The Dixie Group, Inc. (DXYN) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings. Welcome to the Dixie Group Second Quarter 2021 Conference Call. Please note this conference is being recorded. I will now turn the call over to your host, Dan Frierson.
Dan Frierson: Thank you, Stacy and welcome everyone to our second quarter conference call. I have with me our CFO, Allen Danzey. Our Safe Harbor statement is included by reference both to our website and press release. As we have highlighted in the quarterly results, our sales were approximately $105 million for the quarter, net income about $3.3 million, and we had strong order activity throughout the quarter, which has continued into the third quarter. For the second quarter of 2021, the company had net sales of $104.8 million and income from continuing operations of $3.4 million or $0.21 per diluted share. Net sales for the second quarter of 2020 were $60.8 million. The net loss from continuing operations in the second quarter of last year was approximately $7 million or a loss of $0.46 per diluted share. During the second quarter of 2021, we were able to build on the momentum we experienced through the end of the first quarter. Overall, net sales increased 72.3% compared with the second quarter of 2020. Net sales of our residential flooring products were up 99.5% or close to double the comparable residential sales in the second quarter of 2020, comparing favorably to the industry which we believe was up approximately 50% to 55%. For the first 6 months of the year, our total net sales of residential products, was up 55.1% 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 a result of the impact of COVID-19 pandemic in the second quarter of last year and strong growth in new and existing home sales and home remodeling in 2021. Sales volume in the commercial markets has improved, but continued to be at lower levels. Allen Danzey will review our financial results, after which I will have additional comments regarding events which took place during the quarter. Allen?
Allen Danzey: Thank you, Dan. As Dan just discussed, this was a very good quarter for the company driven by the strong demand in the residential markets. Net sales during the second quarter of this year were at $104.8 million as of 21% increase over the sales of $86.3 million that we saw in our first quarter of the year, and it puts our total net sales for the first 6 months of this year at $191.1 million. That’s an increase of 35% over the first 6 months of the COVID-impacted year 2020. Our gross profit margin in the quarter was 24.6% of net sales compared to 21 – I am sorry, 20.1% in the second quarter of 2020. The 2021 margins were driven by the increased volume in the manufacturing plants, which was partially offset by rising material and labor costs. We’ve implemented price increases this year on our products to offset these rising costs. Selling and administrative costs in the second quarter of 2021 ended at $21.0 million or 20% of net sales as compared to 23.3% in the first quarter of this year and 27% in the same period of the prior year. 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 held on to many of these reductions while strategically investing in the growth for our residential markets. Our operating income in the quarter was $4.6 million or 4.4% of net sales compared to a loss of $5.6 million in the second quarter of 2020. For the current quarter, we incurred $1.2 million in interest expense, which was a reduction from the second quarter amount in 2020, which was at $1.4 million. The 2021 interest expense includes approximately $180,000 for the recognition of deferred expenses related to a de-designation of an interest rate swap. The decreased interest is a result of our financing initiatives in the fourth quarter of 2020 and our continued efforts towards debt reduction. Our year-over-year debt reduced from $79.1 million in the second quarter of 2020 to $77.9 million in our current quarter. Net income in the quarter was $3.3 million, giving us an earnings per share of $0.22. For the fiscal year-to-date, we reported a net income of $1.3 million and earnings per share of $0.08. Turning to our balance sheet at the end of June 2021, the higher sales demand for the quarter drove increases in our net receivables of $10.9 million and inventories of $1.7 million when compared with the first quarter. Accounts payable and accrued expenses increased $5.6 million from the previous quarter due to the sales volume as well as some timing of payments at quarter end. Capital equipment acquisitions, including those funded by cash and financings, was $1.8 million on the quarter. Depreciation and amortization during the quarter was $2.5 million. We anticipate capital expenditures for 2021 to be approximately $5 million and depreciation and amortization to be approximately $10 million. At quarter end, our borrowing availability under the long-term credit agreement was $40.2 million. To see our investor presentation, please go to our website at www.dixiegroup.com and click on our Investors tab. At this time, I will hand it back to Dan Frierson for further comments.
