Transcript
Good day, and welcome to the Dixie Group, Inc. 2020 Third Quarter 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, Stacy. And welcome to all to our third quarter conference call. I have with me Allen Danzey, our Chief Financial Officer. Our Safe Harbor statement is included by reference both to our website and press release. Today, we reported financial results for the third fiscal quarter ended September 26. For the third quarter, the company had net income from continuing operations of $906,000, or $0.06 per diluted share, as compared to a loss of over $2.5 million last year or $0.16 per diluted share. For the third quarter of 2020, the company had net sales of $85,920,000 as compared to $95,447,000 in 2019. For the third quarter of 2020, net sales were down 10% as compared to the same quarter in 2019. But we're up 41% compared to the prior quarter. In spite of the sales revenue being down 10%, our gross profit margin of 25.9% was 3.8 percentage points higher than last year. We also secured $25 million in long term fixed rate loans entered into a new $75 million five-year senior credit facility, which raised our borrowing availability to $45 million. We have also announced authorization of a $2.9 million stock repurchase plan. We're pleased to report a profit for the third quarter. We continue our efforts to keep our employees safe through the COVID-19 crisis. To minimize and prevent cases of COVID-19 exposure in our facilities we have taken measures aimed at enhancing worker safety, including large-scale COVID-19 testing, mandatory temperature checks prior to starting work, and requirements to wear masks when unable to maintain social distance. We're still assessing the long-term impacts of COVID-19 on our markets and operating practices. We're encouraged by the improvement we've seen in sales, but as a resurgence of COVID-19 cases has been seen in many parts of the country and as government authorities reassess their decisions to lift the restrictions in their jurisdictions, we're cautious as to what the remainder of the year may look like. Allen Danzey will review our third quarter financial results after which I will comment further on current business conditions. Allen?
Thank you, Dan. As Dan mentioned earlier, our net sales for the third quarter of 2020 were $85.9 million, which was down 10% from the third quarter of 2019, where we were at $95.4 million. Our gross profit for the quarter was 25.9% of net sales. This was a significant improvement of 2.1% compared to the third quarter of 2019. This 2020 gross profit reflected our improved operations as well as cost reductions from our gross profit improvement plan and expense reductions enacted in response to the COVID-19 crisis. Our selling and administrative costs in the third quarter of 2020 were $1.7 million lower than the third quarter of 2019. However, due to lower net sales in 2020, the selling and administrative expenses as a percent of net sales was slightly higher for 2020 at 22.5%, compared with 22% in the same quarter of 2019. This reduction in selling and administrative expenses was primarily the result of cost-saving initiatives that we implemented in response to the COVID-19 pandemic. These initiatives included reductions in samples and marketing expenses, reduced travel, reductions in payroll expenses through job eliminations and temporary pay reductions, as well as other expense reductions. During the quarter, we also incurred $515,000 in facility consolidation and severance expenses. These expenses included $145,000 in residual expenses related to our profit improvement plan, as well as $370,000 in severance and financing expenses related to our COVID-19 response plan. We ended the quarter with an operating income of $2.6 million compared to an operating loss of $1 million for the same period in 2019. Our total debt decreased by approximately $1 million from the end of the prior quarter. The reduction during the quarter was primarily driven by earnings and working capital changes, most significantly reductions in inventory. Year-over-year, debt has decreased by $50.2 million when compared to the third quarter of 2019. The increasing debt year-over-year is primarily the result of the sale of our California facility in the fourth quarter of 2019, as well as better use of working capital. Diluted earnings per share from continuing operations were $0.06. Looking at our balance sheet at the end of September, net receivables increased by $6.7 million during the quarter. The increase in receivables was the result of higher sales volume in the third quarter as compared to the prior quarter, which was heavily impacted by the COVID-19 crisis. Inventory decreased $3 million in the third quarter of 2020 compared with the second quarter balance. During the third quarter, we continued our focus on improvements in working capital, including inventory turnover. Capital equipment acquisitions, including those funded by cash and financing, were $403,000 in the third quarter of 2020. Depreciation and amortization during the quarter was $2.8 million. We anticipate capital expenditures for 2020 to be approximately $3.5 million and a depreciation amortization total of approximately $10.6 million. At quarter end, the borrowing availability under a long-term credit agreement was $25.3 million. However, as Dan mentioned, subsequent to quarter end, we entered into an agreement for a new five-year senior credit facility of $75 million and also closed on two long-term fixed asset-backed loans totaling $25 million. At the close of the credit facility agreement on October 30, our borrowing availability was $45 million. The current availability of funds is $46.7 million. Our investor representation including our non-GAAP information is on our website at www.dixiegroup.com. Dan?
