Dixie Group’s (DXYN) CEO Dan Frierson on Q4 2021 Results – Earnings Call Transcript

Dixie Group (NASDAQ:DXYN) Q4 2021 Earnings Conference Call March 10, 2022 2:00 PM ET

Company Participants

Dan Frierson – Chairman and Chief Executive Officer

Allen Danzey – Chief Financial Officer

Conference Call Participants

Operator

Good day, and welcome to the Dixie Group, Inc. 2021 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. Please go ahead.

Dan Frierson

Thank you, Kyle, and welcome, everyone, to our fourth quarter and year-end conference call. I have with me Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by reference to our website and press release. Net sales for the fiscal year of 2021 were $341 million or 36% above the net sales of $251 million in the previous year, as adjusted for the divestiture of our commercial business.

The net income for the fiscal year in 2021 was $1.6 million with $5.2 million income from continuing operations. As a result of the inflationary impact on inventory costs, our LIFO reserve for inventory increased by $16.2 million in 2021, more than doubling the reserve balance at the end of fiscal year 2020. Despite rising costs in 2021, we were able to reduce our total debt at fiscal year-end December 25, 2021, to the lowest fiscal year-end level in nearly ten years.

This time, I’ll turn it over to Allen Danzey, our Chief Financial Officer.

Allen Danzey

Thank you, Dan. The year 2021 was full of challenges from a ransomware attack to significant increases in raw material costs through the divestiture of our commercial business. But even as we face these challenges, we’re able to grow sales and further strengthen our balance sheet as we move into 2022. In the fourth quarter of 2021, our sales of $89.2 million were 18.2% above the prior year amount of $75.5 million. But our gross profit margin in the fourth quarter dropped to 14.4% compared to the prior year of 25.9%. This drop in margin was driven by cost increases in our raw materials and a $7.5 million increase to our LIFO reserve during the quarter. This put us in a loss from continuing operations of $4.4 million for the quarter compared to a loss of $552,000 in the fourth quarter of 2020.

As Dan mentioned, for the fiscal year 2021, our net sales were $341.2 million, an increase of 36% over the net sales of $250.9 million in the prior year. The gross profit margin for the year was 22.6% of net sales, which was slightly below the prior year margin of 22.9%. Selling and admin costs as a percent of net sales was 19.9% in 2021, which compared favorably to the 20 to 22 – I’m sorry to 20% of 23.2%. But in dollars, selling and admin increased year-over-year and that is a result of having cut back on our investment in selling expenses and travel with the initial outbreak of COVID-19 in 2020.

Our decrease in our debt over the last two years has brought our interest expense down to $4.7 million in 2021 compared to $5.8 million in 2020. We ended the year with an income from continuing operations at $5.2 million compared to an $11 million loss in continuing operations in 2020. The loss from discontinued operations, which includes the divestiture of the commercial business during 2021 was $3.5 million for 2021 compared to an income of $615,000 in 2020. Net income on the year was $1.6 million and it compares against a net loss of $9.2 million in the prior year 2020.

With a look at the balance sheet at the end of December 2021, net receivables increased $7.3 million over the prior year. This increase was a result of higher sales volume during 2021. Inventories increased by $14.8 million, driven by the higher demand and higher costs that was offset by a $16.2 million increase, as Dan mentioned, in our LIFO reserve during the year.

Capital expenditures are just under $5 million on the year with $9.1 million in depreciation. Accounts payable and accrued expenses increased by $8.4 million year-over-year. And again, the biggest factor was the rising costs, particularly throughout the fourth quarter. Proceeds from the divestiture of our commercial division offset the higher costs in 2021, allowing us to reduce our debt by $1.1 million from the end of the prior year.

And again, as Dan mentioned in his opening comments, this brought our long-term and current portion of debt on our balance sheet is the lowest year-end level since 2011. At year-end, the borrowing availability under our long-term credit agreement was $37.6 million. Our investor presentation, including our – I’m sorry, our investor presentation is on our website at www.thedixiegroup.com. Dan?

Dan Frierson

Thank you, Allen. As the year 2020 was coming to a close, we have begun to see stronger business activity with residential orders and shipments up 15% in the fourth quarter. We also were feeling the benefits of cost reductions that were implemented in reaction to the COVID-19 pandemic. Additionally, we were experiencing operational improvement in quality, yields and cost. We felt these improvements, along with our significantly improved balance sheet had us well prepared for 2021.

As we entered the second quarter, our residential business was strong, and the commercial business was beginning to improve. But during the second quarter, we experienced three major events, two of which will have significant impact on our future. In mid-April, we were the target of a ransomware attack that it first brought our operations and communications to a halt. Fortunately, we were not totally compromised, in over several weeks, we were able to restore order entry, operations and shipping first on a limited basis then to a more normal level.

