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Edited Transcript of DXYN.OQ earnings conference call or presentation 9-Nov-17 6:30pm GMT

Q3 2017 Dixie Group Inc Earnings Call

CHATTANOOGA Aug 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Dixie Group Inc earnings conference call or presentation Thursday, November 9, 2017 at 6:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel K. Frierson

The Dixie Group, Inc. - Chairman & CEO

* Jon A. Faulkner

The Dixie Group, Inc. - VP of Strategic Initiatives

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Conference Call Participants

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* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Joshua Kenneth Wilson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

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Presentation

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Operator [1]

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Good day, and welcome to The Dixie Group, Inc. 2017 Third Quarter Earnings Conference Call. Today's call is being recorded.

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

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Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [2]

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Thank you, Shannon. Welcome to our third quarter conference call. I have with me here, Jon Faulkner, who will be participating in the call.

And our safe harbor statement is referenced both from our press release and our website.

For the quarter, our floorcovering sales were up year-over-year by 3.1%, while the industry, we believe, was slightly down. For the year-to-date, our floorcovering sales are up 5.9% against prior year in a market that was marginally down year-over-year.

Our commercial product sales for the quarter were down 5.5%, while the market was down in the mid-single digits. However, our commercial product sales are actually up 1.3% for the year-to-date relative to the prior year, while the industry, we estimate, was down by low single digits.

Our commercial sales were strong in July, but weakened throughout the quarter as our order entry was quite weak in July and August. We've seen a pickup of our order entry starting in September and continuing through October. Our residential products were up 7.4% for the quarter as compared with the third quarter of 2016, with the industry, we estimate, was up in the low single-digit range.

For the 9-month period in September -- ending in September, our residential product sales were up 8.3% compared to the same period a year ago, while the industry, we believe, was up only low single digits.

This time, I'll turn the meeting over to Jon Faulkner who will review our financial results. After which, I will make additional comments.

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Jon A. Faulkner, The Dixie Group, Inc. - VP of Strategic Initiatives [3]

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Thank you, Dan. Again, looking at sales for the third quarter of 2017, our sales were $102.7 million, an increase of 2.3% as compared to the third quarter of 2016. The year-to-date period, our sales were $307.4 million, a 4.2% increase over the sales of $294.8 million from the year ago period.

Looking at gross profit for the third quarter. It was at 24.2% of net sales as compared to 25.8% in the third quarter of 2016. We had a price increase that took effect in the third quarter, and the industry has announced price increases to be effective at the start of the new year. The increases are to offset increases of materials, labor and operating expenses.

During the third quarter of 2017, our gross profit was positively impacted by higher sales volume, offset by higher raw material costs, the start-up expenses of our new portable yarn operation, the completion of our Colormaster skein and beck dye expansion and the under-absorbed manufacturing expenses as our production volumes dropped off significantly late in the quarter due to weak order volume earlier in the period. As Dan described, our order entry volume strengthened early in the fourth quarter.

Selling and administrative expenses for the quarter was 23.4% of net sales as compared to 23.7% for the same period in the prior year. We had an operating profit of $767,000 in the third quarter of 2017 compared with an operating income of $1.9 million in the third quarter of 2016.

Our interest expense for the third quarter of 2017 was $1.5 million as compared to $1.3 million in the same period of 2016. The higher interest expense was due to higher interest rate and higher level of debt. Our tax benefit rate for the period was 24.8%. We anticipate it to be 35% going forward.

Diluted loss per share from continuing operations was $0.03 for the quarter.

Looking at our balance sheet at the end of the quarter, our receivables increased $2.9 million during the quarter. The increase in our inventories was $10.9 million from the prior quarter.

Capital equipment acquisitions, including those funded by cash and financings, was $5.7 million for the quarter.

Depreciation and amortization for the quarter was $3.2 million.

