The Dixie Group, Inc. (DXYN) CEO Dan Frierson on Q1 2019 Results - Earnings Call Transcript

May 03, 2019 8:19 PM ETThe Dixie Group, Inc. (DXYN)1 Comment
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The Dixie Group, Inc. (NASDAQ:DXYN) Q1 2019 Results Conference Call May 3, 2019 11:00 AM ET

Company Participants

Dan Frierson - Chairman and Chief Executive Officer

Jon Faulkner - Chief Financial Officer

Operator

Good day, ladies and gentlemen. And welcome to Dixie Group, Incorporated 2019 First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later we will conduct the question-and-answer session and instruction will at that time [Operator Instructions]. As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference Mr. Dan Frierson. Sir, please go ahead.

Dan Frierson

Thank you, Michelle. And welcome everyone to our first quarter conference call. I have with me Jon Faulkner, our CFO. Our Safe Harbor statement is included by reference, both to our website and press release.

For the first quarter of 2019, the company had net sales of $88.6 million as compared to $98.8 million in 2018. First quarter 2019 net sales were down 10.4%. For the first quarter of 2019, the company had a loss from continuing operations of $6,641,000 or $0.42 per diluted share as compared to a loss of $2,884,000 or $0.18 per diluted share in the first quarter of '18.

On a non-GAAP basis, our loss was $4,545,000 for the period. Our results for the first quarter were weaker than anticipated, residential and floor covering business was down for the industry as well. The early part of the quarter was impacted by poor weather conditions in much of the country and retail traffic was very slow. We believe this was also due to the uncertain economic environment at year-end and the confusion surrounding international trade issues.

Our commercial business continued to be impacted during the quarter by our restructuring, which is now complete. The restructuring was primarily brought about by the actions of the key supplier. The exclusive supplier of yarns to our Atlas contract operation has decided to dramatically reduce the supply of white dyeable yarns, which have been the major source of differentiation and supported the majority of our Atlas product line. The Atlas business model has been to make piece dyeable products on a make to order model. The change in piece dyed yarn availability along with other product trends in the marketplace has caused us to change our business model. We have responded by merging our two commercial businesses, Maslin and Atlas; first, by consolidating the marketing, product development and support functions; followed by consolidating our sales team and manufacturing operations. That consolidation is now complete. We're still in the process of introducing new products to replace those being phased out, and we'll continue this transition for several years.

At this time, I would like to ask Jon Faulkner to review our financial results.

Jon Faulkner

Thank you, Dan. Looking at sales for the quarter, sales were at $88.6 million, 10% decrease over sales of $98.9 million for first quarter of 2018. Floor covering sales were down 10.5% while the industry was down low single-digits. Commercial products were up 21.3%, while we believe commercial soft floor covering was flat. Our residential products were up 5.5% while the industry we believe was down mid-single-digits.

Gross profit for the quarter was 21.4% of net sales compared to 21.8% in 2018. For first quarter of 2018 our sales and costs were negatively impacted by lower sales in both our businesses contributing to under absorb costs in our manufacturing operations. In addition, we have significantly higher medical expenses relative to the same time period a year ago. Selling and administrative expense for the quarter was 24.4% compared to 23.4% in 2018.

Other items in the quarter included $2.1 million for facility consolidation and severance expenses. We completed the closure of Commerce California tufting operations, all part of our profit improvement plan. Our total expense reduction from the profit improvement plan once fully implemented later in 2019 is $18.7 million on an annualized basis with an operating loss of $4.9 million first quarter of 2019 compared to an operating loss of $1.5 million to 2018. Our interest expense for first quarter of 2019 was $1.7 million versus $1.5 million a year ago. Our diluted loss per share from continuing operations was $0.42 for the quarter.

Looking at our balance sheet, at the end of the quarter, our receivables were up $1 million since year-end and inventories increased to seasonal $1.4 million during the quarter. Capital equipment acquisitions, including those funded by cash and financing, was $1 million for the quarter. Depreciation and amortization for the period was $3.1 million. We anticipate capital expenditures for 2019 of approximately $6 million, depreciation and amortization of approximately $12.5 million.

In accordance with the new lease accounting standard, we added to the balance sheet both the right of use asset of $9 million and operating lease obligation of $9.4 million. Outside of our operating lease liabilities, the total of our long-term debt and short-term portion increased $4.6 million during the first quarter due to normal seasonal increases in working capital. Early in the quarter, we did an $11.5 million sale leaseback of our Saraland facility, increasing our availability by approximately $6 million.

Our investor presentation, including our non-GAAP information, is on our website at www.thedixiegroup.com. Thank you, Dan.

Dan Frierson

Thank you, Jon. Our residential product sales were down 5.5% for the quarter with the industry we estimate being down mid to higher single-digits as compared to the prior year. So we continued to outperform the market. We did see a significant pick up in order activity starting in late first quarter. And for the first four weeks of April, our orders in 2019 exceeded our sales as compared to the 2018 for the residential business during that period.

Residential order activity in the second quarter is also benefiting from the earlier introduction of new products relative to our product introductions a year ago. Of note is our EnVision 6,6 collections. This new program is an extension of our Dixie Home product line with beautifully styled products at moderate price points to reach a wider range of consumers.

These products are made with type 6,6 nylon to ensure the highest quality and performance standards. For 2019, we're building on the momentum we gained by tripling our residential hard surface business in 2018 with the launch of TruCor, our new solid polymer core or SPC luxury vinyl flooring line. This latest addition to our rich core luxury vinyl flooring offering is designed to create an extremely durable and waterproof luxury vinyl flooring product. To facilitate this growth, we're expanding our distribution of hard surface products to our West Coast distribution center to complement our East Coast services center.

Focusing on the second quarter, our residential sales for the first four weeks of April are 1.7% behind last year at this time. The weekly sales rate for residential products in April is 18% above the weekly sales rate in the first quarter. Our commercial backlog has increased $2.1 million or 12% since the beginning of the second quarter. Orders for the company for the first four weeks of the second quarter are now above sales for the same time period a year ago. It appears the normal seasonal pattern of business started later this year, but is now in motion.

We continue to focus on operational improvements throughout the company and work at reducing costs. Our staffing is now down 19% from first quarter of 2018 and SG&A expenses well below a year ago. We had $2.1 million in expenses related to our profit improvement plan during the period. We have continued to add additional projects to our program, including plans to further cut administrative staffs and eliminated in the third quarter of 2019, our Commerce California distribution center, better utilizing our Santa Ana, California facility and some outside resources. Combined savings on an annualized basis for our profit improvement plan are now $18.7 million as compared to the beginning of 2018.

We have instituted a companywide purchasing initiative and are beginning to see resulting cost reductions there. We also increased prices on carpet products during the first quarter, which of course now is fully implemented. It appears the raw material inflation we experienced last year has subsided. We're also taking action to mitigate the potential impact of higher medical costs, which we experienced in the first quarter.

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

Question-and-Answer Session

Operator

Dan Frierson

Michelle, thank you. And thank all of you for being with us on the conference call. Obviously, the first quarter was a difficult quarter for us, but we're looking for much better results going forward. Look forward to speaking with you after the second quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.

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