Results Earnings Conference Call March 1, 2018 10:00 AM ET

Executives

Dan Frierson - Chairman and CEO

Jon Faulkner - CFO

Analysts

Samuel Darkatsh - Raymond James

Operator

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

Dan Frierson

Thank you, Shawn. Welcome everyone. I have with me Jon Faulkner, our Chief Financial Officer, who you will hear from shortly. Our Safe Harbor statement is included by reference both to our website and press release.

On a comparable 52-week basis, our sales perform of $412 million, were up 5.2% compared to 2016. Our sales increase was led by residential business, which had a sales increase of 9.3% for the year and 12.3% for the fourth quarter on a comparable week basis.

Our commercial sales adjusted for the additional week in 2016 were up slightly for the year and down slightly for the quarter, which we believe was marginally better than the industry performed.

While we did improve our operational performances in 2017, the improvement was not at levels that is acceptable long-term. Therefore 2018 will be focused on continuing to improve our operating performance, which I will discuss further after John reviews our financial performance of last year.

Jon Faulkner

Thank you, Dan. Looking at ourselves for the year they were $412.5 million, 5.2% increase over sales of $397.5 million a year ago when adjusting for the 53 weeks in 2016 as compares to 52-weeks in 2017.

For the fourth quarter of 2017, our sales were $105.1 million, an increase of 8.1% as compared to the fourth quarter of 2016 when adjusting for 14 weeks in 2016 versus 13 weeks in 2017.

Our floorcovering sales for the year were up 6.5% p, again on an adjusted basis while the industry was flat. Our commercial products were up 0.9%, while the industry was down low single-digit. And our residential products were up 9.3% while the industry was up in the low single-digit.

For the fourth quarter, our floorcovering sales, again, adjusting for weeks, were up 8.2%, while the industry was in the low single-digits. Our commercial products were down 0.3%, while the industry was down single-digits. And our residential products were up 12.3%, while the industry was up in the mid-single-digit.

Gross profit for the year was 24.5% of net sales, this compared to 24% in 2016. For the fourth quarter, our gross profit was 21.7%, as compared to 21.3% in the fourth quarter of 2016. We had a price increase that took effect at the start of 2018. The increases were to offset increases in materials, labor, and operating expenses.

During 2017, our gross profit was positively impacted by higher sales volume, offset by higher raw material cost, the startup expenses of our EVA pre-coat line, our [Indiscernible] and twisting capabilities at our Atmore facility, our new Porterville yarn operation, completion of our Colormaster skein and beck dye expansion and under absorbed manufacturing expenses as we had labor retention issues in many of our operations throughout the year.

Selling and administrative expenses for the year was 23.3% as compared to 24.4% in 2016. For the fourth quarter, selling and administrative expenses were 21.3% of net sales as compared to 24.6% for the same period in the prior year.

We had an operating profit of $4 million for 2017 as compared to an operating loss of $3.4 million in 2016. For the fourth quarter, we had an operating loss of $608,000 as compared to loss of $2.9 million in the same period in 2016.

Our interest expense for the year of 2017 was $5.7 million versus $5.4 million in 2016. Higher interest expense was due to higher interest rates and higher levels of debt.

We took charge of $8.2 million in the fourth quarter of 2017, relative to changes as a result of the new tax law. The tax charge is made up of $1.8 million to reprice our deferred tax assets to the new lower rate and the $6.4 million to establish evaluation allowance on a deferred tax assets, relative to the new rules regarding net operating losses.

We anticipate for the next year, we will record no income tax expense as we slowly reverse this evaluation allowance. As a result, our net loss for the year was $9.6 million. Our diluted loss per share from continuing operations was $0.59 for the quarter.

Looking at our balance sheet, at the end of the year, receivables increased by $2.9 million during the year of 2017. Increase in our inventories was $16.4 million from the prior year end. Nearly one-third of the increase was due to launch of our luxury vinyl flooring lines and the acquisition of Porterville operation.

Capital equipment acquisitions, including those funded by cash and financings was $13.6 million for the year. Depreciation and amortization for the year was $12.9 million. We anticipate capital expenditures for 2018 approximately $6 million and depreciation and amortization of approximately $13 million.

Our debt stood at $133.3 million at the end of the year, increasing by $24.9 million for the period. Accessible availability on our lines of credit at the end of the year was $16.4 million. Our investor presentation, including our non-GAAP information, is on our website at www.thedixiegroup.com. Dan?

Dan Frierson

Thank you, Jon. During 2017, we continued our strategic movement into hard surface products by launching Stainmaster Pet Protect luxury vinyl flooring, with its claw scratch shield coating, into the residential market through our Masland and Dixie Home brands.

Dixie Home is offering this superior residential product line with the limited lifetime warranty, while Masland is offering a commercial grade version of the Pet Protect line, featuring one of the heaviest wear layers available in the industry with a limited lifetime residential warranty and a 12-year limited commercial warranty.

With over 1,300 dealers having displays, we have made a solid foundation, upon which we can build our luxury vinyl flooring businesses. We are now launching a new luxury engineered wood line under our Fabrica brand. This line of superior engineered wood flooring and wall treatments is designed to fulfill the needs of discriminating designers and consumers. We will roll up -- roll out this line of products regionally first and then nationally.

We have been disappointed with our results in the commercial market. Our sales for the year were flat, while our commercial side of floorcovering market, we believe, declined in the low single-digits.

However, operationally, we have struggled to meet our financial expectations. Therefore, we decided to merge the management of our two commercial businesses, Masland Contract and Atlas Carpet Mills under one common operational structure. This is similar to what we did in 2009 with our residential business when we combined our three brands, Fabrica, Masland, and Dixie Home.