Dan Frierson: Thank you, Allen. Our second quarter was punctuated by three major events, two of which will have a significant impact on our future. First, a ransom attack, which occurred in mid-April, it impacted our operations and both internal and external communications. Certainly, our April results were negatively impacted, but we were able to return to more normal operations later in the quarter with limited impact on our customers. Second, the sale of the Stainmaster brand at Lowe’s and the withdrawal of the brand from independent retailers as well as the price changes by Invista will have a long-lasting impact on our business and the industry. We are executing a plan to enhance our brand and competitive offerings to the market. Lastly, we have entered into an agreement in principle for the sale of our commercial business. This sale would represent a major change of focus for our company. We are currently negotiating terms and conditions of the proposed sale. Upon successful completion of the sale, our entire focus will be solely on the residential floorcovering market, where our well-known and respected brands continue to gain market share. Due to the growth of our residential divisions, our commercial business represents less than 15% of our sales. Residentially, many of our planned second quarter product launches were delayed by the ransomware attack, but we were still able to launch some key products into the residential market. On the soft surface side, we launched our 4 new TECHnique patterns in our Masland and Fabrica divisions. These are high-end patterns tufted on the latest tufting innovations in the market and produced with EnVision 6,6 fiber. We also launched several other EnVision 6,6 products across all divisions, bringing our total EnVision 6,6 offering to 31 styles, with additional styles coming during the third quarter. In April, we unveiled our new EnVisionSD Pet Solutions program, with 5 new special edition styles expected to begin hitting retail stores this summer. One key event for the industry during the second quarter was the sale of the Stainmaster brand by Invista to Lowe’s. Over the last couple of years, our company has begun developing alternative fiber offerings in order to diversify our sources of raw materials and help prepare for such an eventuality. We had also introduced EnVision 6,6 products as our new brand to the industry. In response to this event, we quickly developed a multifaceted strategy to help our specialty retail customers transition their showrooms from the Stainmaster brand to our EnVision 6,6 and EnVisionSD Pet Solutions brands. A key component of this effort was the development of the premier flooring center, PFC. PFC was developed as a nondisruptive turnkey solution for existing Stainmaster flooring retailers. The PFC offers a retail-friendly selling system for upselling to better goods and focuses on the benefits of nylon 6,6. It also provides new signage, labels and in-store merchandising materials to create a fresh new look and feel in these showrooms. We will be installing the PFC in about 200 stores this summer. On the hard surface side, we introduced two key programs in our luxury vinyl category, TRUCOR 3DP, a new collection of 12 wood and tile visuals in our TRUCOR family. It is built on our SPC core and features an enhanced digital print technology. These beautiful products deliver high-definition visuals and AC5 scratch resistance rating for exceptional durability and virtually eliminate the pattern repeat found in most luxury vinyl flooring products currently on the market. We also introduced TRUCOR Applause, an SPC offering with 8 SKUs made in the USA. This is our first domestically sourced luxury vinyl program, and we’re seeing great reception to the competitive price points and simplified supply chain for this offering. Our commercial business and the commercial market continues to be adversely impacted by COVID-19. Our sales of commercial flooring products during the quarter were down approximately 8% from the previous year. We are beginning to see improvement, but we believe the recovery will be longer coming and not as dynamic as the residential market recovery. On June 30, 2021, we announced that we had entered into an agreement in principle for the sale of the commercial business. Obviously, we are continuing to discuss the terms and conditions of this agreement. Our residential and flooring sales and orders for the first 5 weeks of the quarter have continued at a very strong pace, well ahead of the same period a year ago. Both residential sales and orders are approximately 30% ahead of sales and orders in July of last year and well ahead in the 30% range of 2019 as well. Due to increased cost pressure on many fronts, industry-wide price increases were implemented during the last half of the second quarter. Additional price increases have been announced for August. Raw material, labor and transportation costs have continued to escalate. At this time, we would like to open up the meeting for any questions you may have.
Operator: Thank you. Your first question is Mike Hughes with SGF Capital.
Mike Hughes: Good morning. Thanks for taking my questions. First one, just on the Stainmaster opportunity, is it possible to size the revenue opportunity in the – your specialty retail channel? And then that product line, does it carry an above-average gross margin for you?
Dan Frierson: Well, obviously, the Stainmaster products were very much in the higher end of the business to respond to that. I don’t think there is anyway we can quantify the opportunity, but I see it as an excellent opportunity to introduce our brand, which we had already been doing over the last couple of years and to build on that with retailers who concentrate in the upper end of the market. So, we do see it as an opportunity. Obviously, there will be a transition period going from Stainmaster to our EnVision 6,6 and EnVision solution pet products – Pet Solution products, but – and that will take some time, but we see this longer term as an opportunity for us to become more important with a broader product selection for our retail customers.
Mike Hughes: Okay. And what percentage of your residential sales right now are from the EnVision product line?
Dan Frierson: I don’t have that today, but all products are going to be – are in the process of being switched from Stainmaster to EnVision 6,6. That is our brand. So we will be branding everything with that or almost everything with that very soon, or we are in the process, will be accomplished in the next couple of months.
Mike Hughes: Okay. And then on the pending commercial line divestiture, I think you just disclosed the revenue numbers. Can you give us an idea on what the gross margins and operating contribution are for that line?
Dan Frierson: We had shared the percent of sales with you previously. We have one segment. So we have not divulged or separated our gross margin or any other financials for the commercial side of the business. Obviously, once the transaction is consummated, there will be some material that will be available at that time.
Mike Hughes: Okay. And then just the last question for you, obviously, everyone in the industry is faced with cost pressures and you are taking pricing. Do you think the pricing actions will protect the third quarter gross margins kind of at the level you just reported or will we need to wait till the fourth quarter to kind of get back to the number that was close to 25%?
Dan Frierson: That’s somewhat difficult to predict. I would add that we are on LIFO. So, those increases come right away to us in our costs. So typically, when we raise prices, we are a little behind the cost increases. But there have been four increases this year and it is not an easy prediction to make. But our intent over the last half of the year is to have – is to increase prices to offset raw material price increases. I would say on the hard surface side, obviously, that’s been complicated by the transportation costs, which have been difficult to predict and we are passing those costs along. But again, we are on LIFO and there will probably be some impact from that.
Mike Hughes: Okay. And if I may sneak in just one last question, just the commentary about residential sales and orders being approximately 30% ahead of 2020 and 2019, the month of July, the full quarter of September ‘20 was $86 million. The full quarter of September of ‘19 was $95 million. So, I know you – it’s a monthly number, but I am a little confused by what to compare that to?
Dan Frierson: Well, obviously, I’ve mentioned ‘19 because last year we were just coming out of the COVID downturn and it was actually greater, but the increase. But I think the – what I was trying to get across is we are seeing solid growth relative to where we were prior to COVID.
Mike Hughes: Okay, as I thought. Appreciate it. Thank you very much.
Dan Frierson: Thank you.
Operator: Thank you. I would like to turn the floor over to Dan for closing remarks.
Dan Frierson: Stacy, thank you very much and thank all of you for being with us on our conference call. We look forward to talking with you again at the end of third quarter.
