Dixie Group Inc (DXYN) 2007 Q3 法說會逐字稿

Good day and welcome to The Dixie Group Inc. Third Quarter 2007 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 sir.

Thank you, Robbie, and welcome to our third quarter conference call. I have with me today Gary Harmon, our Chief Financial Officer. I want to include our Safe Harbor statement by reference. It's in both in our press release and posted on our Web site. Despite easier comparisons, the industry's third quarter sales showed no improvement compared with the year ago period. Carpet sales were off about 8% from a year ago with the residential down almost 14% and contract up 2.5%. Dixie's carpet sales in the third quarter were essentially flat, with residential products down about 10.7%, with commercial products up almost 24%. In spite of higher raw material, utility and other costs, our third quarter gross margin percentage was unchanged from the third quarter of last year. The improvement is attributable to better product mix and better operational performance. At this time, I would like to ask Gary Harmon for a financial review, after which I will comment on our outlook. Gary?

Thank you, Dan. Looking at sales, third quarter sales were $82.4 million, down 1%. For the first nine months, sales were $241.3 million, down 4%. Third quarter carpet sales were essentially flat, residential retail products were down 8%, home center residential products were down 36% and commercial products were up 24%. Commercial broadloom products grew over 18% and our marginal carpet tile sales were over $1.5 million, up 34% from the second quarter of this year. For the nine months, total carpet sales were down 4%, residential retail products were down 6%, home center residential products were down 47% and commercial products were up 10%.

Looking at gross margin, third quarter gross margin was 29.7%, the same as in the prior year. The nine months comparison was 30.1% versus 28.6%. Third quarter gross margin dollars declined about $300,000 due to lower sales of yarn and dying and finishing services. Carpet margins were flat in both dollars and as a percent of sales. Higher selling prices and a more profitable product mix offset higher raw material, utility and other manufacturing costs.

Looking at the third quarter -- the year to date, despite lower sales volume and higher raw material and utility costs, gross margin dollars improved $794,000 for the nine months due to higher selling prices, better product mix and improved operational performance. Improved quality, manufacturing and distribution efficiencies and better material utilization, all contributed to the improved margins. If you compare the third quarter of '07 with the second quarter of '07, margins declined about 1.4 percentage point. This is primarily due to 2.4% lower volume, which increased fixed costs per unit, higher raw material cost, and much higher electrical rates which increased about $300,000 in the third quarter verses the second quarter.

Taking a look at the selling and administrative expenses, as a percentage of sales, the comparison was 23.5% versus 22.8% in the third quarter and 24.7% versus 22.8% for the nine months. We have increased these expenses because we continue to invest in new technology, products and sales people to grow our business. The operating income comparison was 6.2% versus 6.7% for the third quarter. The nine months comparison was 5.3% versus 4.6%. The negative impact of our modular carpet tile operation was less than $100,000 in the third quarter, and this business positively contributed to our results in the month of September. Expenses to terminate a defined benefit pension plan in 2006 reduced operating profit for the first nine months of that year by $3.2 million, or 1.3 percentage point. Interest expense decreased $182,000 in the third quarter and $667,000 for the first nine months due to lower total debt levels. Interest expense for the full 2007 year is expected to be approximately $6.5 million.

Looking at our income tax, the effective income tax rate was 36% for the third quarter and the first nine months of 2007, about as expected. That's compared to 28.3% in the third quarter of '06 and 23.5% for the first nine months of '06. The effective income tax rate was below our expected 36% tax rate in 2006 due to positive adjustments to our tax contingency reserves, federal and state income tax credit and non-deductible life insurance benefits. The adjustment to our tax contingency reserve was generally due to the conclusion of a federal and state revenue agency examination in 2006. We expect the effective income tax rate to be approximately 36% for the full year of 2007. Diluted earnings per share from continuing operation the third quarter comparison was $0.17 versus $0.21, and the nine months comparison was $0.39 versus $0.36. Expenses to terminate the defined benefit pension plan in 2006 reduced income from continuing operation by $0.16 per share.