Royalty Carpet Mills, a West Coast competitor, ceased operations in June. In July, we purchased the yarn processing assets and leased the Porterville yarn facility from Royalty to take advantage of the opportunities in the market. Thus, we anticipate capital expenditures for 2017 of approximately $13.8 million and depreciation and amortization of approximately $13.1 million.

Our debt stood at $138.5 million at the end of the quarter, increasing by $14.8 million for the period. Accessible availability under our lines of credit at the end of the quarter was $11 million.

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

Dan?

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Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [4]

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Thank you, Jon. Although it is difficult to quantify, the third quarter sales were impacted by the hurricanes in Texas and Florida as well as the force majeure, which was declared by our largest raw material supplier. Our earnings were also negatively impacted by the start-up expenses of our expanded beck and skein dyeing operations in our Colormaster facility. The start-up of our new Porterville yarn processing plant also impacted earnings as well as the installation of a pre-coat line in our Atmore facility. Fortunately, all of these issues appear to be behind us at this time and we -- as we embark on the fourth quarter.

Residentially, our sales in the fourth quarter are strong for all 3 of our brands: Fabrica, Masland and Dixie Home. And with the addition of the Porterville yarn operation, we're better able to meet the service requirements of our customers, both East Coast and West Coast. The launch of our Masland and Dixie Home Stainmaster PetProtect luxury vinyl flooring is off to a great start. We have placed over 1,300 retail displays. And as these displays are put on the floor, we're beginning to see strong consumer acceptance. Next year, this should be a significant contributor to our sales and earnings.

We announced in mid-October the appointment of David Hobbs as President of our Commercial business. With this change, his responsibilities will now encompass both Masland contract and Atlas Carpet Mills commercial brands. We will maintain the distinct sales forces of Masland contract and Atlas. And the unique style and design characteristics of these brands have been known for in the past.

The organizational change we are instituting on the commercial side is similar to the successful change we made to our residential business in 2009 when we consolidated the residential management structure, but maintained our 3 distinct brands and sales forces. The announcement regarding the consolidation of our 2 commercial brands, Atlas and Masland, is part of our company's profit improvement plan to improve our profitability through lower cost and streamlined decision-making, aligning processes to maximize efficiency. The plan includes consolidating the management of Dixie's 2 commercial brands under one management team, sharing operations and sales, marketing product development and manufacturing.

As we look forward in the commercial business, we think this will allow us to be more impactful in the industry. There are several changes in the industry also that have had an impact in the last several months, starting with the closing of Royalty Carpet Mills in June, followed by the bankruptcy of Beaulieu and its acquisition recently by EF. These changes have provided additional opportunities to improve our market penetration. Recently, the announcement of a price increase in the industry should help us cover the cost increases we had experienced in 2017 in our operations.

In summary, we have consolidated our 2 commercial brands, Masland Contract and Atlas, under one management, sharing operations and marketing, product development and manufacturing but maintaining distinct sales forces. We announced our profit improvement plan with a charge in the fourth quarter of $775,000, but savings in '18 of over $3 million.

We're taking advantage of the opportunities created in the West Coast market with added retailer and builder penetration and increased service flexibility with the acquisition of the Porterville, California yarn facility. Masland Contract has launched both the new Calibr? and [Quiet Down] luxury vinyl product lines, and they're doing very well. We have placed over 1,300 displays of our Stainmaster PetProtect luxury vinyl flooring through our Masland and Dixie Home residential brands.

The fourth quarter has started off upbeat with our floorcovering sales up over 11% for the first 5.5 weeks as compared to the same time in 2016. Residential sales have been particularly strong. And we are implementing a price increase of 4% to 6% for 2018.

This time, we'd like to open up the meeting to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Sam Darkatsh with Raymond James.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

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This is Josh, filling in for Sam. To maybe start with the gross margin in the quarter, could you quantify or rank the various headwinds that you faced?

