The Dixie Group, Inc. (NASDAQ:DXYN) Q2 2022 Outcomes Convention Name August 15, 2022 2:00 PM ET
Firm Members
Dan Frierson – Chairman & CEO
Allen Danzey – VP & CFO
Convention Name Members
Barry Gertner – Improverb
Derek Maupin – Hodges Capital Administration
Chris Riemenschneider – Morgan Stanley
Operator
Greetings, and welcome to the Dixie Group Second Quarter 2022 Convention Name. Right now, all members are in a listen-only mode. An issue-and-answer session will observe the formal presentation. [Operator Instructions] Please be aware that this convention is being recorded.
I’ll now flip the convention over to our host, Dan Frierson, Chairman. Please go forward.
Dan Frierson
Thanks, Diego. Welcome to our second quarter convention name. Welcome to you, and I’ve with Allen Danzey, our Chief Monetary Officer.
Our secure harbor assertion is included by reference each to our web site and press launch. For the second quarter of 2022, the Firm had web gross sales from persevering with operations of $83,698,000 and a web lack of $4,487,000 or $0.29 per diluted share. Within the second quarter of 2021, as adjusted to mirror the industrial enterprise as discontinued operations, web gross sales from persevering with operations have been roughly $90 million with a web earnings $3,349,000 or $0.21 per diluted share.
In the course of the second quarter of 2022, our web gross sales decreased 7% in contrast with the identical interval of the prior 12 months. This was primarily attributable to a $7 million year-over-year lack of gross sales quantity via our mass service provider retail enterprise with loans. Our gross sales with this buyer ended within the first quarter of 2022 because of their change in technique to give attention to cheaper price level merchandise. This loss in gross sales within the mass service provider enterprise contributed to the decrease gross sales quantity in our Dixie House model which was offset by development in our Fabrica, Masland and TRUCOR manufacturers.
Right now, Allen will evaluation our monetary outcomes, after which I’ll have extra feedback.
Allen Danzey
Thanks, Dan. Within the second quarter, we continued to expertise the unfavourable impression of the worth will increase that have been imposed by our major uncooked materials supplier. By the top of the second quarter, we transformed to different fiber suppliers at worth factors that have been extra according to the marketplace for the vast majority of these affected merchandise. We’ll proceed to work via the remaining stock on the increased value fiber via the start of the third quarter.
Along with the fiber conversions, our gross margins have been impacted by excessive freight prices on our imported items and different elevated prices that have been pushed by inflation. On account of these unfavourable components, our gross revenue as a p.c of web gross sales for the quarter was 19.2% in comparison with the 25.1% we noticed within the second quarter of ’21.
Promoting and administrative bills have been 22.5% of web gross sales within the second quarter of 2022. That compares to 18.8% within the second quarter of the earlier 12 months. The elevated bills in ’22 have been primarily directed to investments in samples in advertising, skilled charges and financing info programs and better total prices because of inflation.
The curiosity expense within the quarter was $1.1 million, which was down from the earlier 12 months at $1.2 million. And searching on the adjustments within the steadiness sheet for the quarter, receivables decreased by $4.3 million from our 2021 fiscal year-end steadiness, and this was primarily because of the lack of gross sales quantity with our major residence middle clients, as Dan talked about. The will increase in uncooked materials value was the first issue for elevated stock, and web stock was up by $4.2 million from the 2021 fiscal year-end.
Timing of funds on accounts payable and accretive bills decreased the full steadiness by $2.3 million from fiscal year-end. Capital expenditures within the quarter have been $2.6 million, and that introduced our year-to-date capital expenditure to $2.9 million. Whole capital expenditures are deliberate at a upkeep degree of roughly $5 million for the 12 months. Depreciation on a year-to-date was $4 million.
Our debt elevated by $4.5 million throughout the quarter, and that was pushed by the upper value and timing of funds on our accruals. Our borrowing availability and our senior credit score facility at quarter finish was $32.6 million.
Our investor presentation is out there on our web site at www.dixiegroup.com. Dan?
Dan Frierson
Thanks, Allen. A number of occasions — a number of exterior occasions had a serious impression on the second quarter and the primary half of 2022. The need of our major rolled materials provider Invista to exit the ground overlaying enterprise by midyear and do that by pricing themselves out of the market, creating an surroundings the place our uncooked materials prices dramatically elevated and rather more quickly than our rivals, which has the impression of reducing our gross margin as Allen commented.
This example meant we would have liked to and substitute Invista as a provider as quickly as potential, which we achieved early within the third quarter. Implementing these adjustments sadly did interrupt the introduction of latest merchandise throughout the first half of the 12 months however these introductions will happen within the final half of the 12 months and will have a optimistic impression on our gross sales as our clients are uncovered to those new laborious and gentle floor merchandise.
Secondly, over the past 12 months, our largest buyer modified its product technique to give attention to decrease and commodity merchandise primarily produced from polyester fiber. This alteration of focus meant we not match into their product providing and accounted for our complete discount of gross sales for the second quarter. Gross sales to this buyer have been down $7 million within the second quarter. The lack of this quantity has diminished quantity in our services, which, after all, has had the impression of accelerating our manufacturing prices and reducing our profitability.