Taking a look at the balance sheet, we ended the third quarter with total debt of $91.7 million or 39.5% of total capitalization. That's seasonally up $2.6 million from the end of 2006, but down $7.2 million from the third quarter a year ago and $4.3 million from the second quarter of this year. Total debt is expected to decline $47 million by year end. Capital expenditures were $11.6 million during the first nine months of 2007, and depreciation and amortization was $9.7 million. We expect capital expenditures for 2007 year to be approximately $16 million, while depreciation and amortization is expected to be around $13 million. We have not completed our 2008 capital expenditure budget. However, we expect to lower our capital expenditures until the industry conditions improve. During the third quarter, we purchased 79,000 shares of our common stock at an average price of $10.53 per share. Based on the current market price of our common stock, we believe repurchases of our stock represents an excellent investment that should provide long term value to our shareholders.

Thank you, Gary. The residential portion of the floor covering industry continues to struggle and it is unclear when the industry will begin to rebound. All product categories have been impacted as volumes of housing starts and home re-sales have declined precipitously. The carpet industry reached its peak in square yard shipments in the third quarter of 2005. The third quarter of this year was down more than 20% from that peak. Dixie's units in the third quarter were actually up from the 2005 third quarter level. We continue to outperform the industry by investing in new technology products and sales people. Our wool collections at Masland and Fabrica are just getting to market and should help our residential business next year. Realizing the residential business would be slow, we have increased our presence in the commercial category.

The new Dixie Home and Office Stainmaster collection is in the field and beginning to generate sales. With the Office to Home collection, the Masland residential sales force has continued to sell more commercial products through the residential retail channel. Masland contract has brought out more running line items as well as more modular products which are now becoming contributors. In order to speed up our operational improvement in June, we replaced our Manufacturing Vice President and feel this will be seen in our bottom line next year. As we have discussed in the past, our capital expenditures are focused on areas that enable us to differentiate our products. We will continue these types of investments, but will lower the level until we are confident the industry is rebounding. Likewise, our SG&A expenditures next year will not be as aggressive until improvement in sales is seen.

We still have confidence that the upper end of the market will perform better than the market in general and want to be positioned to take advantage of market opportunities as they arise. Despite the issues facing our industry, we are optimistic because, number one, our modular business just experienced its first $1 million month. Dixie Home and Office is just beginning to take off in the marketplace, and we have over 1100 placements in the market. Wool collections are just beginning to perform and to create sales. We continue to outperform the industry significantly. Also, the price increases are now fully implemented and we should see those results in the fourth quarter and beyond, and we continue to have operational improvements.

At this time, I would like to open up the call to questions.

Thank you. (OPERATOR INSTRUCTIONS) And we will go first to Sam Darkatsh with Raymond James.

Good morning Dan. Good morning Gary.

Good morning Sam.

Couple of questions. Gary, do you have the year to date, the total unabsorbed carpet tile costs for this year, however you want to define that, startup costs or whatever the costs that would not be repeated next year in theory would be?

I don't have that right with me, Sam, but as I recall, it was about $300,000 in the first two quarters and less than $100,000 this quarter. So, it is in the $700,000 range.

And you don't suspect that in the fourth quarter that that would be repeated, so the $700,000 is probably going to be a '07 number you think?

Yes.

Okay. You don't expect anymore unabsorption rate in the fourth quarter?

No, it all depends on business level, but I would expect that business will make a positive contribution in the fourth quarter.

Okay. CapEx, you said $16 million for '07 was the plan for CapEx. Dan, what are your thoughts just in terms of capital spending? You mentioned paring back SG&A next year unless things rebound, what about capital spending plans?

Sam, we would do the same with CapEx. We have not finished our budgets for next year, but we certainly want to have our capital expenditures at or below our depreciation and amortization number, which ought to be in the $13.5 million range.

Okay. Again, I apologize for a lot of these housekeeping questions, but accounts receivable, Gary, look like it was up about 7% or 8% on a year-on-year basis and with flat sales. Would that -- I am trying to ascertain as to the derivation, would that be because business accelerated throughout the quarter or would that be because you are extending credit to your dealer customers or could you help as to why that might be?

