Dixie Group Inc (DXYN) 2007 Q4 法說會逐字稿

Good day and welcome to The Dixie Group Inc. year-end 2007 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Chairman and Chief Executive Officer, Mr. Dan Frierson. Please go ahead, sir.

Thank you, Robbie, and welcome, everyone, to our fourth=quarter and year-end conference call. I have with me Gary Harmon, our Chief Financial Officer, and Gene Lasater, our Corporate Controller.

Our Safe Harbor statement is incorporated by reference. It is both in the press release and posted on our Web site.

The industry continues to suffer from a dramatic decline in new housing and home resales, as well as a general tightening of credit availability. The result has been another year of declines in units and dollars for the carpet industry.

The industry reported carpet sales declined 6.5% in the fourth quarter and 8% for the year. During these same periods, our sales continued to outperform those of the industry with year-over-year carpet sales comparisons that were flat for the fourth quarter and down to 2.8% for the full year.

We are pleased that gross margins improved in both dollars and percent of sales for the fourth quarter and full year. We believe it is also significant that, without the pension merger expense incurred in the fourth quarter and the abnormally low tax rates in the fourth quarter a year ago, our fourth-quarter 2007 operating income and income from continuing operations were better than those of the prior year.

Gary Harmon will review our financial results, after which I will speak to our market segments and current business conditions. Gary?

Thank you, Dan.

Fourth-quarter sales were $79.5 million, down less than 1%. For the year, sales were $320.8 million, down 3.1%. Fourth-quarter carpet sales were relatively flat in total with residential products down 5.4%, commercial products were up 11%, and our carpet tile sales were $2.7 million. The industry, during the fourth quarter, showed residential sales down 11.1% and commercial sales up 1.4%.

For the fiscal year 2007, carpet sales were down 2.8% with residential products being down 9.1%. Commercial products grew 10.5% during this period. The industry reflected residential sales down 13.1% and commercial up 1.6%.

Gross margin improved $600,000 in the fourth quarter. The percentage comparison was 31% versus 30%. For fiscal 2007, the gross margin improved $1.4 million. The percentage comparison was 30.3% versus 28.9%. Gross margin dollars and percents improved due to our carpet tile operation, which was profitable in the fourth quarter, higher selling prices, better product mix and operational improvements.

Our suppliers increased raw material costs in early February this year. We increased our selling prices to pass along higher raw material and other costs. The higher costs will negatively affect our margin for several months until the new selling prices are fully implemented. The first quarter will also be affected by seasonally low sales that normally occur in the first quarter of each year.

Selling and administrative expenses as a percentage of sales were 24% versus 23.5% for the fourth quarter and 24.6% versus 22.9% for the year. Despite the softness in our business, we have continued to invest in new products, information systems, and our selling and marketing infrastructure. While these investments should benefit the future, they increased selling and administrative expenses in 2007.

Operating income was 5% of sales in the fourth quarter of 2007 and was reduced by 1.9 percentage points, due to the pension plan merger, versus 6.2% a year ago. The yearly comparison was 5.2% versus 5%. Pension merger and termination expenses reduced our operating income by 0.5 percentage point in 2007 and 1 percentage point in 2006.

In the fourth quarter of 2007, we recorded $1.5 million of principally non-cash prior-service expenses related to the merger of our only remaining defined-benefit pension plan. In the second quarter of 2006, we recorded $3.2 million of expenses to terminate a legacy defined benefit pension plan. As a result of the merger and termination, we're no longer responsible for any defined-benefit retirement plans. Ongoing contributions for pensions are expected to be less than $300,000 annually or about $200,000 below our average pension costs for the last two years.

Interest expense was down $198,000 in the fourth quarter and $866,000 for the year, due to lower levels of debt, lower interest rates and a higher level of capitalized interest in 2007. Interest expense for 2008 is expected to be approximately $6.2 million.

Our effective income tax rate was 32.5% in the fourth quarter of 2007 and 35.3% for fiscal 2007, compared with 9.8% in the fourth quarter of 2006 and 18.4% for fiscal 2006. The effective income tax rates in 2006 were well below normal rates we expect principally due to adjustments to tax contingency reserves for federal and state income tax examinations concluded and expiring statute of limitations. The effect of the income tax adjustments increased income from continuing operations per diluted share in 2006 by $0.06 for the fourth quarter and $0.13 for the year. We expect the effective income tax rate to be between 35% and 36% in 2008.