The third exterior issue with which we have been confronted was the unprecedented improve in freight charges impacting our imported laborious floor merchandise. The charges elevated extra quickly and to a larger diploma than we might move alongside to our clients. Therefore, our margins for our laborious floor merchandise have been additionally impacted throughout the first half of the 12 months. The freight charges have been subsiding for the reason that spring and though nonetheless excessive by historic requirements have come down considerably.
As we progress via the third quarter, the above points have been addressed. We presently have 4 main uncooked materials suppliers, which produce a broader array of merchandise at extra aggressive costs. Though we not do enterprise with our earlier largest buyer, we proceed to give attention to our residential retail clients and work collectively to enhance our joint share of the upper-end residential market.
By repurposing our Atmore plant from a carpet facility to a tough floor facility, we are going to enhance productiveness in our different carpet services, which ought to mitigate the impression of the misplaced lows enterprise. And as indicated, the freight prices for imported merchandise have dropped considerably, which has helped alleviate the margin compression with which we’re confronted.
We’re very excited in regards to the announcement of our new three way partnership to provide luxurious vinyl flooring in our Atmore, Alabama plant. This funding in Atmore will guarantee there are jobs for our associates in that facility. Home manufacturing ought to assist us proceed gaining market share by bettering service and suppleness to satisfy our clients’ expectations and reply to market adjustments.
As we’re all conscious, the residential retail enterprise has been adversely impacted by decrease demand. Our gross sales for the third quarter of soppy floor merchandise are beneath the very robust year-ago ranges. Despite the fact that our quantity is down, we did implement a worth improve in late July. Laborious service merchandise proceed to outpace final 12 months however are additionally being impacted by present market circumstances.
In the course of the second quarter, we started executing the launch of our new ornamental packages, 1866 by Masland and Décor by Fabrica. This can be a key development initiative for the Firm with the launch of over 30 new types, which helps additional place us and our key clients within the luxurious finish of the market. The brand new types ought to start impacting our gross sales throughout the the rest of the 12 months.
Regardless of working in a extremely inflationary surroundings and introducing a lot of new laborious floor and ornamental merchandise, we’ve got been in a position to management inventories. Our capital expenditures for the primary six months have been beneath depreciation ranges additionally. Consequently, our availability beneath our revolver continued to be in extra of $30 million.
Our perception in our future is the motivating think about our Board’s announcement of a brand new inventory repurchase authorization with the intent of getting into right into a 10b5-1 plan to repurchase inventory.
Right now, we are going to open the decision to questions.
Query-and-Reply Session
Operator
Thanks. And women and gents at the moment we’ll conduct our question-and-answer session. [Operator Instructions] Our first query comes from Barry Gertner with Improverb. Please go forward.
Barry Gertner
Lots this quarter. And as regular, adapting to the time, so congrats on that. Two questions for every, should you do not thoughts. The very first thing, I seen on this 10-Q that the 3M lawsuit line which was eliminated, I am additionally type of been monitoring the go well with. And it appears to be that plenty of this has kind of wound down. Is that this not one thing that Dixie must have a give attention to anymore? Is that this one thing that is now within the rearview there?
Allen Danzey
Sure, Barry. We — I’ve labored with our authorized workforce and work with the events within the authorized case and have labored via a settlement for these circumstances that have been open and occurred within the Q in earlier quarters.
Barry Gertner
That is nice. After which yet another query, simply on the three way partnership introduced immediately as nicely that will probably be producing a luxurious vinyl out of the Atmore plant. In order per the JV with some this accomplice, is that this accomplice anyone who Dixie has completed enterprise ahead? Is somebody that Dixie you spend a very good period of time kind of discovering a very good accomplice to get actually into the manufacturing aspect of luxurious vinyl enterprise?
Dan Frierson
Barry, if somebody has been within the luxurious vinyl flooring enterprise for a lot of, a few years, we’ve got completed enterprise with them for quite a few years and anyone that has the technical experience to assist us produce the merchandise on this nation.
Barry Gertner
That is unbelievable. I am actually excited. I believe that is going to be actually good for the Firm and sustain the good work. Thanks a lot.
Dan Frierson
Thanks, Barry.
Operator
Our subsequent query comes from Derek Maupin with Hodges Capital Administration. Please state your query.
Derek Maupin
Thanks for taking my query this morning. May you perhaps go just a little deeper into the JV? Perhaps is the fairness contribution onto outlined within the Ok, ought to that cowl the price of changing the ability to fabricate LVT?
Dan Frierson
Barry, that is Dan. How are you?
Derek Maupin
Doing nicely.
Dan Frierson
It won’t cowl all the prices. That is the price for the brand new JV. There will probably be some value of getting the plant ready for the JV. And we do not have that determine decided precisely. However when it comes to the JV value itself that ought to — sure, that ought to cowl the price of set up of apparatus and startup.
