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Earnings Transcript for DXYN - Q4 Fiscal Year 2022

Daniel Frierson: And welcome, everyone, to our fourth quarter and year-end 2022 conference call. I have with me Allen Danzey, our Chief Financial Officer, who will also be presenting. Our Safe Harbor statement is included by reference both to our website and press release. Net sales for the fiscal year of 2022 were $304 million or 11% below the net sales of $341 million in the fiscal year of 2021. The net loss for the fiscal year-end 2022 was $35.1 million with $33.4 million loss from continuing operations. The plan for consolidation of our East Coast facilities has resulted in a 24% reduction of associates and is expected to result in estimated savings of over $25 million. At this time, Allen will review our financial results, after which I will have additional comments. Allen?
Allen Danzey: Thank you, Dan. Our financial results for the 2022 fiscal year reflected the large unfavorable impact on our inventory costs in the first half of the year, which was due to several primary factors
Daniel Frierson: Thank you, Allen. During 2022, we faced a number of obstacles which were made even more difficult by the slowdown in business which the industry began to experience in the second quarter. The decision by Invista to exit the Stainmaster nylon business has had a significant impact on our company. Initially, we were not aware that their exit would be so abrupt and abusive. Starting in 2020, Invista began increasing prices dramatically which continued into last year. Increases were of a magnitude that could not be passed on to our customers. These actions meant we had to source product elsewhere as rapidly as possible. These actions significantly increased our costs and consumed the time of our operating people. Consequently, nylon raw material from all sources – excuse me, concurrently, nylon raw material from all sources increased significantly, which impacted our competitiveness in the marketplace. The actions by Invista ultimately led to our loss of Dixie's Home entire business with Lowe's. Our team did an excellent job of replicating our Stainmaster products in the field with new sources of raw material, but the onetime costs incurred were enormous and it meant delaying of new products until very late in the year. At the same time we were working through the issues which were created by Invista, our hard surface business along with the industry was impacted by logistical issues and exorbitant ocean freight rates, which rose rapidly to unprecedented levels. These costs also could not be fully passed on to our customers. Fortunately, those rates now have returned to more normal levels. We also experienced significant costs in restructuring our East Coast carpet manufacturing to reflect the loss of the Lowe's business and the slowdown of demand starting in the second quarter. This entails ceasing yarn and carpet manufacturing in our Atmore, Alabama plant and starting the repurposing of the plant to accommodate equipment to produce luxury vinyl tile and to locate our hard surface distribution to this facility. Atmore today is the distribution center for our hard surface products, but due to economic changes we decided to postpone our plan to locate LVT manufacturing in the plant. The loss of the Lowe's business and the general reduction in demand impacted our fourth quarter results, as Allen has already indicated. In order to reduce inventory levels to match our sales levels we had temporary shutdowns in several facilities and reduced hours worked in others, which resulted in significant unabsorbed fixed costs. In the quarter, the combination of the lower volume, plant shutdowns and curtailments and the consumption of higher-cost product inventory decreased our financial results. As a result of the issues which we were faced, we embarked on an extensive cost reduction plan, which included the consolidation of our manufacturing. Under this plan, we began this year with 24% fewer people in our company and should reduce costs in 2023 in excess of $40 million. We are also taking other actions to preserve cash and continue to reduce inventories in 2023. Even though we're expecting this year to be a challenging one, with the cost reductions in place and growth initiatives being, that have been implemented we expect our results to be much improved. As we enter 2023, the uncertainty in the economy, largely due to inflation and higher interest rates leads us to believe our markets will not show growth this year. While we think our core business will be sluggish, we do anticipate growth from our recent growth initiatives. Our Hard Surface growth initiative began in 2017 with two collections in the WPC segment. Although the initial launch were successful, it quickly became clear that we needed to increase our talent level and focus on the Hard Surface category to make this a meaningful part of our business and be successful in the long run. In mid-2018, we hired Jamann Stepp as Vice President of Hard Surfaces. Jamann came from COREtec, the leading brand in the resilient segment. He developed the TRUCOR brand as well as high-end wood program and created a product strategy, which worked well for our three brand sales team structure. Over the next four years, with Jamann's leadership, we have expanded our offering to include over 200 SKUs of WPC and SPC/LVT. And over 50 SKUs of engineered wood, and we have entered the laminate category, which is making a resurgence in the market with water-resistant technology advancements. And we have seen the Hard Surface segment grow to approximately $50 million of sales annually and represent about 20% of our total sales. Our second growth initiative revolves around the exit of Stainmaster fiber from the market and the growth of polyester products in the floor covering business. We have had success with polyester products over the years, but have not been a major player. We have been able to access certain differentiated products which fit into our Dixie Home offering. We now have also been able to source polyester yarn at competitive prices so that we are now applying our best-in-industry product development capabilities to the polyester category. In 2022, our polyester business grew 49%, and this year, we're introducing nine new products in our Dixie Home division. The early reaction has been phenomenal, and we are projecting sales growth of 75% for the year, starting from a very low base. Beyond 2023, we are planning additional introductions, taking advantage of our unique sources. This will continue to be an important part of our Dixie Home offering. Our third growth initiative revolves around wool. The high-end wool business has been part of Dixie's portfolio for 15 years. However, we've been primarily focused on internally-tufted wool products. While we have enjoyed success in this category, there's been a shift in consumer preference from a style and design standpoint. The shift has been toward more distinct patterns in woven, hand-loomed and hand-tufted constructions. These types of products have traditionally been a very small part of our offering. To address these changes and grow our business, in 2021, we hired Len Andolino to lead our High-end Decorative segment. Len has over 35 years of experience in this segment and understands this business very well, including the landscape of suppliers, products and key customers. Len developed a three-year strategy and plan to grow this category. And in 2022, we unveiled the 1866 products by Masland, keying on the year Masland was founded; and Décor by Fabrica, keying on the notion of Fabrica's reputation for high-end, best-in-class products. These new programs with new brands and 27 fresh styles were very well received by the market. In 2023, we are launching another 30 new styles into 1866 and Décor lines. And we also are launching the 1866 All Seasons collection featuring 15 new styles, which are suitable for both indoor and outdoor applications. Market reception to the new styles again has been very positive, and we anticipate growth in this category for the year. During last year, we have taken numerous actions to improve short-term results this year and are making structural changes to help us deal with market conditions. Simultaneously, we've been investing in the future growth of our – the future through our growth initiatives. These actions should have us well positioned for future growth when business conditions do improve. This time, we'd like to open up the call for questions. Daryl?
Operator: [Operator Instructions] There are no questions at this time. I'd like to hand the call back over to Dan Frierson for any closing comments.
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Daniel Frierson: Daryl, thank you very much. And we appreciate everyone joining us for the call, and look forward to 2023 which should be much improved than 2022. Thank you. Good bye.