The Dixie Group, Inc. (DXYN) on Q2 2022 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the Dixie Group Second Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Dan Frierson, Chairman. Please go ahead.
Dan Frierson: Thank you, Diego. Welcome to our second quarter conference call. Welcome to you, and I have with Allen Danzey, our Chief Financial Officer. Our 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 $83,698,000 and a net loss of $4,487,000 or $0.29 per diluted share. In the second quarter of 2021, as adjusted to reflect the commercial business as discontinued operations, net sales from continuing operations were roughly $90 million with a net income $3,349,000 or $0.21 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 year-over-year loss of sales volume through our mass merchant retail business with loans. Our sales with this customer ended 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 brand which was offset by growth in our Fabrica, Masland and TRUCOR brands. At this time, Allen will review our financial results, after which I will have additional comments.
Allen Danzey: 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. By 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'll continue to work through the remaining inventory at the higher cost fiber through the beginning of the third quarter. In addition to the fiber conversions, our gross margins were impacted by high freight costs 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 '21. 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 '22 were primarily directed to investments in samples in marketing, professional fees and financing information systems and higher overall costs as a result of inflation. The interest expense in the quarter was $1.1 million, which was down from the previous year at $1.2 million. And looking at the changes in the balance sheet for the quarter, receivables 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, as Dan mentioned. The increases in raw material cost was the primary factor for increased inventory, and net inventory was up by $4.2 million from the 2021 fiscal year-end. Timing of payments on accounts payable and accretive expenses decreased the total balance by $2.3 million from fiscal year-end. Capital expenditures in the quarter were $2.6 million, and that brought our year-to-date capital expenditure to $2.9 million. Total capital expenditures are planned at a maintenance level of approximately $5 million for the year. Depreciation on a year-to-date was $4 million. Our debt increased by $4.5 million during the quarter, and that was driven by the higher cost and timing of payments on our accruals. Our borrowing availability and our senior credit facility at quarter end was $32.6 million. Our investor presentation is available on our website at www.dixiegroup.com. Dan?
Dan Frierson: Thank you, Allen. Several events -- several external events had a major impact on the second quarter and the first half of 2022. The desire of our primary rolled material supplier Invista to exit the floor covering business by midyear and do this by pricing themselves out of the market, creating an environment where our raw material costs dramatically increased and much more rapidly than our competitors, which has the impact of lowering our gross margin as Allen commented. This situation meant we needed to and replace Invista 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 surface products. Secondly, over the last year, our largest customer changed its product strategy to focus on lower and 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 of sales for the second quarter. Sales to this customer were down $7 million in the second quarter. The loss of this volume has reduced volume in our facilities, which, of course, has had the impact of increasing our manufacturing costs and lowering our profitability. The third external factor with which we were faced was the unprecedented increase in freight rates impacting our imported hard surface products. The 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 although still high by historical standards have 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 share of the upper-end residential market. By repurposing our Atmore plant from a carpet facility to a hard surface facility, we will improve productivity in our other carpet facilities, which should mitigate the impact of the lost lows business. And as indicated, the freight costs for imported products have dropped significantly, which has helped alleviate the margin compression with which we are faced. We're very excited about the announcement of our new joint venture to produce luxury vinyl flooring in our Atmore, Alabama plant. This investment in Atmore will ensure there are jobs for our associates in that facility. Domestic production should help us continue gaining market share by improving service and flexibility to meet our customers' expectations and respond to market changes. As we are all aware, the residential retail business has been adversely impacted by lower demand. Our 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 service products continue to outpace last year but are also being impacted by current market conditions. During the second quarter, we began executing the launch of our new decorative programs, 1866 by Masland and Décor by Fabrica. This is a key growth initiative for the Company with the launch of over 30 new styles, which helps further position us and our key customers in the luxury end of the market. The new styles should begin impacting our sales during the remainder of the year. Despite operating in a highly inflationary environment and introducing a large number of new hard surface and decorative products, we have been able to control inventories. Our capital expenditures for the first six months were below depreciation levels also. Consequently, our availability under our revolver continued to be in excess of $30 million. Our belief in our future is the motivating factor in our Board's announcement of a new stock repurchase authorization with the intent of entering into a 10b5-1 plan to repurchase stock. At this time, we will open the call to questions.
Operator: Thank you. And ladies and gentlemen at this time we'll conduct our question-and-answer session. [Operator Instructions] Our first question comes from Barry Gertner with Improverb. Please go ahead.
Operator: Our next question comes from Derek Maupin with Hodges Capital Management. Please state your question.
Operator: And our next question comes from Chris Riemenschneider with Morgan Stanley. Please go ahead.
Operator: There are no further questions at this time. I'll hand the floor back to Mr. Frierson for closing remarks.
Dan Frierson: Thank you, Diego, and we appreciate all of you being with us today. We appreciate the questions. We look forward to improving results as we mitigate the impact of some of the things that have happened in the last six months to a year, but we feel like we are moving in the right direction. I appreciate you being with us and talk to you next quarter.
Operator: Thank you. This concludes today's conference. All parties may disconnect. Have a great day.