We will maintain the power of dedicated salesforces for each brand, with sheer back office functions and support staff. This transition which will result in our saving over $3 million in 2018, is in place and we're gaining synergies in our operations and sales support functions.

We're excited about the lineup of the new products we're introducing. That leverages the design expertise of both commercial brands to give us many new and exciting broadloom and modular tile products.

Further, we're continuing the expansion of our Calibre lines and quiet down of luxury vinyl flooring products through our Masland Contract brand. This past year has seen steady growth in our hard surface category as we penetrated this market since we launched the Calibre line in 2016.

Financially, the sales volume improvements we saw in 2017 relative to 2016 were largely offset by compressed margins as we dealt with rising costs in raw materials, associate, and other operating costs.

We did improve our operational performance over 2016, but not to our level of expectations. Therefore, 2018 will be a year focused on refining the operational changes, we made in 2017 to fully realize those planned operational savings.

We have dedicated our South Alabama operations over the last several years to becoming a fully integrated yarn, tufting, and finishing operation for make-to-order modular carpet tile and broadloom.

With this focus, we expanded our yarn processing capabilities in our Atmore operation to include additional yarn processing and heat set capabilities with variable packet size capabilities to support our make-to-order model. This project is physically complete, but we're still in the process of achieving all the operational efficiencies before we are satisfied.

Likewise, we have added an EVA pre-coat line to allow us to expand our range of master carpet tile products as well as lower our cost for this important product category. We successfully started up the line this past year and now we're finalizing the operational parameters to have it operating at full efficiency early in 2018.

Our third major initiative was the consolidation of all of our North Georgia dye operations into our Colormaster facility. We've completed the physical changes, but are still working through operational issues related to staffing and training. Across all of our operations, we have experienced more difficulty in hiring and retaining associates.

Major focus of 2018 will be a more intense emphasis on training and associate communications to be able to better attract and retain talent to our manufacturing work environment.

To support our efforts to complete all of the initiatives over the last year, we've limited our capital expenditures in 2018 to a maintenance level of spending around $6 million. Similarly, we have set up teams to address specific areas of opportunity in operations and planning to increase our asset utilization, while maintaining higher levels of service.

Fortunately, as we move into 2018, consumer confidence, the economy, and housing appear to be headed in the right direction and the new tax law changes add to this momentum. At year end, the industry implemented a price increase to offset the rising costs, which we experienced in 2017. This increase is now fully implemented.

During 2017, we experienced the cost of launching our hard surface strategy. This year we should begin to experience the positive impact of our movement into hard surface products. The weather conditions in January dictated a slow start to the year for many of our markets, but business has gained momentum as the quarter progressed.

To-date, our sales are flat with growth in our residential business and the commercial business down slightly with order entry better than it shows.

At this time, we will open up the meeting to questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question comes from the line of Sam Darkatsh with Raymond James. Your line is now open.

Sam Darkatsh

Good morning Dan, good morning Jon. How are you?

Jon Faulkner

I'm fine Sam.

Sam Darkatsh

Few questions. First housekeeping question, Jon, I just wanted to make sure my math was right. What do you have for the fourth quarter earnings per share if you exclude both one-time tax items as well as for the facility consolidation and severance expenses on a tax-adjusted basis, I'm coming up with a loss of $0.06, is that right?

Jon Faulkner

That's correct.

Sam Darkatsh

Okay. Just wanted to make sure, I had that right, okay. Dan, the fourth quarter gross margin was considerably softer than I thought it would be. I don't know how it was versus planned necessarily, but can you quantify some of the headwinds that you were seeing in gross margin, be it raw materials, be it labor inflation, what have you?

DanFrierson

Sam, it was not sales prices, I'll start with that. It was raw material increases. We had less production than we originally anticipated, and we did have more interference or issues with the project, which we outlined as we are focusing on to improve as we go forward.

Sam Darkatsh

So, as we look into Q1, how many of these would have already been rectified and how -- and I'm guessing the raw material and labor inflation will take some time to offset with price, but how do you see gross margins progressing as we get into 2018, here?

Dan Frierson

Well, from a pricing standpoint, we did have a pricing -- the industry went through a price increase at the end of the year, which we participated in. And as I indicated, it's fully implemented at this time. So, there is improvement there.

We will not, in the first quarter, have the benefit of all these projects operating where we had originally anticipated, but we have made progress in the first quarter relative to the operational progress last year. I would say by some time in second quarter or mid-year, we should be in a position to see that flowing through our numbers.

Sam Darkatsh

So, if I'm paraphrasing, Q1 gross margin better than Q4 but not normalized. And then once we get into the summer months, the gross margin normalizes, is that how to think of it?

Jon Faulkner

That's correct, Sam.

Sam Darkatsh

Okay. And then as you see it right now, what's your raw material inflation pressure for 2018?

Jon Faulkner

We don't have any anticipated further increases other than, as you know, there had been some disruptions in the supply chain, which have not yet shown up in price, at this point in time, it may not relative to some of the raw materials that go into nylon.

But at this point in time, we have no indications or issues with price. That's just more of a supply issue, we believe that may affect others.

Sam Darkatsh

And this is a mild question, it's not of significant importance. But I've noticed that your receivables in the fourth quarter were up more so than sales and with the soft early demand in the first quarter, just curious as to whether there was a change in terms or a big project that you have it -- you got an order from? Or what the reasoning for the receivables growing faster than sales might have been?

Jon Faulkner

There was no change in terms, it was just customer mix change slightly.

Sam Darkatsh

Got it. Thank you very much gentlemen.

Dan Frierson

Thank you, Sam.

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

Shawn, thank you very much. We appreciate everyone being with us on the call. And that will conclude today's conference call. Thank you.

Operator

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