The Dixie Group, Inc. (DXYN) CEO Dan Frierson on Q2 2019 Results - Earnings Call Transcript

Aug. 05, 2019 3:00 PM ETThe Dixie Group, Inc. (DXYN)
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The Dixie Group, Inc. (NASDAQ:DXYN) Q2 2019 Results Earnings Conference Call August 5, 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, Inc. 2019 Second Quarter Earnings Conference Call. Today's call is being recorded.

At this time, for opening remarks and introduction, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Dan Frierson. Please go ahead.

Dan Frierson

Thank you, Olivia. And welcome everyone to our second 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.

Dixie reported a profit for the quarter excluding facility restructuring changes. Net sales were $100,394,000 down 5.7% as compared to the same period in 2018. Our residential sales were down 2.6% for the quarter. Soft surface products were down 4.1%, while we estimate our segment of the soft surface market was down half single-digits. So we continued to outperform the industry.

Our residential hard surface was up 48% as we continue launching additional luxury vinyl flooring and wood products. Our commercial business was down 13.7%, while we believe the industry was up low single-digits. With the consolidation of our commercial business is complete, we should perform better in the last half of the year.

I'll now turn it over to Jon Faulkner to review our financial results.

Jon Faulkner

Thank you, Dan. For quarter sales were $100.4 million, 5.7% decrease over sales of $106.4 million in the second quarter of 2018. Gross profit for the quarter was 23.4% of net sales as compared to 23.6% in 2018.

For the second quarter of 2018, our sales and costs were negatively impacted by lower sales in our commercial business. We also had $202,000 in inventory write-downs related to our restructuring. In addition, we had higher medical expenses relative to the same period a year ago.

Selling and administrative expense for the quarter was 21% of net sales as compared to 22.4% in 2018. Expenses were down largely due to cost cutting efforts under our Profit Improvement Plan. Other items in the quarter included $1.9 million in facility consolidation and severance expenses, including the inventory write-downs previously mentioned. We will complete the closure of our Commerce California distribution center in the third quarter. A total expense reduction from the Profit Improvement Plan once fully implemented later in 2019 is $18.7 million on an annualized basis. We had an operating profit of $574,000 for the second quarter of 2019 as compared to an operating loss of $355,000 in the same period in 2018.

Our interest expense for the second quarter of 2019 was $1.7 million versus $1.6 million in 2018. Diluted loss per share from continuing operations was $0.07 for the quarter.

Looking at our balance sheet, at the end of the quarter, our receivables were up $3.9 million at the beginning of the quarter. Our inventories increased to seasonal $343,000 during the quarter. Capital equipment acquisitions, including those funded by cash and financing was $2.2 million year-to-date. Depreciation and amortization year-to-date was $5.9 million.

We anticipate capital expenditures for 2019 of approximately $4 million and depreciation amortization of approximately $11.8 million. Outside of our operating lease liabilities, the total of our long-term debt, including the short term portion, increased $5.5 million during the second quarter due to normal seasonal increases in working capital. Our investor presentation including our non-GAAP information is on our website at www.thedixiegroup.com. Dan?

Dan Frierson

Thank you, Jon. We continue investing in new products and growth initiatives in both our residential and commercial markets. We began our Profit Improvement Plan in late 2017. This plan included a review of all of our business processes, though the primary focus was on the restructuring of our commercial business. Subsequent to our starting of this plan, Invista made the decision to exit the production of most piece dyeable yarns for the commercial market. This decision therefore calls us to expand the commercial restructuring to be a complete integration of all aspects of the business. As a result of this action, we have completed the combination of our Atlas and Masland businesses into one commercial business now known as Atlas | Masland contract.

In order to accomplish the cost reductions and combine our commercial businesses, we have expensed over $17 million of restructuring related charges to-date, which have been reflected in our statements of operations since 2017.

As mentioned above, without these costs in the second quarter, the company was profitable. Costs related to plan are nearly complete and will be at a much lower level in the future. We look forward to completing the Profit Improvement Plan in the second half of 2019.

