Q3 2021 Dixie Group Inc Earnings Call
Good day and welcome to the Dixie Group incorporated 2021 third quarter earnings Conference call today's.
Today's call is being recorded.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
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. Please go ahead Sir.
Thank you John and welcome everyone to our third quarter Conference call. Our Safe Harbor statement is included by reference both to our website.
The press release.
For the third quarter of 2021, the company's continuing operations had net sales of approximately 89 million net income of.
$5.600 million, our net sales for the third quarter of 2020 were approximately $70 million.
With net income of $175000.
With the sale of our commercial business. The third quarter was the beginning of our company is our residential floor covering only.
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Sale of our commercial business did not include our manufacturing facilities in Atmore and sterile and Alabama.
But the availability of labor very constrained throughout the country, we have been moving residential production into these facilities, which has enhanced our ability to service our customers and grow our business.
During the quarter, we continued to gain market share and became.
And began significant changes, which we believe will enhance our future prospects.
Net sales of our residential flooring products were up 27% comparing favorably to the industry, which we believe was up high single digits.
For the first nine months of the year. Our total net sales of residential products were up 44% over the same period in the prior year.
This significant year over year increase in the net sales of our residential floor covering products was the result of the impact of COVID-19 pandemic in 2020 and strong growth in new and existing home sales and home remodeling in 2021.
Allen Diane <unk>, our CFO will review our financial results after which I will have additional comments.
Thank you Dan.
Dan just discussed this was another good quarter for the company driven by strong consumer demand in the residential markets and higher operating margins.
Net sales from continuing operations in the quarter of $89 $3 million of the 27% increase over the comparative sales of $70 million in the third quarter of 2020.
Let's put our total net sales for the first nine months of the year $252 million, an increase of 44% over the first nine months of because it impacted year of 2020.
Gross profit margins for the quarter was 27, 9% of net sales compared to 24, 5% in the third quarter of 2020.
As we are increasing pricing along with higher costs in our raw materials. They saw the benefit of higher current period higher revenues matching against prior period lower actual costs.
But the higher raw material costs roll through production, we anticipate our operating margins to return more in line with recent comparative results.
Selling and administrative costs in the third quarter of 2021.
At $18 1 million or 23% of net sales.
This compares favorably to 21, 7% in the same period of the prior year prior.
Prior period was affected by the onset of the pandemic after which we began a reduction in selling and administrative expenses as part of our COVID-19 response plan.
We've held on to many of those reductions while strategically investing in the growth of our residential market.
Our operating income on the quarter was $6 8 million or seven 7% of net sales compared to an operating income of $1 5 million in the third quarter of 2020.
For the current quarter, we incurred $1 2 million and interest expense as a reduction from the third quarter amount in 2020 of $1 6 million.
The 2020 amount of interest expense was $1 6 million compared to the $1 two in 2021 the.
The decrease in interest as a result of our financing initiatives in the fourth quarter of 2020, and our continued efforts toward debt reduction our year over year debt reduced from $78 2 million in the third quarter of 2000 $20 million to $64 million in the current quarter.
Heavy contributor to that debt reduction was during the third quarter the sale of our commercial operations.
Timber 13th we sold our commercial operations for $20 5 million as part of the purchase agreement we obtained the open trade receivables at the point of sales low cash deposits and certain inventory and fixed assets.
The gain recorded for the sale of the business was $2 $7 million and is reflected within our discontinued operations on our operating statement.
I look forward to focusing on the new structure of our business as we rely on the production in our facilities to meet the increased demand for residential products.
Net income on the quarter was $6 4 million, giving us an earnings per share of <unk> 45 for the fiscal year to date, we reported net income of $7 8 million and earnings per share of <unk> 49.
Looking at the balance sheet at the end of September 2021, with higher sales demand for.
Drove our increases in net receivables of $9 $1 million when compared to the same quarter in the prior year.
Inventories increased over prior year by $15 3 million in accounts payable and accrued expenses increased $12 2 million.
Both those results into higher sales volume and increased cost of our raw materials.