We’re within the luxurious vinyl flooring enterprise, as , have been for 4 years. That market is rising quickly. Our enterprise there was rising quickly. And we really feel like having home manufacturing will probably be an excellent asset going ahead.
Derek Maupin
Are you able to give us an thought of what that luxurious vinyl tile represents to a proportion of complete gross sales immediately?
Dan Frierson
We don’t break that out. It will likely be within the neighborhood of 15% to twenty%.
Derek Maupin
Okay. And would this facility have the ability to cowl the vast majority of your wants?
Dan Frierson
That isn’t — it’s not anticipated that it’ll as a result of the enterprise is rising quickly, and we’ve got quite a few totally different merchandise. So, we are going to nonetheless proceed to import merchandise as nicely.
Derek Maupin
After which perhaps my second query round gross margins. Are you able to give just a little colour on the way you suppose third quarter, fourth quarter, shakes out for this 12 months as you’re employed via that increased value stock? After which perhaps the cut up on the impression between freight value and better uncooked materials inflation?
Allen Danzey
Sure, Derek, I believe that — after all, we do not present any forward-looking statements or something that we do not wish to prognosticate into something right here. However I can say from — as you talked about, among the issues that we’re engaged on and taking a look at, as we’re transitioning expire away from the upper value, the Invista departure and the price that they imposed upon us at the moment.
We’re beginning to see that transition over to the merchandise. We nonetheless have some stock from the primary half on this stock that we’ll work via right here within the first a part of the third quarter. However we nonetheless begin seeing some aid so far as transitioning to those different suppliers at a market value. In addition to we proceed to work ahead taking a look at our total gross margins, the chance within the Atmore facility with the three way partnership will permit us to transition some prices from there.
So, we have got some good issues working. We do count on we might — these issues would translate to some enchancment within the third quarter, however couldn’t and wouldn’t have the ability to present any direct numbers on that.
Dan Frierson
I believe we indicated within the press launch and in our feedback that will probably be felt within the third quarter, however be extra absolutely affected within the fourth quarter. Sure.
Derek Maupin
Okay. That is useful. After which I seen within the press launch you highlighted the ornamental section. What is the alternative there you see?
Dan Frierson
We see a really giant alternative. We’ve got all the time been in that section, however solely with largely domestically produced tufted merchandise. We’re increasing that dramatically. We’ve got introduced anyone on board over about 1.5 years in the past to guide this, who’s been on this enterprise for 30 years plus.
We’ve got — this 12 months, about 30 merchandise we’re introducing and so they’re simply actually attending to market now. It’s being extraordinarily nicely obtained when it comes to clients shopping for samples and shows. We are going to introduce a comparable variety of merchandise subsequent 12 months, beginning earlier within the 12 months.
And this actually helps place us within the very excessive finish of the market the place we’ve got completed very nicely. And we predict it is holding up higher than the market total.
Operator
And our subsequent query comes from Chris Riemenschneider with Morgan Stanley. Please go forward.
Chris Riemenschneider
Simply asking in regards to the three way partnership, I believe, has been addressed, nevertheless it reduce out — my speaker reduce out. Simply the impact of that on the steadiness sheet, the place would you like your debt ranges to be within the close to future and in three to 5 years? How is that this going to have an effect on the debt degree?
Allen Danzey
Properly, from the steadiness sheet standpoint, we’d merely mirror the funding within the three way partnership and the impression of the return off of that from our earnings assertion as nicely.
From an funding standpoint, as we talked about and as disclosed within the 10-Ok, the $6 million funding initially for the capital and the start-up of the three way partnership, and we’ll see as we go ahead, after all, there will probably be some extra funding for working prices as we get began.
From that time ahead, we count on the manufacturing and buy of stock between the three way partnership companions to cowl the price of operations. So simply an preliminary outlay there so far as the funding in — from our aspect as a accomplice, the $6 million plus some extra start-up prices that needs to be — we’ll see that as we go, nevertheless it needs to be considerably much less, clearly, than the preliminary capital expenditure.
Chris Riemenschneider
And ideally, the place would you want your debt ranges to be as part of your capitalization?
Allen Danzey
I imagine we might get extra according to the fairness have equal contribution from our collectors and buyers, that will be excellent. I believe we have got a methods to go to get there. However we’ve got time that robust money move instances. And as we see funding alternatives, we’d have that at the next price going ahead. So simply managing it primarily based on our expectations so far as the Firm goes and what our alternatives are to spend money on development.
Operator
There are not any additional questions at the moment. I will hand the ground again to Mr. Frierson for closing remarks.
Dan Frierson
Thanks, Diego, and we recognize all of you being with us immediately. We recognize the questions. We sit up for bettering outcomes as we mitigate the impression of among the issues which have occurred within the final six months to a 12 months, however we really feel like we’re transferring in the proper path.
I recognize you being with us and speak to you subsequent quarter.
Operator
Thanks. This concludes immediately’s convention. All events might disconnect. Have an excellent day.
