Q2 2022 Dixie Group Inc Earnings Call CHATTANOOGA Aug 16, 2022 (Thomson StreetEvents) -- Edited Transcript of Dixie Group Inc earnings conference call or presentation Monday, August 15, 2022 at 6:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Allen L. Danzey The Dixie Group, Inc. - VP & CFO * Daniel K. Frierson The Dixie Group, Inc. - Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Barry Gertner * Christian Riemenschneider * Derek R. Maupin Hodges Capital Management Inc - VP, Portfolio Manager & Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Dixie Group Second Quarter 2022 Conference Call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the conference over to our host, Dan Frierson, Chairman. Please go ahead. -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [2] -------------------------------------------------------------------------------- Thank you, Diego. Welcome to our second quarter conference call. Welcome to you, and I have with Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by reference both to our website and press release. For the second quarter of 2022, the company had net sales from continuing operations of $83,698,000 and a net loss of $4,487,000 or $0.29 per diluted share. In the second quarter of 2021, as adjusted to reflect the commercial business as discontinued operations, net sales from continuing operations were roughly $90 million with a net income $3,349,000 or $0.21 per diluted share. During the second quarter of 2022, our net sales decreased 7% compared with the same period of the prior year. This was primarily attributable to a $7 million year-over-year loss of sales volume through our mass merchant retail business with [Lowe's]. Our sales with this customer ended in the first quarter of 2022 as a result of their change in strategy to focus on lower price point products. This loss in sales in the mass merchant business contributed to the lower sales volume in our Dixie Home brand, which was offset by growth in our Fabrica, Masland and TRUCOR brands. At this time, Allen will review our financial results, after which I will have additional comments. -------------------------------------------------------------------------------- Allen L. Danzey, The Dixie Group, Inc. - VP & CFO [3] -------------------------------------------------------------------------------- Thank you, Dan. In the second quarter, we continued to experience the negative impact of the price increases that were imposed by our primary raw material provider. By the end of the second quarter, we converted to other fiber suppliers at price points that were more in line with the market for the majority of those affected products. We'll continue to work through the [remaining] inventory at the higher cost fiber at the beginning of the third quarter. In addition to the fiber conversions, our gross margins were impacted by high freight costs on our imported goods and other increased costs that were driven by inflation. As a result of these negative factors, our gross profit as a percent of net sales for the quarter was 19.2% compared to the 25.1% we saw in the second quarter of '21. Selling and administrative expenses were 22.5% of net sales in the second quarter of 2022. That compares to 18.8% in the second quarter of the previous year. The increased expenses in '22 were primarily directed to investments in samples in marketing, professional fees in finance and information systems and higher overall costs as a result of inflation. The interest expense in the quarter was $1.1 million, which was down from the previous year at $1.2 million. And looking at the changes in the balance sheet for the quarter, receivables decreased by $4.3 million from our 2021 fiscal year-end balance, and this was primarily due to the loss of sales volume with our primary home center customers, as Dan mentioned. The increases in raw material cost was the primary factor for increased inventory, and that inventory was up by $4.2 million from the 2021 fiscal year-end. Timing of payments on accounts payable and accretive expenses decreased the total balance by $2.3 million from fiscal year-end. Capital expenditures in the quarter were $2.6 million, and that brought our year-to-date capital expenditure to $2.9 million. Total capital expenditures are planned at a maintenance level of approximately $5 million for the year. Depreciation on a year-to-date was $4 million. Our debt increased by $4.5 million during the quarter, and that was driven by the higher cost and timing of payments on our accruals. Our borrowing availability and our senior credit facility at quarter end was $32.6 million. Our investor presentation is available on our website at www.dixiegroup.com. Dan? -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [4] -------------------------------------------------------------------------------- Thank you, Allen. Several events -- several external events had a major impact on the second quarter and the first half of 2022. The desire of our primary raw material supplier, [Invista], to exit the floor covering business by midyear and do this by pricing themselves out of the market, creating an environment where our raw material costs dramatically increased and much more rapidly than our competitors, which has the impact of lowering our gross margin, as Allen commented. This situation meant we needed to replace Invista as a supplier as rapidly as possible, which we accomplished early in the third quarter. Implementing these changes unfortunately did interrupt the introduction of new products during the first half of the year, but those introductions will take place in the last half of the year and should have a positive impact on our sales as our customers are exposed to these new hard and soft surface products. Secondly, over the last year, our largest customer changed its product strategy to focus on lower and commodity products primarily produced from polyester fiber. This change of focus meant we no longer fit into their product offering and accounted for our entire reduction of sales for the second quarter. Sales to this customer were down $7 million in the second quarter. The loss of this volume has reduced volume in our facilities, which, of course, has had the impact of increasing our manufacturing costs and lowering our profitability. The third external factor with which we were faced was the unprecedented increase in freight rates impacting our imported hard surface products. The rates increased more rapidly and to a greater degree than we could pass along to our customers. Hence, our margins for our hard surface products were also impacted during the first half of the year. The freight rates have been subsiding since the spring and although still high by historical standards have come down significantly. As we progress through the third quarter, the above issues have been addressed. We currently have 4 major raw material suppliers, which produce a broader array of products at more competitive prices. Although we no longer do business with our previous largest customer, we continue to focus on our residential retail customers and work together to improve our joint share of the upper-end residential market. By repurposing our Atmore plant from a carpet facility to