The diluted earnings per share from continuing operations -- the fourth-quarter comparison was $0.14 per share versus $0.25. The yearly comparison was $0.52 versus $0.61. Pension merger and termination expenses and income tax adjustments negatively affected the comparison of diluted earnings per share by $0.14 in the fourth quarter and $0.05 for the fiscal year.

Looking at our balance sheet, we ended 2007 with $88.6 million of total debt or 38.4% of total capitalization. That's down from $89 million or 39.6% of total capitalization at the end of 2006. Total debt is expected to increase $7 million to $10 million in the first and second quarters of this year and decline to the mid to low $80 million range by the end of 2008.

Capital expenditures were $16.7 million in 2007, and depreciation and amortization was $12.9 million. We expect 2008 capital expenditures to be in the $12 million to $14 million range, while depreciation and amortization is expected to be slightly below $14 million.

In the fourth quarter of 2007, we repurchased 78,000 shares of our common stock at an average price per share of $9.29. For fiscal 2007, 157,000 shares were repurchased at an average price of $9.91. This year, through February 22, we have repurchased another 69,000 shares at an average price of $8.14, bringing our total purchases since the inception of the stock repurchase program to 226,000 shares at an average price of $9.38 per share.

Thank you, Gary. As the industry has continued to weaken, we have continued to invest in the future. We believe this will position us well when better conditions arrive. The residential market has been particularly difficult, and it is still unclear when it will begin to rebound. The first quarter could be the low point for the industry in sales and profitability, because the retail business is normally slower in the first quarter than the rest of the year. The higher raw material and other costs also will impact us negatively, and the carpet price increases will not be fully implemented until later in the year. The first quarter in 2008 will be a challenging period for the residential carpet business.

Despite these difficulties, we believe we can continue to grow our market share. At Fabrica and Masland, we've introduced new wool collections in addition to our normal nylon introductions. At Dixie Home, we introduced our new Lifestyle collection and are currently shipping samples into the field. We are also selectively adding to our sales force to increase market penetration. We believe our continued investment in new technology, new products and people will help separate us from the competition in the residential market.

The commercial market grew again in 2007 and is off to a good start this year. Our commercial business grew 10.5% last year, and we're optimistic about 2008. We have placed more new broadloom product into the field, and our tile business is gaining momentum. It is now a contributor to our bottom line.

Our capital expenditures are planned to be at a lower level this year, but we will continue to be focused on equipment and processes that enable us to differentiate ourselves in the marketplace. Our margin improvement is a reflection of our ability to develop and market desirable products for the markets we serve and also the result of better operational and cost control. We continue to have confidence that the upper end of the market will perform better than the market in general and plan to be positioned to take advantage of market opportunities as they arise.

We invested $16.7 million in capital expenditures in 2007, almost $4 million higher than depreciation and amortization. We also purchased 157,000 shares of our common stock for $1.6 million. With the merger of our only remaining defined-benefit retirement plan into a multi-employer plan late last year, we no longer sponsor any defined-benefit retirement plans. Thus, despite the downturn, we strengthened our balance sheet, grew stockholders equity to $142.1 million, reduced total debt to $88.6 million or 38.4% of total capitalization.

Looking forward, although the industry is experiencing a difficult period and the first quarter will certainly be trying, we are encouraged by several factors. Namely, we have consistently favorable sales comparisons to the industry. We've had positive market reception to our new products. Our tile products obviously are beginning to take hold. Dixie Home and Office is off the ground and doing well. The wool collections from Masland and Fabrica are also being well-received, and our new Lifestyles collection from Dixie Home is beginning to get into the marketplace.

We also are encouraged by the average selling prices in 2007 being up 4% over the previous year. We have increased prices in first quarter of this year to recoup raw material and other costs increases.

We had higher gross margins last year at 33%, up from 28.9% in 2006. We continue to see operational improvements in the area of quality, manufacturing and distribution efficiencies, and material utilization.

At this time, we would like to open up the call for your questions.

Thank you. The question-and-answer session will be conducted electronically today. (OPERATOR INSTRUCTIONS). Sam Darkatsh, Raymond James.

Very nice execution and results in a very difficult market.

Thank you.

