The Dixie Group, Inc. (DXYN) CEO Daniel Frierson on Q4 2020 Results - Earnings Call Transcript

The Dixie Group, Inc. (NASDAQ:DXYN) Q4 2020 Earnings Conference Call March 4, 2021 10:00 AM ET

Company Participants

Daniel Frierson - Chairman and Chief Executive Officer

Allen Danzey - Vice President and Chief Financial Officer

Conference Call Participants

Operator

Good day, and welcome to the Dixie Group, Inc. 2020 Fourth Quarter and Year End 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 Chief Executive Officer, Dan Frierson. Thank you, sir. Please go ahead.

Daniel Frierson

Thank you, Donna and welcome everyone to our fourth quarter and year end conference call. Our Safe Harbor statement is included and I reference both to our website and press release. As we entered 2020 business was beginning to improve and we were excited about celebrating our 100th anniversary as a company. Over our 100 years, we've experienced many obstacles such as World Wars, the Great Depression, and more recently the Great Recession, but had not endured a pandemic. We like every company were faced with unprecedented issues on virtually every front.

It's difficult to ascertain the total impact of COVID-19 on the results of 2020. But it is clear that our sales for the year were about 60 million less than plan and the prior year. The reduction of sales with an operating margin in the mid 20s reduced operating income significantly, probably in the $15 million range. We also faced additional challenges in our operations as a result of continued absences of people due to COVID-19 and its related quarantine requirements. Despite the unprecedented challenges faced in the COVID-19 pandemic, we were able to improve our operations and further strengthen our balance sheet to better position our company as we enter 2021 with momentum and optimism.

During 2020 we reduce debt by 10 million. And our total debt reduction has been 60 million over the last 30 months. We entered into a new $75 million line of credit and two long-term loans totaling 25 million. These transactions along with cost reductions and operating efficiencies in 2020 allowed us to end the year with borrowing availability of 43.3 million under our new senior revolving credit facility. Operational improvements and cost reductions generated higher gross profit margin. Our gross profit margin for the year ended December 26, 2020 was 24.2% compared with 23% in the previous year.

The company had operating income for the third quarter of 2020 of 2.6 million, and operating income of 1.5 million in the fourth quarter of 2020. For the year 2020, net sales for the company were 315 million as compared to 374 million in the year 2019. Net loss on the year 2020 was $9.208 million compared to a net income of over 15 million in the previous year. The decline in sales and the loss in 2020 were primarily driven by the impact of the COVID-19 pandemic. Net income in 2019 was the result of the sale of our facility in Santa Ana, California, which generated a $25 million gain in the fourth quarter of 2019.

On a non-GAAP adjusted basis, the company had a net loss of 2.5 million in 2020 and a net loss of 3.9 million in 2019. Sales for the fourth quarter at 88.6 million were down 1.7% despite strong residential sales which were up 15%. After tax income was a loss of 318,000 and was reflective of a number of onetime costs, operating costs and the cost of refinancing our short-term debt into longer term debt instruments.

Allen will now review our fourth quarter and 2020 financial results after which I'll come in on current business conditions. Allen?

Allen Danzey

Thank you, Dan. And by way of reference an 8-K filing is available on our website containing the statement of operations for the fourth quarter results and also our investor presentation including our non-GAAP information is available on our website. That website is www.thedixiegroup.com.

As Dan discussed and as we've all experienced both personally and professionally 2020 was a challenging year. As a company, we have continued to focus on the safety and welfare of our employees while working diligently to continue to improve the financial position of the company. We were encouraged by the recovery in the residential market in the second half of 2020. And we've seen that momentum continue into 2021 for the residential markets.

During the second half, we were able to improve our gross profit margins through cost reductions, operating efficiencies and improvements in quality and waste in our plants. We also saw returns profitability at the operating income level in the third and fourth quarters of 2020. The financing transactions we took at the end of October provide us with sufficient borrowing availability and improved the composition of our debt. Through 2020 we continue to reduce our total debt as Dan mentioned, by $10 million bringing the total debt reduction over the last two and a half years to $60 million.

For the fiscal year 2020, our net sales were 316 million down to 10.7% from the $375 million in net sales from the prior year of 2019. Commercial product sales were down 37%, while the industry we believe was down in the low 20 percentile range. And despite the encouraging recovery in the second half of the year, our residential product sales on the full year were down 13.6% while the industry we believe was down in the mid-single digits.

Gross profit margin for the year was 24.2% of net sales, a strong improvement over the 2019 margins of 23%. The gross profit improvement in 2020 became particularly evident in the second half of the year as volume began to improve, we began benefiting from expense reductions enacted in response to the COVID-19 crisis, quality improvement and waste reduction, as well as overall operating efficiencies in our plants.

Selling and administrative costs in 2020 ended at 75.7 million or $8.1 million below those of 2019. The reduction in selling and administrative expenses was primarily the result of cost saving initiatives implemented as a result of the COVID-19 pandemic. These initiatives included reduction in samples and marketing expenses, reduced travel, reductions in payroll expenses, the job elimination and temporary pay reductions as well as other expense reductions.