a hard surface facility, we will improve productivity in our other carpet facilities, which should mitigate the impact of the [lost Lowe's] business. And as indicated, the freight costs for imported products have dropped significantly, which has helped alleviate the margin compression with which we are faced. We're very excited about the announcement of our new joint venture to produce luxury vinyl flooring in our Atmore, Alabama plant. This investment in Atmore will ensure there are jobs for our associates in that facility. Domestic production should help us continue gaining market share by improving service and flexibility to meet our customers' expectations and respond to market changes. As we are all aware, the residential retail business has been adversely impacted by lower demand. Our sales for the third quarter of soft surface products are below the very strong year-ago levels. Even though our volume is down, we did implement a price increase in late July. Hard surface products continue to outpace last year, but are also being impacted by current market conditions. During the second quarter, we began executing the launch of our new decorative programs, 1866 by Masland and Décorby Fabrica. This is a key growth initiative for the company with the launch of over 30 new styles, which helps further position us and our key customers in the luxury end of the market. The new styles should begin impacting our sales during the remainder of the year. Despite operating in a highly inflationary environment and introducing a large number of new hard surface and decorative products, we have been able to control inventories. Our capital expenditure period for the first 6 months were below depreciation levels also. Consequently, our availability under our revolver continued to be in excess of $30 million. Our belief in our future is the motivating factor in our Board's announcement of a new stock repurchase authorization with the intent of entering into a 10b-5-1 plan to repurchase stock. At this time, we will open the call to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Barry Gertner with Improverb. -------------------------------------------------------------------------------- Barry Gertner, [2] -------------------------------------------------------------------------------- A lot this quarter and, as usual, adapting to the time, so congrats on that. Two questions for me, if you don't mind. The first being, I noticed in this 10-Q that the 3M lawsuit line which was removed. I've also kind of been tracking the suit, and it seems to be that a lot of this has sort of wound down. Is this no longer something that Dixie needs to have a focus on anymore? Is this something that's now in the rearview mirror? -------------------------------------------------------------------------------- Allen L. Danzey, The Dixie Group, Inc. - VP & CFO [3] -------------------------------------------------------------------------------- Yes, Barry. We -- I have worked with our legal team and worked with the parties in the legal case and have worked through a settlement for those cases that were open in the Q in previous quarters. -------------------------------------------------------------------------------- Barry Gertner, [4] -------------------------------------------------------------------------------- That's great. And then one more question, just on the joint venture announced today as well, that will be producing a luxury vinyl out of the Atmore plant. So as per the JV with this partner, is this partner somebody who Dixie has done business before with? Is it someone that Dixie had spent a good amount of time sort of finding a good partner to get really into the manufacturing side of luxury vinyl business? -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [5] -------------------------------------------------------------------------------- Barry, if someone has been in the luxury vinyl flooring business for many, many years, we have done business with them for a number of years and somebody that has the technical expertise to help us produce the products in this country. -------------------------------------------------------------------------------- Barry Gertner, [6] -------------------------------------------------------------------------------- That's incredible. I'm really excited. I think that's going to be really good for the company and keep up the great work. Thank you so much. -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [7] -------------------------------------------------------------------------------- Thank you, Barry. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question comes from Derek Maupin with Hodges Capital Management. -------------------------------------------------------------------------------- Derek R. Maupin, Hodges Capital Management Inc - VP, Portfolio Manager & Senior Research Analyst [9] -------------------------------------------------------------------------------- Could you maybe go a little deeper into the JV? Maybe -- is the equity contribution that you outlined in the [K], should that cover the cost of converting the facility to manufacture LVT? -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [10] -------------------------------------------------------------------------------- Barry, this is Dan. How are you? -------------------------------------------------------------------------------- Derek R. Maupin, Hodges Capital Management Inc - VP, Portfolio Manager & Senior Research Analyst [11] -------------------------------------------------------------------------------- Doing well. -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [12] -------------------------------------------------------------------------------- It will not cover all of the costs. That's the cost for the new JV. There will be some cost of getting the plant prepared for the JV. And we don't have that figure determined exactly. But in terms of the JV cost itself, that should -- yes, that should cover the cost of installation of equipment and startup. We are in the luxury vinyl flooring business, as you know, have been for 4 years. That market is growing rapidly. Our business there has been growing rapidly. And we feel like having domestic production will be a great asset going forward. -------------------------------------------------------------------------------- Derek R. Maupin, Hodges Capital Management Inc - VP, Portfolio Manager & Senior Research Analyst [13] -------------------------------------------------------------------------------- Can you give us an idea of what that luxury vinyl tile represents to a percentage of total sales today? -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [14] -------------------------------------------------------------------------------- We do not break that out. It will be in the neighborhood of 15% to 20%. -------------------------------------------------------------------------------- Derek R. Maupin, Hodges Capital Management Inc - VP, Portfolio Manager & Senior Research Analyst [15] -------------------------------------------------------------------------------- Okay. And would this facility be able to cover the majority of your