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Jon A. Faulkner, The Dixie Group, Inc. - VP of Strategic Initiatives [3]

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Josh, I think the largest effect in terms of the gross margin effect was the reduction throughout the quarter of our demand on the commercial side of the business. Our residential demand was fairly constant throughout the quarter, but we had a drop, a dramatic drop-off as order entry was very weak in July and August for us and, we believe, for the industry. If you look at the other effects, of course, we did have the completion of the skein and beck dye operation as well as the start-up of Porterville, both probably be for magnitude. And then we also had disruption, I can't really quantify it, due to having to react to the force majeure from our largest fiber supplier during the time period, especially trying to rearrange production schedules to fit the flow fibers that we had coming towards the system.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [4]

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And then as it relates to the savings plan for 2018, can you give us a sense of the cadence at which those savings will be realized?

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Jon A. Faulkner, The Dixie Group, Inc. - VP of Strategic Initiatives [5]

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It'll be fully implemented earlier in 2018, so about $3 million. I expect about $700,000 in the first quarter and the balance equally throughout the remaining quarters.

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Operator [6]

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(Operator Instructions) Our next question comes from John Baugh with Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [7]

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I was curious about -- I believe it's California that has this recycling or landfill tax on carpet. And I think it's up to $1 a yard, if I'm not mistaken. But I'm curious, is there a movement around the country or other states towards that? Or any kind of color you can provide on that issue?

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Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [8]

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Well, first of all, I think the current rate is $0.25 per yard. And as you know, that is charged to the consumer. So it is funded in that manner. Jon, you want to comment on other things, other efforts around the country?

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Jon A. Faulkner, The Dixie Group, Inc. - VP of Strategic Initiatives [9]

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There are other states that have looked at similar plans, but we've not been confronted with quite the same expectations as we had in California. There are various states that we're trying to work with through their Carpet and Rug Institute and care, which is the industry-wide recycling group to try and deal with concerns in those. And we have a voluntary plan, which the Carpet and Rug Institute funds to help recyclers and the remaining states to have pickup centers and be more efficient in the recycling process. But at this point in time, California is unique among its particular program design.

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Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [10]

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John, in summary, this is an issue that the Carpet and Rug Institute and care have been addressing for some time. And I think we're most effective when working together as an industry. But it is an issue and one that we're obviously working on.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [11]

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Good. That's helpful. And then, maybe on commercial. I think you talked about a fairly choppy order pattern there. And I guess, kind of a 2-part question. What are you seeing in your carpet tile business and/or demand for carpet tile overall? And what are you hearing from your salespeople or your channels of intel about what parts of the commercial market are soft and what the outlook there might be?

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Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [12]

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Well, obviously, carpet tile continues to gain market share from broadloom. We do participate in some areas like hospitality that still has a fair amount of -- significant amount of broadloom and less tile. But certainly, corporate is going much, much higher percentage of tile and some of the other end-use markets. But the way you characterize the business is choppy. It's probably pretty reflective of what we're seeing from time to time. It did appear in July and August that order entry was off, considerably both in broadloom and carpet tile. I would say both are up pretty significantly in September and October. So it's a little difficult for us at our size to read the entire market. We don't participate in all of the aspects of the market. We do participate in corporate. We do participate in hospitality and other markets. But we are in the higher end of each of those markets as well, and sometimes, that's not reflective of the entire market.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [13]

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And then on that -- so in corporate or hospitality, staying in commercial, are you seeing LVT in Croach? Or are you seeing your architect designers or end users you're talking to who want to add that to the mix? Or no, that's a sufficiently low-priced product line, and we're a high-priced carpet that we don't really run into that?

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Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [14]

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I think everybody runs into that today. I guess -- I don't think a carpet manufacturer isn't also selling luxury vinyl flooring. So it clearly is eating into that market, to some degree. And our Calibr? collection and our [Quiet Down] collection that are -- we started about a year ago with the Calibr? collection, is gaining great traction. And again, I think, in '18, will be a real contributor to our business.

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Operator [15]

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

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Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [16]

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Thank you, Shannon, and thank you all for being with us on our conference call, and look forward to being with you after the end of the year. Thank you.

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Operator [17]

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