During the year, we incurred $1.4 million in restructuring expenses related to our profit improvement plan. These expenses were primarily related to workers comp claims from terminated employees at one of our closed facilities. We also incurred $2.4 million in expenses and severance and financing related to our COVID-19 response plan.

We ended the year with an operating loss of $2.9 million, compared to an operating income of $21.3 million for 2019. The 2019 operating income was benefited by a $25.1 million gain on the sale of our facility in Santa Ana, California. As mentioned earlier, we had positive operating income from the third and fourth quarter of 2020. We had an operating income of 2.6 million and 1.5 million in Q3 and Q4 respectively.

Also, as mentioned earlier, our total debt decrease of $10.2 million was from the end of prior year to the end of the current 2020 year. That reduction during the year was primarily driven by earnings and working capital changes most significantly reduction in inventories which were reduced by $10.1 million during the year.

Turning to our balance sheet at the end of December 2020, net receivables increased by $578,000 over the prior year, the increase in receivables was a result of higher sales volume in the month of December 2020 as compared to the same period in 2019. Capital equipment acquisitions including those funded by cash and financings was $3.1 million over the year. Depreciation and amortization during the year was 10.7 million.

We anticipate our capital expenditures for 2021 to be approximately $5 million and depreciation and amortization of approximately 10 million. At quarter end our borrowing availability in our long-term credit agreement was $43.3 million.

And at this time, I'll turn it back over to Dan for further comments.

Daniel Frierson

Thank you, Allen. Not knowing where the COVID-19 pandemic would lead, we implemented our continuity plan to maintain the health and safety of our associates preserve cash and minimize the impact on our customers. To minimize and prevent cases of COVID-19 exposure in our facilities, we've taken measures aimed at sanitation and safety including large scale COVID-19 testing, mandatory temperature checks prior to starting work, requirements to wear masks when unable to maintain social distancing and deep cleaning and sanitation.

We limited travel for our associates, all of our associates, implemented work from home options where appropriate, limited physical contact with our customers. We reduced our running schedules and our facilities to below demand to maintain order flow to our customers, while simultaneously reducing inventories to align them with lower customer demand and preserve cash. Also to preserve cash, we placed a large percentage of our associates either on rotating layoff or furlough.

We implemented approximately 14 million in spending reductions for the current year. These reductions included, deferring maintenance when possible, reduce capital expenditures, instituting select job eliminations and temporary salary reductions. We deferred new product introductions and reduced sample and marketing expenses. We work with suppliers, lenders and landlords to extend payments in the second quarter, not knowing what the impact of COVID would be.

We've taken advantage of deferral of payroll related taxes under the CARES Act as well as deferring payments into our defined contribution retirement plan. Our management team worked together to implement our continuity plan, which has resulted in improved operating results. Today, we're operating with 100 fewer people than we were a year ago or about 8%. During the year, we were able to decrease selling and administrative costs through headcount reductions and lower spending.

Operationally, we've experienced significant improvement in quality, waste reduction, and cost. At the same time, we're able to maintain superior customer service, and outperformed many of our competitors in this area. In addition to the cost and operational improvements, we were able to strengthen our balance sheet as Allen has covered. The abrupt decline of over 50% in sales in April was certainly a shock to our system. But we've been pleased with the recovery in the residential market, benefiting from strong trends in new home construction, existing home sales.

Our residential segments our business conditions continue to improve through the year. As many flooring retailers emerged from the COVID-19 downturn and an increasing number of consumers began home improvement projects. We're continuing our fiber diversification strategy as well by significantly expanding our Envision 66 offering with over 20 new styles across all brands. This program offers beautiful designs with the durability and performance of nylon type 66 at price points which compete effectively in today's market.

Envision 66 has become our primary growth platform in soft surfaces and we are planning for another significant expansion of this product. Residential order entry and sales have continued to improve since the second quarter and ended the year very strong with orders and shipments of 15% in the fourth quarter. Our residential business continues to gain market share which it has since 2010. Since then, the market share has more than doubled. And the residential business has been profitable every year, as it was in 2020. It now represents over 80% of our total volume [ph].

In 2021, we're again investing in new products, talent and new technology. On the surface side we're excited to showcase TECHnique, our latest tufting technology with six new nylon and wool qualities in Masland and Fabrica. This innovation delivers beautiful patterns through precise yarn placement and control at each needle. Our hard surface programs grew significantly for the year and with TRUCOR and Fabrica wood programs pacing well ahead of the hard surface market.

We continue to invest in product innovation in our TRUCOR PRIME XL and XXL, the widest longest rigid core plank in the market and TRUCOR IGT integrated grout technology tile visual with the grout line engineered into the locking system. We also invested in talent with the addition of eight salespeople dedicated to hard surface in key markets across the country. And we'll be adding more dedicated our service people in 2021.

Also in 2021, we will expand our TRUCOR PRIME program with 12 new visuals. In our Fabrica wood program we've developed a new display system to accommodate an expansion of this program with new colors, board sizes and price points. We expect to double our Fabrica wood placements in the market in 2021. It has been exceptionally well received.