needs? -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [16] -------------------------------------------------------------------------------- That is not -- it is not anticipated that it will because the business is growing rapidly, and we have a number of different products. So we will still continue to import products as well. -------------------------------------------------------------------------------- Derek R. Maupin, Hodges Capital Management Inc - VP, Portfolio Manager & Senior Research Analyst [17] -------------------------------------------------------------------------------- And then maybe my second question around gross margins. Can you give a little color on how you think third quarter, fourth quarter shakes out for this year as you work through that higher cost inventory? And then maybe the split on the impact between freight cost and higher raw material inflation? -------------------------------------------------------------------------------- Allen L. Danzey, The Dixie Group, Inc. - VP & CFO [18] -------------------------------------------------------------------------------- Yes, Derek, I think that -- of course, we don't provide any forward-looking statements or anything that we don't want to prognosticate into anything here. But I can say from -- as you mentioned, some of the things that we're working on and looking at, as we're transitioning the (inaudible) away from the higher cost, the [Invista] departure and the cost that they imposed upon us at that time. We're starting to see that transition over to the products. We still have some inventory from the first half in this inventory that we'll work through here in the first part of the third quarter. But we still start seeing some relief as far as transitioning to these other providers at a market cost as well as, we continue to work forward looking at our overall gross margins, the opportunity in the Atmore facility with the joint venture will allow us to transition some costs from there. So we've got some good things working. We do expect we could -- those things would translate to some improvement in the third quarter, but could not and would not be able to provide any direct numbers on that. -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [19] -------------------------------------------------------------------------------- I think we indicated in the press release and in our comments that it will be felt in the third quarter, but be more fully affected in the fourth quarter. Yes. -------------------------------------------------------------------------------- Derek R. Maupin, Hodges Capital Management Inc - VP, Portfolio Manager & Senior Research Analyst [20] -------------------------------------------------------------------------------- Okay. That's helpful. And then I noticed in the press release you highlighted the decorative segment. What's the opportunity there you see? -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [21] -------------------------------------------------------------------------------- We see a very large opportunity. We have always been in that segment, but only with mostly domestically produced tufted products. We are expanding that dramatically. We have brought somebody on board over about 1.5 years ago to lead this, who's been in this business for 30 years plus. We have -- this year, about 30 products we're introducing and they're just really getting to market now. It is being extremely well received in terms of customers buying samples and displays. We will introduce a comparable number of products next year, starting earlier in the year. And this really helps position us in the very high end of the market where we have done very well. And we think it's holding up better than the market overall. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- And our next question comes from Chris Riemenschneider with Morgan Stanley. -------------------------------------------------------------------------------- Christian Riemenschneider, [23] -------------------------------------------------------------------------------- Just asking about the joint venture, I think, has been addressed, but it cut out, my speaker cut out. Just the effect of that on the balance sheet, where do you want your debt levels to be in the near future and in 3 to 5 years? How is this going to affect the debt levels? -------------------------------------------------------------------------------- Allen L. Danzey, The Dixie Group, Inc. - VP & CFO [24] -------------------------------------------------------------------------------- Well, from the balance sheet standpoint, we would simply reflect the investment in the joint venture and the impact of the return off of that from our income statement as well. From an investment standpoint, as we talked about and as disclosed in the 10-K, the $6 million investment initially for the capital and the start-up of the joint venture, and we'll see as we go forward, of course, there will be some additional investment for operating costs as we get started. From that point forward, we expect the production and purchase of inventory between the joint venture partners to cover the cost of operations. So just an initial outlay there as far as the investment in -- from our side as a partner, the $6 million plus some additional start-up costs that should be -- we'll see that as we go, but it should be significantly less, obviously, than the initial capital expenditure. -------------------------------------------------------------------------------- Christian Riemenschneider, [25] -------------------------------------------------------------------------------- And ideally, where would you like your debt levels to be as a part of your capitalization? -------------------------------------------------------------------------------- Allen L. Danzey, The Dixie Group, Inc. - VP & CFO [26] -------------------------------------------------------------------------------- I believe we could get more in line with the equity have equal contribution from our creditors and investors, that would be ideal. I think we've got a ways to go to get there. But we have time that strong cash flow times. And as we see investment opportunities, we would have that at a higher rate going forward. So just managing it based on our expectations as far as the company is going and what our opportunities are to invest in growth. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- There are no further questions at this time. I'll hand the floor back to Mr. Frierson for closing remarks. -------------------------------------------------------------------------------- Daniel K. Frierson, The Dixie Group, Inc. - Chairman & CEO [28] -------------------------------------------------------------------------------- Thank you, Diego, and we appreciate all of you being with us today. We appreciate the questions. We look forward to improving results as we mitigate the impact of some of the things that have happened in the last 6 to months to a year. But we feel like we are moving in the right direction. I appreciate you being with us and talk to you next quarter. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Thank you. This concludes today's conference. All parties may disconnect. Have a great day.

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