Looking at your production now, Dan, your facilities -- are you running just one shift at this point or what's your level of utilization? Do you think that, if things continue at least on the residential side, do you think you may have to rationalize some production capacity?

Sam, we are running all of the same shifts we were running last year currently. We obviously have capacity to grow our business. Our results or shipments so far this year are off slightly from last year. We do think first quarter is going to be a very difficult period, but that things will improve after that. Seasonally, they tend to, and we don't think this year will be different from that perspective. But we do think the entire year will be a difficult year. So what we're doing is certainly watching our inventories, planning our business better, running fewer hours but not fewer shifts.

Okay, so what you're saying is that your hard capacity you feel fine with and you don't feel that you need to adjust hard capacity at this point?

No, we do not.

Okay. When you're saying that the first quarter or the first half is going to be a real challenge, are you suspecting that the change in sales on a year-on-year basis would be similar to the change on year-on-year sales in the first half of '07, down the mid-single, or are we looking at similar run rates in terms of declines as we saw in the second half of '07?

I don't have a good answer for you. Obviously, if we knew where business was going to be for the industry, we would be able to plan our business better. But our thinking at this time is that business will be more difficult in the first half, with comparisons to the prior year, than it will be in the second half.

Well, then I'll ask the question this way. If this was in your prepared remarks and I missed it, I apologize. Through the first seven or eight weeks of Q1, is your business running down low single digit, down mid single digit? How should we look at that, at least from what you've gone through here so far in the quarter?

It's down low single digits.

Okay. Any slowdown that you're seeing in commercial at all or is it still the demand quite robust and the order book looking solid?

The commercial business has been pretty strong for us. We do think the industry slowed down toward the end of the year and may not be as robust as it was. But remember, our tile business is really just beginning to ramp up and it was profitable in the fourth quarter, and we're seeing that business continue to grow pretty significantly. But our broadloom business is growing as well. So we are very encouraged by our commercial business, and again, how it has done compared to the rest of the industry.

Thank you very much, gentlemen.

Todd Schwartzman, Sidoti & Co.

A couple of things -- who is the plan sponsor of the multi-employer plan?

It is the union that represents the folks in our Atmore plant, unite.

Okay. I think I missed the numbers but I think, Gary, you were giving the expected -- or maybe it was you, Dan, the going forward pension expense. I think you threw out a number of $300,000. Is that correct?

That's what we expect it to be, our contributions, and as I said, that's about $200,000 below what we have averaged for the last two years.

So that is basically predominate -- or exclusively a cost of outsourcing, if you will?

No, I wouldn't call it that. The payment we make into the multi-employer plan, based on our union contract. So I'm not exactly sure what your question is.

Well, in terms of not the employer contributions but the administrative costs of having this third party take the onus off of you guys as sponsor, is that negligible or is that a real cost that perhaps we should net out from the expected saving?

That's all inclusive in the $300,000.

Okay. So going forward, let's say for 2008, assuming the top line is flat, should we think about SG&A (inaudible) a more normal number around maybe 18 or little more towards the end of the year, on a quarterly basis?

Todd, I don't really see any significant reductions in the dollar amount of SG&A expenses. As I said, we've continued to invest in new products and our marketing and selling infrastructure, and we don't see significant reductions. We do hope that growth will allow us to better leverage that (inaudible).

As far as those salespeople, the incremental salespeople that you've added and will add, is that exclusively a variable cost?

That would be basically a variable cost, but generally, there are some guarantees, if they're new people, until they get their feet on the ground.

We've been adding people annually the last couple of years, Todd, and this is not unusual for us. Remember, Dixie Home is really still ramping up as a business, and that's where the bulk of the additions would be, would be in the Dixie Home area. This is consistent with what we've been doing, and there is upfront cost of adding people, no question, but the pay-out is pretty quick.

Once in place, the compensation structure is consistent with what you guys have been doing?

Absolutely.

Okay. Did you quantify your price increases?

No, we did not.

For the raw material hikes in ball-park terms?

Well, in all fairness, it was not just fiber increases. It was utility increases, latex increases, backing increases, medical care cost increases. We really bundled all those together and increased our selling prices to cover the cost increases we had in '07.

How long should that take to fully stick? Or let me put it another way. When do you expect or how much of those stated increases do you expect to be fully realized?

Todd, we increase prices in early February, early to mid February. That will take obviously -- take place on new orders. Really, you'll begin to see the impact early second quarter, and it should be fully impactful by the end of the second quarter.