All right. Sam, that's basically a change that -- in 2006, we were factoring all the fabric as receivables and we have now brought that in house. Because of the timing, when we receive the payment from the factories, it had affected probably reducing our days outstanding two to three days versus the way that is being handled today. So, that's mainly the effect there. We have a very low level of aged receivables and we have not seen an increase in credit losses. In fact, our credit losses have slightly declined this year and we really attribute this to the quality of our credit department and our higher end customer base, most of which are larger and do not appear to be having any financial issues.

Thank you for that answer, that was clear. I have two final questions. The home center, the issue you are having with the one home center customer, at what point do you begin to anniversary that, and I am guessing it's coming up in the next couple of months or so as when you begin to anniversary that, is that correct?

I think beginning November, we will start seeing much better comparisons.

Our business there, Sam, began to drop off significantly in November of last year.

Has the run rate stabilized since earlier this year or has that continued to deteriorate?

No, I think the run rate has stabilized, yes.

Okay. And last question, looking at gross margins, trying to get a sense of what gross margins might be in the near term. You said you had utility costs, which were higher than you expected, but on the other hand, you are going to get the full benefit of price hikes and you will get the better absorption on the carpet tile, would you suspect all else equal that gross margins would rise going forward a bit? I am just trying to get a sense of the impact of those three items?

Sam, I think they tend to offset and it's really going to depend on volume.

Got you, okay. Thank you very much gentlemen.

Thank you, Sam.

(OPERATOR INSTRUCTIONS). And we go next to John Baugh with Stifel Nicolaus.

Good morning. This is actually Stanley Elliott in for John. Couple of quick questions, assuming that demand stays weak, are there any utilization pressures that would prompt you all to look at maybe cutting capacity, or even in this tough environment as $80 million per quarter run rate going forward, is that kind of what we will be looking at?

Stanley, I am not exactly sure what your question is, but we certainly don't have any capacity that we would be scuttling during this period. We may run fewer hours, we may have fewer crews or something of that sort, but there are no facilities that would be impacted so dramatically that we would be looking at mothballing or closure or anything of that sort.

Perfect. And also, on the Dixie Home, where you are picking up a lot of share relative to the residential industry, it looks though like that the delta between the residential and the industry is kind of narrowing a little bit, could you guys give us some color on the three brands, the residential unit?

Stanley, I am not sure again exactly what your question is, but we have -- we think we have gained market share across the board on residential and we think the higher end part of the market is growing faster than the market generally and our new efforts, our new introductions of the wool lines at Maslyn and Fabrica we think have the capability of really accentuating that as does the new Stainmaster Home and Office products from Dixie Home.

Very good. One last one, as far as orders in the residential on a percent kind of year-over-year change, have you been seeing things get better or worse over the past three months?

I would say they have been pretty flat.

Pretty flat.

Yes, and that's why I would really start out by saying we are not really sure when the industry is going to rebound, and in the third quarter again, we saw the industry off about as much from the year ago period as it was in the second quarter. So, I think we are in a -- at a plateau albeit at it a little one, but what we have seen is the commercial business grow and we have sold more commercial products through our residential channels and I think that's one reason we have been able to capture more commercial products. If you think about it, retail are selling residential products, it is residential businesses off, is sniffing around for commercial applications, and we are enjoying a pickup in business in that area.

Very good, thank you very much.

Thank you, Stanley.

(OPERATOR INSTRUCTIONS). And at this time, it appears there are no further questions. I would like to turn the program back over to Mr. Frierson for any additional or closing comments.

Thank you, Robbie, and thank all of you for being with us this morning. Again, we are going through a difficult period as an industry, but we feel like Dixie has been able to outperform the industry generally and we are certainly working to improve our profitability even at these levels and preparing for better business when it comes. Thank you again for being with us.

That does conclude today's call. You may disconnect your lines at this time.