Q2 2022 Dixie Group Inc Earnings Call

Greetings and welcome to the Dixie Group second quarter 2022 conference call at.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During this conference. Please press star zero on your telephone keypad.

Please note that this conference is being recorded.

I will now turn the conference over to our host Dan Frierson Chairman. Please go ahead.

Thank you Diego welcome to our second quarter Conference call.

Welcome.

You and I have with me Alan.

Our Chief Financial Officer.

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 <unk>.

$83 million 698.

[noise] dollars and a net loss of $4.487 million or 29 cents per diluted share in.

In the second quarter of 2021 as adjusted to reflect the commercial business as discontinued operations net sales from continuing operations were <unk>.

$90 million with a net income of about three three.

$3.349 million or 2021 cents 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.

Dollar year over year loss of sales volume through our mass merchant retailer business with lowes.

Sales with this customer and it did 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 Brian .

Which was offset by growth in our fab breaker Massillon and true core Brian .

At this time, Alan will review, our financial results after which I will have additional comments.

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.

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 will continue to work through the remaining inventory of the higher cost fiber through the beginning of the third quarter.

In addition to the fiber convergence, our gross margins were impacted by high breakouts 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 'twenty one.

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 'twenty, two we're primarily directed at investment in samples and marketing professional fees and information system and higher overall costs as a result of inflation.

The interest expense on the quarter was $1 $1 million, which was down from the previous year at $1 2 million.

Looking at the changes in the balance sheet for the quarter.

<unk> 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 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 accrued expenses decreased the total balance of about $2 $3 million from fiscal year end.

Capital expenditures on the quarter were $2 6 million and that brought our year to date capital expenditures of $2 9 million.

Total capital expenditures are planned at a maintenance level of approximately $5 million for the year.

Depreciation on the year to date was 4 million.

Our debt increased by $4 5 million.

$4 $5 million during the quarter and that was driven by the higher cost and timing of payments on our accruals.

Our borrowing availability under our senior credit facility at quarter end was $32 $6 million.

Our investor presentation is available on our website at Www Dot Dixie group Dot Com Dan.

Thank you Alan.

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 and Vista to exit the floor covering business by mid year and do this by pricing themselves out of the market, creating an environment, where raw material costs dramatically increased.

And much more rapidly than our competitors, which had the impact of lowering our gross margin as Allen comment.

This situation meant we needed to replace an vista 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 serve.

As products.

Secondly over the last year, our largest customer changed its product strategy to focus on lower end 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 in sales for the second quarter.

Sales to this customer were down 7 million in the second quarter.

We will also this fall you'll have reduced volume in our facilities, which of course has had the impact of increasing our manufacturing cost and lowering our profitability.

The third external factor with which we were faced with the unprecedented unprecedented increase in freight rates impacting our imported hard surface products.

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 all of those still high by historical standards, they've come down significantly.

As we progress through the third quarter the above issues have been addressed we currently have four 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 chair of the upper end residential market.

Repurposing, our Atmore plan from a carpet facility to a hard surface facility, we will improve the productivity in our other carpet facilities.

It 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 weird phrase.

We're very excited about the announcement of our new joint venture to produce luxury vinyl flooring and our Atmore, Alabama plant.

This investment in that more will ensure their jobs for our associates in that facility.

Domestic production should help us continue gaining market share by improved by improving service and flexibility to meet our customers' expectations and respond respond to market changes.

As we are all aware.

Eventual retail business has been adversely impacted by lower demand.

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 in back at about current market conditions.

During the second quarter, we began executing the launch of our new deck programs 18, 66, biomass and decor fabric.

This is a key growth initiative for the company with the launch of over 30 new styles.

<unk> helps further position us and our key customers and the luxury end of the market.

New style should begin impacting our sales during the remainder of the year.

Despite operating in a highly inflationary environment.

And are introducing a large number of new hard surface and decorative products, we've been able to control inventories are capital expenditures for the first six months were below depreciation levels also.

Consequently, our availability under our revolver continue to be in excess of 30.

Our belief in our future as the motivating factor in our board's announcement of a new stock repurchase authorization with the intent of entering into tend to be five one plan to repurchase stock.

At this time, we will open the call for questions.

Thank you and ladies and gentlemen at this time well conduct a question and answer session.

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Our first question comes from Barry Gertner with Improver. Please go ahead.

Hey, Thanks for taking my call a lot this quarter.

As usual.

Adapting to the time, so congrats on that.

Two questions for each you don't mind, the first thing I noticed in the ditch.

And Q3.

Three and lawsuit language was removed about two kind of been tracking.

The shoot and it seems to be that a lot of this has sort of wound down E E.

Longer something that Dixon, a they have a focus on anymore.

Now in the rearview mirror.

Yes, Barry we I have worked with our legal team and work with the parties in the legal.