Great. On the modular, are there any customer categories, industries or geographic segments of strength or weakness, any pockets you would care to talk about in terms of acceptance to the product and demand?

Todd, we've had good acceptance literally everywhere, but we are at this point so small, it's very difficult to really quantify one area versus another. But the acceptance of our carpet tiles, which are most attractive and quite honestly higher-end than most tile out there with more texture, seem to have been very well accepted and we are very encouraged. We're also bringing out additional styles in our tile line.

Okay. I hope you can give a little more color on the commercial side overall. For example, what do you make of the recent report of service sector and white-collar job contraction? Just in general what are you seeing on the commercial side, demand-wise?

We are seeing commercial business stay strong. Our back-order position there, which is more relevant on the commercial side than it is on the residential side, has grown in the last couple of months. That's not untypical, however, when you have a price increase. But our order entry and shipments of commercial product continue to be strong.

So you're not too concerned about the job's picture for the next twelve months or so?

I think you could make a case that, by the time the residential business comes back, the commercial business may slow down.

Right, right. That's fair enough. Thanks a lot, guys.

Tom Lewis, Century Management.

Let me start off by saying that, considering all that the world has been throwing at you, as I look down your results, you seem to be doing a great job.

Thank you very much.

First question, should we be concerned? I mean, you said you announced a price increase early February, but should we be concerned? Was that telegraphed in a way that it may have affected a customer's tendency to buy ahead of a price increase back into December, say, and so add to the difficulty of revenue in the first quarter?

Tom, that's difficult to say. We did announce it I think early January, but the industry had announced some before that, so I think pretty well the retail community knew a price increase was coming.

So you might have got a little help in December from that?

Yes, but we certainly didn't see a spike in orders. We did see a little on the commercial side, as I mentioned earlier, which is more typical. But on the residential side, remember, we don't sell carpet until somebody has a firm order and is ready to install. So we didn't see that kind of uptick that you might normally see.

Okay. Can you remind us what the carpet tile, the losses on starting that up were costing us through the first three quarters of last year?

Sure, I've got something here I think. The loss for the year of 2006 was about $2.5 million.

He's asking about '07.

And in '07, it was probably --

It was right at $1 million, a little over $1 million (multiple speakers) nine months of loss.

For nine months of loss.

Yes.

Yes, all right, okay. Dan, you referenced strengthened broadloom commercial. Was that just a reflection of being able to get into accounts that -- I remember having a conversation about folks that didn't want to talk to you if you didn't have a tile product. Or is it more to it than that? Or is it that at all?

I think that's part of it, Tom, and we did have that discussion. Also, I think our group has done an exceptional job with new product, which has been well-received.

I do think our broadloom commercial business is much stronger than the market generally. So I have to give our fellows credit for developing new, beautiful, differentiated product that has been well-received in the marketplace.

Bruce Baughman, Franklin Advisory Services.

I would echo Tom's comments about how you're coping with these difficult conditions.

We would much rather be in a rising tide!

I'm sure. A couple of a very general questions -- did you give us an EBITDA number?

No, we didn't. We did give you the depreciation.

What was the depreciation for '07?

-- which $12.9 million, I believe.

Okay. When we get a cash-flow statement, is the Company going to be free cash flow positive after CapEx for the full year?

Yes.

Okay. Would it be your expectation, based on whatever level of visibility you have at present, that that will be true for 2008 as well?

That's what we would expect.

Okay. Then in a general sense, I'm always happy to see companies buy back stock below book, but -- and I know you paid down debt a little bit during the year. How much confidence do you have, based on the outlook and the financial strength of the Company, to be buying back stock?

Bruce, we felt like the acquisition of stock was a good investment for the Company and for our shareholders. We had been going through a very difficult period for the industry, but we certainly have outperformed the industry. We feel, when business does improve, that our business will improve disproportionally well. Therefore, we think the acquisition of stock is a good investment.

Okay. If you found money under a desk drawer or something, would you buy back stock today or would you pay down a little bit of debt? That's really my question, is I know that (multiple speakers) --

Let me -- we have repeatedly said that we are comfortable with our debt level in the 30% to 40% of total cap. We are at 38% now, so we obviously would prefer to see that a little lower.

Okay, great. Thanks.

John Baugh, Stifel Nicolaus.

