The Dixie Group, Inc. (DXYN) on Q1 2022 Results - Earnings Call Transcript
Operator: Good day, and welcome to The Dixie Group, Inc. 2022 First 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 Chairman and Chief Executive Officer, Dan Frierson. Please go ahead.
Daniel Frierson: Thank you, Laura. Welcome, everyone. And I have with me Allen Danzey, our CFO. Our safe harbor statement is included by a reference both to our website and press release. Net sales for the quarter were $77.6 million or 6.6% above the net sales of $72.7 million in the first quarter of 2021 as adjusted for the divestiture of the commercial business. The net loss for the quarter was $3.3 million compared to $2 million a year ago, including discontinued operations. Our carpet business was significantly impacted by unprecedented price increases from our major supplier during 2021 and the first quarter of 2022. The magnitude of the price increases made sale of product with their fiber unsustainable, and they have announced plans to exit the business. We're working with other suppliers to replace this volume and bring our costs to a more normal level. These conversions should be completed during the second quarter. Our hard surface business has continued to grow rapidly. But ocean freight costs have risen dramatically, which impacted our first quarter results. Fortunately, we have experienced a reduction -- some reduction in freight costs, which started to improve margins late in the quarter. At this time, Allen Danzey will review our financial results, after which I will have additional comments.
Allen Danzey: Thank you, Dan. As Dan noted, our first quarter results were negatively impacted by price increases imposed by our primary raw material provider, exceptionally high freight costs on our imported goods and other increased costs driven by inflation. Primarily as a result of these factors, our gross profit as a percent of net sales for the quarter was 19.6% compared to 23.2% in the first quarter of 2021. Selling and administrative expenses were 22.4% of net sales in the first quarter of 2022 compared to 21.7% in the first quarter of the prior year. The increase in expenses in 2022 were primarily directed at investment in samples and marketing as well as increased spending in our information systems area. The information systems expenses were primarily directed at improvement in cybersecurity and data systems. Interest expense on the quarter was $1.1 million, which was down from the previous year at $1.3 million. Looking at changes on our balance sheet during the quarter. Our receivables decreased by $1.8 million from our fiscal year-end balance. This is primarily due to seasonality and decreased sales volume with our primary home center customer. Net inventory increased by $3.2 million during the quarter, primarily as a result of the increased raw material costs. Timing of payments and accounts payable and accrued expenses decreased the total balance by $1.8 million from fiscal year-end. Our debt increased by $3.8 million during the quarter, driven by the higher costs and timing of payments on accruals. During the quarter, we closed on an $11 million loan secured by our facility in Adairsville, Georgia. The loan is over 20 years at a fixed rate of 3.81%. This long-term low interest loan allowed us to pay off existing mortgages on the facility at a total of $5.5 million, which were at higher interest rates and avoided future billing payments. Our capital expenditures during the quarter were $345,000 and depreciation was just over $2 million. Our borrowing availability under our senior credit facility at quarter end was $38.2 million. Our investor presentation is available on our website at www.dixiegroup.com. Dan?
Daniel Frierson: Thank you, Allen. As we have stated, our residential business in the first quarter of 2022 grew 6.6%. Order entry also remained ahead of prior year throughout the quarter. Key growth areas included Masland, Fabrica and our hard surface segment. Our Dixie Home business declined due to a shift in strategy toward lower-priced polyester products by our primary home center customer. This will continue to be a headwind within our Dixie Home segment. Overall, we continue to outpace the market in the specialty retail segment with 9% growth for the quarter. We successfully launched our new decorative segment offering during the first quarter at trade shows, including surfaces, other regional markets and our national sales meeting. We're introducing 30 new styles with fresh looks and on-trend colors, and the new offering will include hand tufted, hand loomed, wire wilton and face-to-face woven products. Our new brands for this segment, 1866 by Masland and Décor by Fabrica, include fresh new merchandising and point-of-sale materials. Customer reception to these programs has been extremely positive, and we see this as a significant growth opportunity for our business going forward. We also launched several new hard surface programs during the first quarter, including TRUCOR Tymbr, a 9.5-inch wide by 72-foot long laminate product with excellent water resistance up to 72 hours, stunning visuals and an AC6 scratch-resistant rating, as I mentioned, 72 inches long. TRUCOR Tymbr timber will complete -- compete in the high end of the laminate category. Another new program is Dwellings by home -- Dixie Home, an engineered wood program, which hits mainstream price points and offers beautiful colors and finishes in oak and hickory. In addition to these new categories, we also developed new innovations in our existing categories. TRUCOR is a new WPC offering, with the monster size, lighter colors inspired by coastal living and a new pillowed edge bevel for an authentic look. TRUCOR Prime Pinnacle is a new WPC offering with a monster plank size of 