Our commercial business and the commercial market continues to be adversely impacted by COVID-19. Sales for the year were down more than 35% from the previous year. We're beginning to see improvement, but we believe that recovery will be longer coming and not as dynamic as a residential market recovery. Our commercial business is excited about one of the most unique innovations in our modular carpet tile offering. Sustaina is now the standard for backing on orders.

Sustaina modular tile backing system is a PVC and polyurethane free cushion, POU [ph] backing with very high recycled content. The product is breathable and able to be installed in environments up to 99% relative humidity and with a very high pH. The product provides the cushion backing benefits and increased underfoot comfort, appearance retention and sound absorption. Recently, we have experienced increasing cost pressure relative to our raw materials and other cost inputs. So we have increased prices for both residential and commercial carpet products in the 5% range.

Our floor covering sales for the first nine weeks of the quarter are down low single digits versus the same time in 2020. But orders are up mid single digits. Our residential sales and orders are up double digits and the commercial orders on a weekly basis are better than the second, third and fourth quarters of last year. As the quarter has progressed order entry has continued to improve both sequentially and compared to last year for both residential and commercial products as the economy has gained momentum.

The COVID-19 pandemic in 2020 presented challenges in ways Dixie has not experienced in its history of over 100 years. We responded first with regard to the safety of our employees, and second to protect the operations and financial strength of our company while continuing to service our customers. We're proud to emerge as a stronger company. We're looking forward to the year of 2021 as an opportunity to move past the difficulties of last year and benefit from the continued expectations of a strong residential market growing with differential floor covering products.

Donna, at this time we would like to open up the meeting to questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Our first question today is coming from Barry Gartner of Improverb [ph]. Please go ahead.

Unidentified Analyst

Hi, how are you? Good morning. Two questions -

Daniel Frierson

Good morning.

Unidentified Analyst

And just two quick questions for you, first one on the operating business, many times the comparables or Mohawk and, and some other ones in having just kept an eye on flooring in general for this past quarter, sales at Mohawk overall were up like 9% quarter-over-quarter. Whereas here it seems like it was I think you said 88.6 or something versus at 85, 92. Is there - can you speak to sort of the disparity or if you felt that there was - how you feel the company did versus the broader market on a top line basis for the quarter?

Daniel Frierson

Barry, let me take a crack at that. Residentially, we were up in the fourth quarter about 15%. Commercially, we were down dramatically. Our backlog had run down and order entry was very slow in the second, third and fourth quarters. That order entry has improved significantly in the first quarter.

Unidentified Analyst

No, that makes sense. I understand that. I totally understood. It was the commercial was just the black box and essentially a black hole was hospitality and whatnot.

Daniel Frierson

Right and I think which segments of commercial you were in. I particularly our hospitality and residential, excuse me, and retail areas were dramatically all.

Unidentified Analyst

Understood and one more question for you guys. I appreciate it. Congrats on the refinancing and I think it's an excellent efficiency in terms of re doing debt structure and taking advantage of the ability there. And if it - I think it was in the Wells Fargo and Bank of America were the prior lenders. So in the - I think it was like the 14th credit amendment, the lenders had offered the ability for Dixie to buy the real estate interest out from Encumbrance. And I was wondering if - I did see that the company had paid down that part. But as part of the broader refinancing, does the company have a view towards the real estate, now that it is not pledged as collateral, or not all the plants are pledged as collateral under the new credit facility.

Daniel Frierson

Let me make a comment. I want Alan to address that. But our current revolver term is with Fifth Third. It includes only inventories and receivables. And we did refinance part of real estate and equipment in the America - with AmeriState and Nevada Credit on the $25 million term loans, which are - one is 10 million, the other 15. Allen, do you want to comment further on?

Allen Danzey

Yeah, exactly, as Dan had said, we did move the assets around on a different loan agreement. And there is still some room under some of our assets that are not falling under the loan agreements that we put in place. However, we're very happy with the transactions that took place at the end of October. It did put us in a strong position from our availability. We do not see an immediate need to be accessing those funds. We'll make the best decisions as opportunities become available. But our focus has been on certainly reducing our debt. And we will continue with that mindset as we go forward and making the best decisions around opportunities that are in front of us.

Unidentified Analyst

Thank you so much, Allen. Thank you, Dan. And once again, congrats on getting your refinancing done. I think it's going to be massively creative to the business going forward, so best of luck and stay safe.

Daniel Frierson

Thank you, Barry, and we agree with.

Allen Danzey

Thanks Barry.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Frierson for any additional or closing comments.

Daniel Frierson

Donna, thank you very much. We appreciate all of you being with us on the year-end conference call. Obviously, 2020 was a most unusual year that we will all remember forever. But I think the good news is we have made it through 2020. We have refinanced the company, financially much stronger than we've ever been before, operationally much stronger than we've ever been. And business in 2021 is - particularly residential businesses after a great start. Thank you very much and see you next quarter.

Operator

Ladies and gentlemen, thank you for your participation and interest in the Dixie Group. You may disconnect your lines or log off the webcast at this time and have a wonderful day.