Capital equipment acquisitions, including those funded by cash and financing was approximately $2 million in the quarter.
We anticipate capital expenditures for 2021 to be approximately $5 million in depreciation and amortization of approximately $10 million.
And our borrowing availability under our long term credit agreement was $54 1 million.
Let's see our Investor presentation. Please go to our website at Www Dot group Dot com and click on our investors tab.
Thank you Allen.
During the third quarter, the availability of labor materials, and transportation became even more challenging which resulted in higher costs and created service issues for the industry.
The departure of stainmaster from the residential market also represents a major change, but one which offers opportunity for growth and repositioning.
We are implementing strategies to help our customers transition to our new brands envisioned six six and envision solutions SD pet solutions.
Our true core brand has continued to grow even more rapidly than the luxury vinyl flooring market.
With additional cutting edge products and focus on domestic sourcing we feel we can continue growing faster than the marketplace.
As part of our commitment to the upper end of the decorative market.
We're bringing it to new call it bringing out two new collections to the market.
Our maslin $18 66, and BRCA de core product offerings bring a large number of fresh and distinctive looks which are designed to complement our offering for the design community.
Our residential business in the third quarter continued to be very strong as noted our sales were 27% ahead of the same period in the prior year.
Including.
Sales of soft surface products that were up over 20% and hard surface up over 70%.
Our order entry rate.
We remained well above year ago levels throughout the quarter.
And hard surfaces, we launched true core applause, our new domestically sourced to SPC offering with eight skus.
It has quickly generated a significant level of interest and order activity in the market.
And we're working with our vendors to maximize production on these skus.
We also launched our true core <unk> DP program with 16, Skus, including wood and stone looks.
<unk> features high rise residential.
High resolution digital printing.
Directly.
And SPC core instead of the traditional film used in most SPC in WPC products.
Truecar <unk> is waterproof and can be easily installed over most existing hard surface floors and sub floors with minimal preparation.
The additional benefits of this technology include sharp realistic visuals virtual elimination of pattern repeats found in film based products and a highly durable AC five scratch resistance rating, we are continuing to vest.
To invest in our hard surface business.
As part of the transitioning away from Stainmaster 217 retail stores.
I've joined our new Premier Flooring Center network.
Through the PC PFC program, we delivered a turnkey solution for retailers, who had been closely aligned with the stainmaster brand in the past with the tagline it matters, where you Bath flooring.
Z program offers a best in class selling system, which promotes higher tickets and higher retail margins. It also highlights the benefits of high quality carpets made with type 66 nylon.
And refreshes the showroom with up to date merchandising and messaging.
PFC program has been very well received.
As Alan discussed our results as our residential flooring company were better in the third quarter.
Despite challenges from inflation material availability and transitioning away from stainmaster, we remain optimistic for the future.
New home construction home resale and residential remodeling are projected to remain robust.
We believe the focusing of our company owned residential flooring utilizing the remaining assets of our commercial production has positioned us for growth going forward.
During this period, we have maintained capital expenditures at about half of our depreciation and amortization level.
Allen mentioned, our debt reduction over the last 36 months, we have reduced debt by $81 million or approximately $2 million to $5 million a month.
In summary.
During the quarter, our sales of residential carpet increased 27% compared to a year ago.
Which was up significantly more than the industry as was our sales year to date up 44% when the industry. We think was up in the mid twenties range.
We have several growth initiatives that are doing very well.
First in response to the sale of Stainmaster brand of Lowe's, we're implementing our PFC.
PFC.
Program to transition our customers to our envision 66 and vision SD pet solution brands, we continue to introduce new hard surface products to our rapidly growing <unk> core collection of products will.
We will be expanding our products in the decorative category through our Maslin, $18 66, and fab BRCA the core offerings.
The momentum of our sales by residential products has continued into the fourth quarter for.
For the first five weeks of the quarter, our sales are up approximately 20% from year ago levels in the fourth quarter of last year was very strong.
This time, we would like to open up the call to questions.
Thank you Dan but at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please pull for questions.