Thanks. Again, a job well done. When do you anniversary your large home center account, in terms of sales fall-off?

John, we anniversaried that in the fourth quarter and we are no longer seeing a drag due to that. About 95% of our decline in sales last year was due to the decline in sales with one customer. But today, that customer is up.

Interesting, okay. Anything that's unusual or truly different about this price increase and your ability to pass it along than the prior, what, ten our something we've had in the last three or four years?

Well, again, we have no customer that's over 3% of our sales, so passing on price increases is not automatic but it certainly is easier than it used to be when we had a concentration in a few accounts back four or five years ago. So the price increase did go into effect in February. Obviously, there are home centers and builders that are under a lot of pressure but other than that, I would say things have gone extremely well and not materially different than previously.

Okay. The last question -- as you look at your mix of residential business, say, in your Masland and Fabrica businesses, and let's just stick with those two, are you seeing any mix deterioration? Is that customer trading down at all?

You know, that customer may be, but we may not getting the trade down! (LAUGHTER) Actually, our average selling price, as I mentioned, was up in '07 over '06, and we have introduced product into the field, particularly our wool collections at Masland and Fabrica. Masland has got into the field in August and has been a significant contributor already, and the average selling prices there are in the $40 to $50 per square yard mill price.

So my answer to you is no, but I'm not sure we would be the ones to see that.

I know, in your builder business out in California, you were sort of the upgrade for the, what, $2 million track home or whatever. I would think that, at least in that segment, you are seeing a loss of some business. True? Not true?

I'm not sure we are seeing any more loss than others, but it's significant. You know, those homebuilders are all 40%, 50%, and our business, consequently, with the builder community, particularly in the West, is off significantly. That's the one area where we are off the most.

Got it. Great. Thanks. Good luck.

(OPERATOR INSTRUCTIONS). Arnold Brief, Goldsmith and Harris.

Yes, I apologize but I got distracted. When you mentioned a $10.5 million loss and a $1 million loss in '07, were you referring to the tile business, or was it something else?

We had $1.5 million tile of expenses for merging a pension plan.

No, no, no, I know that.

You're asking about the tile, Arnie?

Well, I got distracted and I just picked up on the tail end of -- you said something about a $1 million loss in '07 and a $10.5 million loss in '06.

No, he said a $2.7 million or $2.6 million loss in '06. (multiple speakers)

(multiple speakers) in '07 for the first nine months.

Was $1 million?

Yes.

And you are referring to what? The tile business?

The tile business, but it was profitable in the fourth quarter.

Okay, so you lost a little less than $1 million in '07 and you would expect it to be profitable in '08?

Yes.

Yes.

Based on the fourth-quarter sales rate, something in the area of $10 million in revenues would not be out of line?

For '08?

Yes. I mean ballpark?

We certainly believe that's doable.

It's a little bit unusual -- I know what oil prices are doing, but to see price increases in an industry this weak is almost unheard of. Do you think these price increases can hold on the raw material, your fiber?

Arnie, raw material is 60-some-odd percent of your total cost, and when raw material goes up, it's really mandatory that it be passed along if the industry is -- (multiple speakers).

No, no, no, I know it can be passed along. I'm saying, do you think the cost increase to you can hold, in light of the weakness of demand from the carpet manufacturers? The fiber increase, do you think that can hold in light of the weakness of --?

As long as all stays where it is, yes.

I'm not a strong proponent of buying back stock. I think I'd rather see companies use the money to grow their business, but in your case, you are selling below book, earning money and increasing market share. It's one of the most unusual combinations I've seen for some time. Is there any way or plans to get even more aggressive with the buyback program?

Arnie, not at this time. However, we've been buying really all that was available under the rules under which we have to buy in the marketplace. We have not had anyone approach us to sell us stock directly, in a different way, but so we're doing what we can do today under the current rules.

How about your sample expenses in '07 versus '06. Are they going to go up or down or --?

You're talking '08 versus '07?

Yes, I'm sorry.

I think they will be similar.

Similar?

Yes.

At this time, we have no further questions. I'd like to turn the call back over to Mr. Frierson for any additional or closing comments.

Thank you, Robbie, and we appreciate all of you being with us for our fourth-quarter and year-end conference call. We look forward to our next conference call with you. Thank you.

That does conclude today's conference. You may disconnect your lines and this time.