We did not, however, lose a significant amount of data. We did, however, lose a significant amount of data and programs, which has continued to impact the timeliness of getting administrative things done. This disruption did bring out the best from our associates who worked many long hours to lessen the impact of the ransomware attack on our customers, our associates and the company.

Secondly was the announcement by Invista that the Stainmaster brand was being sold to Lowe’s. The actions taken by Invista since this announcement have made it clear to us that they will not continue to be a fiber supplier. They continue to raise prices dramatically, which ensures products made from their fiber are no longer competitive in the marketplace and we are in the process of replacing all Invista fiber as quickly as possible.

These actions by Invista negatively impacted our margins and profitability in the fourth quarter as we were not able to pass along all of the increases and will continue to impact us until we complete the conversion to other suppliers in the second quarter of this year.

The third major event of the second quarter was the announcement that we had entered into an agreement in principle for the sale of our commercial business, which represented about 15% of our sales. The sale of this business was completed in the third quarter. The sale did not include any facilities, which we retained for expansion of our residential footprint.

Our Atmore facility is already converted to a residential yarn processing and carpet manufacturing facility. In a time of very tight labor supply, we are able to utilize this facility and the associates there to service our expanding residential retail business. The Saraland facility will be used to service our TRUCOR hard service brand. Our TRUCOR luxury vinyl and wood programs have continued to grow dramatically in 2021 and early 2022.

Since 2009, we have more than doubled our sales and market share in the residential market. And in 2021, as we indicated, our sales increased 36%. Our commitment to buyer groups and the design community has led to strong growth and improved results for our residential business. As part of our commitment to the upper end and decorative market in 2022, we’re bringing two new collections to the market. Our Masland 1866 and Fabrica decor product offerings bring a large number of fresh and distinctive looks, which are designed to complement our hard and soft surface offerings for the design community.

Unfortunately, the Stainmaster sale has already begun to impact our business with Lowe’s as they have put increased emphasis on perceived value at the expense of style and design. Our plan to continue growing our residential business – our plan is to continue growing our residential business through our growth initiatives focused on residential retail customers.

The dramatically increased cost of raw materials implemented by Invista and their desire to exit the market has negatively impacted our results. But as the year progresses, we will utilize other suppliers, which will enhance our flexibility, enable us to be more competitive and improve profitability.

As we look to the future, our industry is well positioned to take advantage of the increase in new housing and sales of existing homes. Our retail customers have learned how to compete in a COVID-19 world and the end consumer has focused on beautifying their homes. These trends certainly provide opportunities for us in the upper end of the flooring market.

At the same time, there are issues which we and all businesses need to overcome. Despite the Federal Reserve’s previous comments, inflation is here and impacts all of us. We, like everyone else in the industry, must deal with cost and availability of raw materials, severe labor shortages and transportation cost issues.

Our new material sourcing plan will be implemented during the first half of 2022. The movement of residential products into our Atmore facility will provide additional worker availability and the domestic sourcing of hard surface will help us deal with the transportation issues.

2021 was a challenging year in many respects, but we enter the New Year with great optimism. Our associates rose to the occasion when ransomware hit and continue to deal with COVID-19-related issues. We finished the year with sales up 36% and a strong balance sheet and improved profitability. In 2021, we continue to gain market share due to the dedication and hard work of our associates and the support of our retail customers. The sale of our commercial business allows us to focus on the residential business, which plays to our greatest strengths.

In summary, net sales in the fourth quarter of 2021 increased 18% over the prior year quarter. And as we already mentioned, sales for the year were up 36%. We also have several growth initiatives. In response to the sale of the Stainmaster brand to Lowe’s, we have created the Premier Flooring Center program. And all of our nylon – and all of our nylon customers are moved to EnVision Nylon and EnVision Solution – Pet Solutions brands. We continue to introduce new hard surface products into our rapidly growing TRUCOR and Fabrica Fine Wood programs. We’re also entering new categories to diversify our hard surface offering.

And as we pointed out, we have launched new decorative segment offerings. In early 2022, our momentum has continued with sales through the first 10 weeks of the year, up in the high single digits versus the same period of 2021.

At this time, we will open the meeting to questions.

Question-and-Answer Session

Operator

Dan Frierson

Thank you, Kyle, and thank all of you for being with us on our conference call. Again, we are optimistic about the year. We feel like the transformation of our products to other suppliers will be complete in the second quarter and have a significant impact on our results going forward. Thank you very much.

Operator

Ladies and gentlemen, that will conclude today’s conference. Thank you again for your participation.