Our first question comes from the line of Derrick Martin with Hodges Capital You May proceed with your question.
Dan Allen congratulations on the quarter, Thanks for taking my questions.
Thanks.
Yes.
As far as gross margins.
How should we think about those going forward.
I know you indicated youre seeing a lot of raw material inflation as well as.
Logistics, but kind of maybe timing of price increases and what you think you can offset.
Yes.
And certainly not wanting to provide any forward looking or projections in that area, but just talking a little bit about.
What we've experienced in the quarter as you know this year, we've been hit as so many people have.
High cost high cost increases in our raw materials, and we've been implementing price increases on our products and.
<unk> seen.
Having issues going both ways certainly as we're getting the price increases in there to recoup the costs on the raw materials, sometimes there are some delays around that.
We saw a benefit of some timing related issues on our costing methodology that allowed our actual costs to come in it would be.
Prior lower period cost matching up against some higher revenues from the current quarter, we would expect.
That would level out something more.
Comparatively to.
Historically recent margins.
But it's difficult to tell as we get.
And more efficiencies in our operations as we're looking to capitalize the.
From the divestiture of the commercial business, having more capacity in our particularly our atmore plan to be able to.
Fulfill more of the demand around our residential products.
And as we continue to see more cost increases coming in on our raw materials.
Difficult to predict in this environment.
Believe in the third quarter, we certainly saw a bit of a bit of a timing issue there and we'll look forward to the third and fourth quarter to continue to respond to pricing cost increases and continue to try to drive our margins Derrick.
I think we had five or six increases.
Perfect price increases during the year, obviously, a lot of different costs have gone up everything from labor to transportation to raw materials. We're also seeing a major switch from our stainmaster products too.
Actually for other raw material sources.
So there are a lot of moving parts here, it's very difficult to predict but we.
We would hope next year that we don't have as much inflation as we had this year, but clearly when that inflationary pressures there the industry has been increasing prices and virtually every mill is an announced price increase for either December or early January.
Thank you maybe a question on on the resets.
Given what's going on with stainmaster.
One do you think this is giving you an opportunity to get in front of customers and maybe take a little incremental market share and maybe second part of that on the on the labor side. As you indicated you moved some some employees over to the residential.
Sure.
Maybe just a little bit more color on.
Being able to.
Meet those customers' demands versus some of your competitors that could not deliver.
Well.
To be specific on stainmaster, we're moving away as rapidly as we can.
It takes time to.
Replicate products that are already in the marketplace and the new products of course would be introduced with other fiber sources.
We feel like we do have the fiber sources to replace the stainmaster products and we will do it as rapidly as possible.
Obviously.
That's not an easy task and.
Sure.
It may be some bumps in the road there but.
Net net we think we'll be in a much stronger position, we will have more suppliers more diversity of supply.
I think we'll be in a better position in terms of the commercial.
Folks that are now in the residential area, our Atmore plant was where our commercial products were produced.
The plant.
And.
Most of the equipment there was not part of the transaction of selling the commercial business and therefore, we can utilize those people.
And those assets to serve help service our residential business.
Labour today is a major factor in the whole industry, particularly in North Georgia.
Unemployment rates are extremely low.
I would say.
Capacity constraints have really.
Impacted virtually every carpet mill.
In North, Georgia, So we see this as an opportunity to utilize the people and the machinery that we have and the assets we have in Atmore too.
Grow our residential business.
And maybe last question for me you have done a tremendous job as far as bringing down the leverage on the balance sheet.
Is it will that still be a focus going forward is there a certain level that you'd like to get to as.
As far as the balance sheet goes.
I would say traditionally we've been pretty comfortable in the 30.
30% to 35%.
That too.
Capitalization and we're a little a little above that still so we will continue.
I'm trying to bring our debt down.
Gentlemen, thank you for your time thank.
Thank you Derek.
Our next question comes from the line of Mike Hughes with <unk> Capital You May proceed with your question.
Thanks for taking my questions.
First a detailed question on the balance sheet.