Our strongest residential sales growth was in hard surfaces where we continued gaining traction in the luxury vinyl flooring and engineered wood flooring segments. Our new TRUCOR SPC program has begun to gain traction in the market. We will be expanding our Fabrica wood program during the second half of 2019.

Our EnVision 6,6 nylon program continues to grow nicely. In the third quarter of 2019, we will continue to expand our placement of this program in the specialty retail channel. Our EnVision 6,6 nylon program continues to grow nicely. In the third quarter of 2019 we will continue to expand our placement of this program in the specialty retail channel. Our EnVision 6,6 nylon products are well styled, and feature type 6,6 nylon for durability, stain, and soil resistance which stands up to the most demanding applications.

In April 2019, we launched Masland California Classics. This collection of 16 styles is finished and distributed out of our Santa Ana, California facility. In our Dixie Home line, we are expanding the Pacific Living Quick ship program, growing our footprint from 10 to 19 styles with new retail displays and updated colors. Our Masland and Dixie Home customers in the Western United States will benefit from these program expansions

Our commercial team has a number of new offerings for 2019 with particular emphasis on new modular carpet tile -- on our new modular tile offerings. Our new Sustaina modular carpet tile backing system, a PVC and polyurethane free backing system, was created for the specifier who desires both the most sustainable construction and performance in high relative humidity environments, thus allowing quicker installation on new concrete surfaces. The Crafted Collection will launch in the third quarter of 2019 using this new backing system.

Further, Crafted will have over 80% recycled content with 100% recycled content in the face fiber.

During the quarter our medical costs continued to be higher than anticipated and we're developing plans to mitigate the increased costs with the introduction of changes to our medical insurance plans.

Operationally, we have experienced continued improvement during the quarter. Material utilization, service and quality continue to improve as we fine tune our operations. As you can see, during 2019, we have continued to invest for the future.

In summary, we've consolidated our two commercial brands into one business, under one management, sharing operations and market product development, manufacturing and consolidating the sales force.

We launched TRUCOR, a luxury vinyl flooring line in 2019. We will have placed over 2,000 displays of TRUCOR through our Masland and Dixie Home residential brands in the third quarter of 2019. We began shipment of our new EnVision 6,6 soft flooring collection. The Dixie Home product line consists of beautifully styled carpet products at moderate price points to reach a wider range of consumers.

We enhanced our West Coast offerings with the introduction of Masland California Classics, and Dixie Home Pacific Living Quick ship programs. We’re progressing with our Profit Improvement Plan and anticipate the bulk of the savings to be in place by the third quarter of 2019. And again, we were profitable excluding facility restructuring charges in the second quarter.

At this time, we'll open the meeting to questions.

Question-And-Answer Session

Operator

[Operator Instructions] I am showing, we have a question coming from the line of Barry Blank with J H Darbie & Company. Your line is open.

Barry Blank

Hi, Dan and Jon. Got one question. Do you think -- let's -- let me rephrase it. What kind of additional write-downs do you foresee in the next few quarters?

Jon Faulkner

Barry, we anticipate about $800,000 through now and year end to be complete at year end, a bulk of that will be in the third quarter with a small amount of that $800,000 in the fourth quarter.

Barry Blank

And what -- I've one more question regarding the hard flooring. Do you see more improvement at a greater percentage later on this year or do you think that's a pretty stagnant amount like we had last quarter?

Dan Frierson

Barry, I'm not quite sure, I understand the question. But basically our hard surface business, as we've been investing in that in the last two years, it has not been a contributor to the bottom-line until very recently. We have invested quite a bit in inventory as well as samples and displays in the marketplace. So, while it has been a detractor from profitability over the last couple of years, it should be a contributor to profitability going forward.

Operator

And I am showing no further questions at this time. I will turn the call back over to Mr. Dan Frierson for any additional or closing remarks.

Dan Frierson

Thank you, Olivia. And thank all of you for being with us. We're committed to continuing --continue improving operationally and thereby improving our financial results, lowering our debt and improving our balance sheet. Look forward to discussing this with you at the end of next quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you again for your participation.

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