12 inches by 90 inches long. And 18 new SKUs in our Fabrica Fine Wood program included 2 new Ash collections with fresh, clean visuals. These new hard surface programs will begin hitting the market during the second quarter. Even before the exit of the market by Invista, we have begun developing plans to diversify our raw material sourcing. Invista's dramatic price increases last year and this year and subsequent announcement that they would exit the carpet fiber market has caused us to move more rapidly than planned. The result has been much higher costs in the fourth quarter and first quarter as we were unable to increase our prices as rapidly as Invista had. The movement to several other suppliers should be completed in the second quarter, and our costs for the second quarter will begin to reflect this transition with these changes. And with these changes, the last half of the year should show significant improvement in our results. We in the industry have had to continue increasing prices to offset inflationary -- the inflationary environment with which we are faced. The most recent increase was implemented in April. In the last year, the average price of residential carpet for the industry has risen 10% and over the last 2 years, 20%. This has led to trading down in certain segments of the market, but the upper end of the retail market has continued to be robust. The industry -- which is where we participate. The industry is faced with various headwinds. Clearly, labor availability continues to create manufacturing issues, and material supply shortages have had an impact on capacity utilization. The industry has also experienced incoming and outgoing freight service and cost issues, and the cost of energy today is higher than had been forecasted. However, we're still cautiously optimistic for the year due to the structural deficit of housing availability today, and remodeling should continue as homeowners continue customizing their homes. Going forward, we feel our new raw material sourcing plan allows us to have more control over our product offering over a broader array of price points. The development of our premier flooring center concept has helped us build stronger relationships with our key retail customers and offer them a selling system, which is focused on selling better goods and helping them improve margins. With our EnVision piece dye and EnVision Solution Dye Pet Solutions, we offer a greater variety of beautiful product with superior performance. In conclusion, comparing the first 6 weeks of the second quarter to last year is complicated by the fact that we had a ransomware attack during that same period a year ago. We also are exiting our business with a large mass merchant this quarter, which will negatively impact our top line. Despite these factors, our orders and sales to our residential retail customers are up, and we believe our initiatives described above will help us be a more important supplier to the specialty retail segment in the future. Laura, at this time, we would like to open up the meeting to questions.
Operator: Our first question comes from the line of Barry Gertner with Improverb. You may proceed with your question.
Barry Gertner: Hey good morning. I just wanted to ask sort of one question and then a follow-up. The question is on the divestiture of the commercial business, there was some inventory that was retained on behalf of Dixie that you guys commented we're going to dispose of with the next couple of quarters. I was curious if the price increases that you're seeing across the board have been sort of reflected in the value of this legacy inventory, and if we can expect to sort of see some of that realized?
Allen Danzey: No, Barry, the value of the inventory that was part of the divestiture that we retained was written down to what we estimate as our disposal in recovery value and is being maintained at that value.
Barry Gertner: Got it. And then just one further follow-up is, on the residential side, just curious, say generally, are you seeing sort of a return back to people having on-premises designers and installations coming in and doing their work that sort of had been a slowdown as a result of the pandemic? Is there any sort of commentary that you have around that and just sort of a resumption of people allowing staffing on-premises in terms of the residential side, so the completion of projects, et cetera? Is there any sort of backlog or indicators of how that channel is doing?
Daniel Frierson: Barry, I'm not exactly sure what the question is, but let me just make a couple of comments. Many of our retail customers developed ways of selling either having private audiences and sales rooms or having mobile groups go out and call on people. Obviously, at one time, there was a hesitance or resistance to having people come in their homes. I think today that is gone. But I do believe most retailers enhance their selling skills during this period because they had to. And I think as a result of that, a lot of retailers strengthened their position in the marketplace during COVID.
Barry Gertner: Thank you so much.
Operator: With no further questions in the queue, I would like to turn the call back over to Dan Frierson for any additional or closing remarks.
Daniel Frierson: We thank all of you for being with us for this quarter's conference call. We are looking forward to our conference call at the end of the second quarter, at which time we think we will be virtually complete with the conversion from our Invista fiber, which 3 years ago was 90% of what we purchased to 4 or 5 other suppliers, and we feel like it will put us in a much stronger position going forward. Thank you.
Operator: Ladies and gentlemen, that will conclude today's conference. Thank you again for your participation.