Thank you, Allen. As Allen pointed out, subsequent to the end of the third quarter, the company entered into a new $75 million five-year senior revolving credit facility and also closed on two additional long-term fixed rate asset-backed loans totaling $25 million. The company currently has no goodwill or intangibles on its balance sheet, and has reduced debt by $15 million in the last 12 months. Availability under the revolving credit, close to the transaction, was $45 million. Additionally, the company's Board of Directors approved the repurchase of up to $2.9 million of the company's common stock. We believe these transactions together with significant operational improvements put the company in a much stronger position going forward. The third quarter sales continue to recover from the impact of the COVID-19 pandemic. Our third quarter sales were 10% below the same quarter sales in the prior year. Sales of our residential products were up 3% for the quarter, while the industry, we believe, was up closer to 1.5%, benefiting from strong trends in home construction and existing home sales. Our residential segments have continued to improve throughout the quarter, as many retailers reemerged from the COVID-19 downturn and an increasing number of consumers began home improvement projects. Our specialty retail soft surface business was positive for the third quarter. Despite lower total quarter sales in our mass merchant segment, we showed favorable comparisons to the prior year by the end of the quarter. Early fourth quarter trends show strong soft surface growth in all retail segments. With 10 new products for 2020, our EnVision 6,6 nylon program continues to demonstrate significant growth and build momentum in the market. This program offers beautiful designs with the durability and performance of nylon type 6,6 at price points that compete effectively in today's market. EnVision 6,6 has become our primary growth platform in soft surfaces. We're planning for another significant expansion of this product family in 2021. Our residential hard surface segment has also continued to perform exceptionally well for the third quarter, growing significantly in both the luxury vinyl flooring and engineered hardwood categories. Within our TRUCOR brand, two new innovations made a notable impact. TRUCOR IGT is an SPC product which utilizes an innovative blocking system to deliver realistic ground lines on authentic tile and stone visuals. This innovation saves money, time, and eliminates many disruptions associated with traditional ceramic tile replacement projects. TRUCOR XXL, a WPC offering with 18 beautiful French oak visuals, and oversized planks, including 7 by 72, 9 by 72, and 10 by 84 inches, is the widest and longest rigid core plank on the market today. With the clean visuals and on-trend colors, these products gained immediate traction during the third quarter. Our commercial business continues to be adversely impacted by COVID-19. In the third quarter, sales of our commercial products were down 41% on a year-over-year basis, while the industry we believe was up close to 25% for the same time period. We believe the recovery will take longer and may not be as dynamic as the prospects for market recovery. Our focus in terms of market segments is on the senior living, multifamily, and non-lodging hospitality market segments. The living series launched this year produced focused opportunities for public spaces, and these market segments have generated numerous specifications. We will be launching additional products this year focused on flooring in these market segments. We are continuing to focus on our overall performance. We are experiencing acceptance and sales growth with our new non-PVC backing on our modular tile product. This product offers a non-PVC alternative with very high recycled content that can be used in high relative humidity conditions. Looking at the fourth quarter and where we are today, we have returned to profitability in the third quarter with a gross profit of 25.9% compared to 22.1% last year. The commercial business continues to be adversely impacted by COVID-19. We see no change in the fourth quarter in that regard. The commercial business currently represents about 15% of our sales. To mitigate the impact of the slow commercial business, we're utilizing some of our commercial business assets to help support the growth of our residential business. Residential continues to gain momentum. For October, orders and sales are up low to mid-teens compared to a year ago. We, along with the industry, have implemented a price increase in the fourth quarter. We've provided good operational performance in our manufacturing facility and continue to see major improvements in cost and quality ways to serve. Through operational improvement, we've been able to reduce headcount by 6% this year, and by 26% over the last three years. Again, we've refinanced the company, with loan maturities extending from just over a year to 5 and 25 years. We no longer have any goodwill or intangibles on our balance sheet. We announced the $2.9 million stock repurchase authorization, as well as have reduced debt in the last 12 months by over $50 million. At this time, we will open the meeting to questions.
Our first question comes from Barry Blank with JH Darbie.
Hi, Dan. That was an excellent quarter. Congratulations. I have a few questions. My first question is you outperformed pretty much the industry. I'm looking at Armstrong, and they had a terrible quarter compared to the quarter that you had. I realized their mix is a little different, but maybe you could comment on why the rest of the industry is doing so poorly and the difference between you and them?
Barry, again, there's no right comparable; no other company that's exactly configured the way we are. But I think basically, we're in the high-end residential business with a smaller commercial business. The commercial business continues to be challenged, but the high-end residential business has grown nicely. If somebody had told me we're going to lock everybody in this country in their houses for two or three months, and then we're going to let them loose, and they're going to want to go out and buy carpet, I would have thought they were crazy. But that's what happened. It's an exciting environment. It's a growing part of the business, and I think you will see that continue as the housing statistics, both home resales and housing starts continue to improve and are at all-time highs. So, we see the residential business, particularly in the higher end, growing very nicely.
With these competitors and their stock prices dropping, are you considering possibly any consolidations or acquisitions at this time?
Barry, quite honestly, obviously, with everything that we have been doing, our focus has been pretty inward for the last couple of months, not knowing what the real impact of COVID would be, and reconfiguring our balance sheet. Having accomplished all this, yes, I think we will continue looking at opportunities as they may arise.