As of the end of the September quarter, there was $10 $4 million in current assets related to discontinued ops and $3 6 million in long term assets for discontinued ops, what happens to those two line items going forward.
Yeah.
The assets as we mentioned we retained the accounts receivables from the business as well as some of the inventories in the.
Fixed assets.
Of course, the accounts receivable, we are collecting all of them will expect to see that diminish significantly by the end of the year and then the.
The fixed assets and inventory we are also working to dispose of sell into the market.
Best obtainable value.
That will take a little bit more of a process just working through that into the market.
But the expectation is that those items.
B.
Hello.
Taken care of I guess for lack of a better terminology around it.
And then the next a couple.
A couple of quarters.
As far as the liabilities there.
There are some.
Ongoing liabilities, we have as far as an employee responsibilities for our employee responsibilities as well, but for most part those are other liabilities that are paid off rapidly in the quarter. It would be significantly decrease by the end of the year, Mike Let me clarify on the fixed assets those were assets that were used in the commercial business that cannot.
Or arent appropriately used in the residential business many of the assets that were in these those facilities can be used in the residential business, but these are ones that will not be used in the residential business.
Okay, Great and then the SG&A of $18 1 million in the quarter is that a good run rate going forward I was just curious if there was maybe some one time cost to somebody's resets from stainmaster tier tier one branding.
There were no onetime in particular cost we've had.
Some different issues throughout the year that have.
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<unk> got some cost as we went to France, where impact earlier in the year.
But in general those are.
There is nothing outstanding as far as any one particular large calls or item in there, but as we continue to look at our.
Plan for the next year and develop our strategy around building our residential business.
We certainly would reassess our commitment and investment into the <unk>.
Staples marketing in other selling areas.
Okay and your sales have been exception over the last few quarters just curious.
This quarter was there any channel fill dynamic just related to the resets on the stainmaster are we can we think of kind of point of sale.
At the same levels as youre selling.
Mike we're a little different from some other suppliers to the industry basically we do not sell a lot of stock.
So there is very little channel filling 90 over 90% of our sales occur when a.
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Consumer usually a lady place.
Places an order with a retailer and we get a order for a cut a certain size. So we're not selling.
A lot there's not a lot of channel fill possibility for us it's very small.
Okay. Thank you for that explanation I appreciate it and then just.
Last question not to get into a cost accounting discussion, but I think youre on LIFO. So I was a little bit surprised how strong the gross margins or in the quarter. So can you just maybe flush that issue out a little bit more.
And he said I mean, you really get into some cost accounting as far as our methodology and capturing actual cost.
Applying those the.
Though our calculation for the quarter as you mentioned for many companies right now Youre seeing a income deferral into LIFO is.
We're seeing this inflationary impact.
For US there were a number of things with our LIFO situation as far as the.
Movement with the commercial business in the.
$11 $5 million of inventory that was moved off the books at that point.
But in general for continuing operations. After a result of all the movement. There LIFO was relatively flat from quarter to quarter on our.
Other estimation of the LIFO calculation for the quarter the rail movement around the costs again as we.
Calculate our actual cost is.
Really timing driven.
As far as getting the price increases in place and having some prior period actual costs inventory.
Rolling through.
So again, it's a.
Any benefit on the quarter that is.
With respect to settle down a little bit as we get moving forward into the fourth quarter, Mike I think once the Q is available you will notice that our LIFO reserve at the end of second quarter was almost identical to what it was at the end of the third quarter and that is up I think around $6 million from year end.
Okay, Great I appreciate all the information thank you.
Thank you.
With no further questions in the queue I will now turn the call back over to Dan Frierson for any additional or closing remarks.
Thank you John third quarter was a sort of a.
Watershed quarter for us.
Getting out of the commercial business concentrating.
Totally on residential both hard and soft surface with a number of initiatives to grow our business.
And with assets and people available to help grow our business. So we're looking forward to the future and appreciate your being with us. Thank you.
Ladies and gentlemen that will conclude today's conference. Thank you again for your participation have a great day.