Legal case and have worked through a settlement for those cases that were open and they have been in the queue in previous quarters.

Well, that's great and then one more question just on the joint venture.

Today as well.

That will be producing a luxury wine added the atmore plan.

So that's pretty cheap.

Which sounds good partner in.

In this partner somebody who.

He has done this before with someone that Dixie had spent a good amount of transferred in.

Good partner to get really into the manufacturing side.

Luxury vinyl business.

There is someone that has been in the luxury vinyl flooring business for many many years, we have done business with them for a number of years.

Somebody that has the technical expertise to help us.

Hum.

Produce the products in this country.

That's incredible I'm really excited I think that can be a really good company and keep up the great work. Thank you so much.

Thank you Gary.

Thank you.

And our next question comes from.

Derick Martin with Hodges Capital management. Please state your question.

Thank you for.

Taking my question this morning.

Could you maybe going a little deeper into the JV maybe.

It is the equity contribution nacho outlined in the K it should that cover the cost of converting the.

Facility to manufacture L. P T.

Barry This is Dan how are you.

Doing well.

It will not cover all the costs that 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.

Term exactly but in terms of the JV cost itself that should yes that should cover.

The cost of installation.

Installation of equipment.

Startup.

We are in the luxury vinyl flooring business as you know have been for four years is that market is growing rapidly our business there has been growing rapidly.

We feel like having domestic production.

Be great asset going forward.

Can you give us an idea of what.

Yes.

What that luxury vinyl tile represents as a percentage of total sales today.

We do not break that out.

It will be in the.

Neighborhood of 15% to 20%.

Okay and would this would this facility to be able to cover the majority of your needs.

That is not a 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.

Okay.

And then maybe my second question around gross margins.

Can you give a little color on.

How do you think third quarter fourth quarter shakes out for this year as you work through that higher cost inventory and then maybe you know this.

The split on the impact between freight cost and higher raw material inflation.

Yes.

Eric I think that.

Yeah of course, we don't provide any forward looking statements or anything.

Yeah.

We don't want to prognosticate can do 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 these fibers are away from the higher cost.

And but.

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.

Four facility with a joint venture will allow us to transition some calls from there. So we got some good things working we do expect we could you know.

Those things would.

Translate to some improvement in the third quarter, but could not and would not be able to pronounce provide any direct numbers on that I think where you indicated in the press relation are communist and it will be fell from the third quarter, but it'd be more fully effected in the fourth cool yes.

Okay. That's helpful.

And then I noticed in in the press release, you highlighted the the decorative second segment or what what's the opportunity there you see.

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.

Brought somebody onboard over a about a year and a half ago to lead this he's been in this business for 30 years plus.

We have.

This year about 30 products were introducing and they're just really getting to market now.

It is being extremely well received in terms of.

Customers buying samples.

<unk> and displays.

We will introduce a comparable.

Number of products next year, starting earlier in the year and that's really helps position us in the very high end of the market, where we had gone very well and we think he's holding up better.

Market overall.

Very good well, thank you I'll, let somebody else ask some questions.

Hi, there thanks, Sir.

Thank you and our next question comes from Chris Riemenschneider with Morgan Stanley . Please go ahead.

Just asking about the the joint venture I think it's been a dress put it cut out my speaker cut out.

The effect of that and the balance sheet and where do you want your your your debt levels to be in the near future and in three to five years.

I was just gonna affect at that level.

[noise] well from the balance sheet standpoint, we would simply reflect the investment in the joint venture and.

Connected to return off of that.

Income statement as well.

Yeah from a universalist standpoint, as we talked about and this was disclosed in the 10-K six.

6 million dollar investment initially for you know the capital in the startup 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're just supposed to production purchase of inventory between the joint venture partners seat cover the cost of operate.

<unk>.

So just the initial outlay there as far as you know the investment in from our side as a partner.

6 million plus some additional startup costs that it should be will see that as we go that it should be significantly less obviously, the the initial capital expenditure.

And ideally where would you like your your debt levels to be as a party for capitalization.

I believe you know if we could get more in line with the equity have equal contribution from creditors and investors that would be ideal.

Got a ways to go to get there, but you know we have a time that and strong cash flow times and you know as we see investment opportunities. We would have that at a higher rate going board. So just managing it based on our expectations.

You know as far as where the company's doing what opportunities are to invest in growth.

Okay. Thank you.

Alright, Thank you Chris.

Thank you there are no further questions at this time I'll hand, the floor back to Mister Firestone for closing remarks.

Thank you Diego and we appreciate all of your being with US today. We appreciate the questions. We look forward to.

Improving resolved says <unk>.

Mitigate the impact of some of the things that have happened in the last.

Six to master here, but we feel like we are moving in the right direction I appreciate your being with US and talk to you next court.

Thank you. This concludes today's conference all parties may disconnect have a great day.