Last question is you received some government loans. I'm not sure what they were and how much of it did you have and how much is under forgiveness - under the forgiveness program.
The bonds were secured under the USDA, the fixed asset-backed loans that we spoke about, which total $25 million. The two loans together were under the USDA program, not directly under the forgiveness program or the CARES Act directly, but it is through a USDA program backed by them.
So if any of it forgivable? Or does it all have to be paid back at some point in time?
Barry, there is no forgivable portion of these loans. The loans are actually with AmeriState Bank out of Oklahoma and the Greater Nevada Credit Union out of Nevada through a USDA program, where we have facilities that are in rural areas. The USDA simply provided some assurances to the banks on the loans which are repayable by us over the term of the loan period.
Our next question comes from Barry Gartner with City Staples.
Good morning, folks. I guess the call. But first of all, I wanted to personally wish my congratulations to Mr. Faulkner Jon. You guys announced last night he'll be rotating into a consulting role. I think as an investor and someone who's dealt with him, he's still going to be a part of the company. He has been an incredible resource and someone that's made it very easy to access the company. So I want to say that first. Secondly, congratulations on your efforts to set out to do in the PIP plan despite COVID and all the other crazy things thrown your way. You mentioned the residential businesses being a shining point, especially on the higher end. Is the sales mix as it relates to the distribution channel changing this time around? Are you seeing it less out of retailers and more in that not direct to consumer, but contractors and other designers that you typically sell through?
Barry, we haven't seen a major change in our mix of customers. As you know, we have thousands of retail customers. We also participate through the big box retailers. Our big box business, as you're probably aware, declined last year, but that has reached the point where we're showing favorable comparisons on our vendors as we have gotten better placement there. So we don't see any major mix change. Let me comment on your remark about Jon Faulkner. Jon was instrumental in the reconfiguration of our balance sheet. Jon's been with us for a long time and has been a great help to the company. He has left, but he will stay as a consultant for 18 months with us. He's going to be moving on to other things but still as part of Dixie and very connected to us. So again, he's been extremely helpful, and we appreciate that immensely. I hope that you will find we're still as available as we were when Jon was here. If you have questions, please call either Allen or me.
Absolutely. Thank you so much. And congratulations again on an excellent quarter, and on the next 124 months, really getting this plan implemented.
Our next question comes from Derek Maupin with Hodges Capital Market.
Good morning. Can you provide a little bit more color on the improvement in gross margins? And is this a level you think is sustainable going forward?
Derek, again, I pointed out at the end that we have reduced headcount this year by 6%. Over the last three years, we reduced headcount by 26%. We were able to do this because of major improvements in our manufacturing facilities, as well as automating some functions corporately and administratively. We see these as reductions in cost obviously impacting our gross margins. We've seen major improvement in lowering our waste and improving our quality and productivity. We certainly hope and believe these changes are ones that we can build on going forward.
Very good. Maybe a second question on just the refinancing of the balance sheet. What kind of interest savings do you foresee on an annual basis?
Remember, it's going to reflect lower debt as well as interest savings. It is a moving target, because we will be paying off some machinery loans during the next year or two.
Yes, the transaction, as we're reporting this, obviously, we had a kind of rush to the finish line last week. The intent to secure the longer-term financing at a more secured rate and replacing our revolver and assessing how much we need to access that revolver over the next year will play into that. We do expect this puts us in a much stronger position from a cash availability standpoint going forward, as well as continuing to improve our interest rate expense.
And then the parameters around the buyback program and what you're allowed to do on a daily basis. Are there any restrictions or covenants in that new revolving credit agreement on the buyback?
There are certain restrictions, but our plan takes that into account.
Okay. And maybe one, well, maybe two for me, if you don't mind. Yes, I'd love to hear a little bit more color on the relationship with the big box retailer and maybe getting back some more floor space. What's been going on there? And then the second question would be what is hard surface in residential to you all today as a percentage and where do you think that could go?
We typically do not give the percentage on hard surfaces. I'll address that one first, but we're seeing excellent growth in excess of 50% in our hard surface business. Regarding LVT and engineered wood, we have achieved significant additional placement in our hard surface products with the retail community. This is all for retail, not through the big boxes. Additionally, we're introducing new products and have hired hard surface sales personnel only in certain geographical areas. We see this as a continued area of significant growth for the company. In terms of the position with the big box retailers, we did lose position a little over a year and a half ago; major changes in the big box configuration led to some of our products being taken out. However, we were able to regain some position, and in June of this year, that began to impact our sales. By late September, we were having favorable comparisons to a year ago with our big box business, and that has continued into the fourth quarter.
With no further questions in queue; I will turn the call back to Daniel Frierson for additional or closing remarks.
Thank you, Stacey. What a difference a quarter makes. We're glad that today we can discuss improved sales in the residential business and growth as a company. We appreciate your being with us today and look forward to meeting with you again next quarter. Thank you.