The Dixie Group, Inc. (NASDAQ:DXYN) Q3 2020 Earnings Conference Call November 5, 2020 10:00 AM ET
Daniel Frierson – Chairman of the Board and Chief Executive Officer
Allen Danzey – Vice President and Chief Financial Officer
Conference Call Participants
Barry Blank – JH Darbie and Co
Derek Maupin – Hodges Capital Market
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 $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 mask when unable to maintain social distance. We’re still assessing the long-term impacts of COVID-19 crisis on our markets, and operating practices. We’re encouraged by the improvement we’ve seen in sales, but as a resurgent of COVID-19 cases had 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’re at $95.4 million. Our gross profit for the quarter was 25.9% of net sales. And this was a significant improvement of 2.1% we saw in the third quarter of 2019. This 2020 gross profit reflected our improved operations as well as cost reductions from our gross profit improvement plan, as well as expense reductions enacted in response to the COVID-19 crisis.
Our selling and administrative costs in the third quarter of 2020 $1.7 million lower than the third quarter of 2019 but did a 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 and samples and marketing expenses, reduced travel reductions and 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 and residual expenses that were related to our profit improvement plan, as well as $370,000 per 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 approximate $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 $50.2 million when compared to the third quarter of 2019. 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 $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 in 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 financings 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. But 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 close on two long term fixed asset backed loans in the total of $25 million. At the close of the credit facility agreement on October 30, our borrowing availability was $45 million.
Current availability of fund is $46.7 million. Our investor representation including our non-GAAP information is on our website at www. dixiegroup.com. Dan?
Thank you, Allen. And as Allen pointed out subsequent to the end of the third quarter the company entered into a new $75 million five-year seniors revolving credit facility and also closed on two additional long-term fixed rate asset backed loans and in the total amount of $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, it’s 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 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 all business conditions continue to improve throughout the quarter, as many foreign 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 comparatives 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 envision nylon program continues to demonstrate significant growth and build momentum in the market. This program offers beautiful designs with the durability and the performance of nylon type 6,6 at price points which 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 continued performing 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 the traditional ceramic tile replacement projects.
TRUCOR XXL, a WPC offering with 18 beautiful French oak visuals, and oversized planks, including seven by 72, 9 by 72 and 10 by 84 inches, 10 by 84 is the widest longest rigid core plank on the market today. And with the clean visuals and on trend colors, these products gain immediate traction during the third quarter. Our commercial business continues to be adequately 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 be longer coming and not as dynamic as the prospects of market recovery. Our focus in terms of market segments on the senior living, multifamily, and non-lodging hospitality market segments. The living series last this year produced focused on public space opportunities and these market segments has generated numerous specifications and will be launching additional product this year focused on the flooring in these market segments. We are continuing to focus on [Indiscernible] as great as overall. We are experiencing acceptance and sales growth and our new non-PVC backing on our modular tile product.
This product offers a non-PVC alternative, 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% a year ago. Commercial business continues to be adversely impacted by COVID-19. We see no change in the fourth quarter there. 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, order, sales are up a low to mid teen compared to a year ago.
We along with industry have implemented a price increase in the fourth quarter. We’ve provided good operational performance in our manufacturing facility continue to see major improvement cost quality ways to serve. Through operational improvement, we’ve been able to reduce headcount 6% this year, and 26% for the last three. Again, we’ve refinanced the company with loan maturities going from just over a year to 5 and 25. We no longer have any goodwill or intangibles on our balance. And we announced the $2.9 million stock repurchase authorization, as well as have reduced debt in the last 12 months, over $50 million.
At this time, we will open up the meetings 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. I have a first question is you outperform 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 it continues to be challenged. But the high-end residential business has grown nicely. And if somebody had told me, we’re going to lock everybody in this country in their house 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 – you were crazy. But that’s what happened. And 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 re-sales and housing starts and continue to improve and are at all-time high. So we see the residential business, particularly in the higher end growing very nicely.
Well with these competitors, and their stock price is 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 is the $25 million. The two loans total together was under the USDA program, not directly under the forgiveness program or the CARES Act directly, but it is through a USDA program and backed through them.
So if any of it forgivable? Or does it all have paid back at some point in time?
Barry, there is no forgivable in these loans. The loans actually are with the 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 unit. The USDA simply provided some assurances to the banks on the loan that they are loans that 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 we’ll be rotating into a consulting role. And I just I think as an investor and someone who’s sort of dealt with him, obviously still going to be a part of the company. But 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 [Indiscernible] to set out to do in the PIP plan in sort of, despite of 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 distribution channel changing this time around meaning 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, thousands of retail customers. We also do participate through the big boxes. And I would say that our big box business, as you’re probably aware declined last year, but that has reached the point where we’re showing favorable comp on our vendors as we have gotten better placement there. So we don’t see any major mix change. And let me comment on your comment about Jon Faulkner. Jon was instrumental into reconfiguration of our balance sheet. Jon’s been with us for a long time and been a great help to the company. He has leaved – 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 a part of Dixie and very connected to us.
So, again, he’s been extremely helpful. And we appreciate that immensely. And I hope that you will find we’re still as available as we were when Jon was here. And 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 that is sustainable going forward?
Derek, again, I pointed out at the end that we have reduced headcount this year by 6%. And over the last three years 26%, we were able to do this because of major improvements in our manufacturing facilities, as well as automating some functions corporately, or administratively. So we see these as reductions in cost, obviously, in the plants very directly impacting our gross margins. We’ve seen major improvement in lowering our waste and improving our quality and productivity. So 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 be reflective of lower debt as well as interest savings. So and 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 a rush to the finish line last week, the intent to secure the longer-term financing at the more secured rate. And replacing our revolver and assessing how much we need to access of that revolver over the next year is really going to play into that. We do expect this puts us in a much stronger position from a cash availability 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. And then also, are there any restrictions or covenants in that new revolving credit agreement on the buyback?
There are certain restrictions, but this is – 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 surface. I’ll address that one. First, but we were seeing excellent growth in excess of 50% in our hard surface business; looking both at LVT and engineered wood, we have achieved significant additional placement in our hard surface products with the retail community. And this is all for the retail not through the big boxes. We also – inn addition, we’re introducing new products as well and have hired hard surface sales people only in certain geographical areas. So we see this as a continued area of significant growth for us as a company.
In terms of the position in the big boxes, we did lose position a little over about a year and a half ago. They were major changes in the big box configuration – some of our products were taken out. But then again, we were able to regain some position and in June of this year, that is beginning to have an impact on our sales. And as I mentioned, by late September, we were having favorable comps to a year ago with our big box business. And that has continued into the fourth quarter and we think will continue going forward.
With no further questions in queue; I will turn the call back to Daniel Frierson for additional or closing remarks.
Thank you, Stacey. And oh what a difference a quarter makes. We’re glad that at least today we can talk about improved sales in the residential business and growth as a company. Appreciate you are being with us today and look forward to meeting with you again next quarter. Thank you.