Dixie Group Inc (DXYN) 2008 Q1 法說會逐字稿

Good day and welcome to The Dixie Group Inc. First Quarter 2008 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, [Katy], and welcome everyone to our first quarter 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 both in the press release and posted on the web site.

The first quarter brought little relief to the carpet industry. The dramatic decline in new housing and home resales and the lack of credit availability continued to impact carpet sales adversely. Residential carpet sales declined 11.8% and commercial carpet sales were up 1.3%. In total, the industry was off 7% from the year ago period.

We continued to outperform the industry with carpet sales down 3% from a year ago. Due to improved operating performance and reductions in selling and administrative expenses, we were able to offset most of the effect of lower fixed cost absorption and higher raw material prices. We also announced a price increase in the first quarter which should be fully implemented this quarter.

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

Thank you, Dan. Taking a look at sales. First quarter of sales were $70.7 million, down 5%. Carpet sales were down 3.1% with residential products being down 10.6% and commercial products up 10.4%.

Gross margins declined $1.3 million in the first quarter, principally due to lower sales volume. The percentage comparison was 29.1 versus 29.3. Despite the effect of higher raw material costs and lower fixed costs absorption, our gross margin percentage only declined 2/10 of a percentage point due to improved operating performance.

The price increase we announced near the end of the first quarter should be fully implemented by the end of this second quarter. However additional raw material prices are predicted for the industry.

Selling and administrative expenses were down $835,000 due to lower sales volume and cost control. The percentage comparison was 26.8% versus 26.6%. Operating income was 2.2% of sales in 2008 versus 2.6% a year ago. Interest expense declined $81,000 in the first quarter due to lower interest rates. Interest expense for the full year of 2008 is expected to be approximately $6.2 million.

In the first quarter our effective income tax rate was 46.1%, compared with 38.3% a year ago. The 2008 effective income tax rate was above the expected 36% annual rate, due to the effect of a small $15,000 adjustment to our [tax] contingency reserve.

Earnings per diluted share was $0.01 versus $0.02 a year ago.

Looking at the balance sheet, total debt was $94.3 million or 40.1% total capitalization at the end of the first quarter, up from $88.6 million or 38.4% of total capitalization at the end of 2007. The increase in total debt is principally due to seasonal working capital requirements and an increase in raw material inventories.

Total debt is expected to increase slightly in the second and third quarters of this year and decline to the mid to high $80 million range by the end of 2008.

Capital expenditures were $2.9 million in the first quarter and depreciation and amortization was $3.5 million. We expect fiscal 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 first quarter, we repurchased approximately 138,000 shares of common stock at an average price per share of $8.26. Approximately 32,000 additional shares at an average price of $8.13 were purchased in the second quarter through last Friday. Approximately 7 million remains available for purchase of our common stock under our $10 million repurchase authorization.

Thank you, Gary. The residential market remains difficult and the industry is trying to determine when business will improve. The normal spring selling season does not appear to have changed the dynamics at retail, and reports continue to be pessimistic.

It also appears that raw material increases will make another round of carpet price increases inevitable late second quarter. As we have discussed previously, we continue to introduce new products to the market and believe we can continue to gain market share. We are getting new product into the marketplace on a timely basis and are experiencing a strong response to our new wool collections at Masland and Fabrica. Dixie Home's Lifestyles Collection and Home and Office Collection are also helping us gain market share.

The commercial market was up slightly, 1.3% for the industry. The growth was driven by the tile business. Our commercial business grew over 10% in the first quarter and tile continued to lead the way. Our Broadloom products also grouped and we are clearly outperforming the industry. We have a large number of new products and, just as in our residential businesses, have new growth initiatives.

Despite the issues in the marketplace, we expect improved sales volumes during this second quarter as a result of the normal seasonality of the carpet industry and our business.

Our carpet sales so far in April through last week were basically flat. However, a year ago Easter was in early April so in essence we are running slightly behind year ago levels. The residential business should improve in the last half of the year, however. The rate of growth of commercial carpet sales is expected to slow down.

On balance the rest of the year will continue to be a challenging period for our industry. Consequently we will keep our capital expenditures at a lower level than last year and under our depreciation level. We also are acting aggressively to take cost out of our system. Numerous cost reduction plans are in place and others are being considered, dependent upon the severity of the downturn and the timing of the recovery.

In addition we are reducing inventory until we see an improvement in the top line. Fortunately the upper end of the market is performing better than the market in general, and has been responsive to new innovative product styling.

At this time we would be happy to open up the calls to questions.

(OPERATOR INSTRUCTIONS) Todd Schwartzman with Sidoti & Company.

Good morning. What color can you give us now regarding cost-cutting moves?

We are in the middle of a cost reduction effort that is not fully implemented and gelled yet. Give you a little color. In terms of salary -- salaries we will be delaying salary increases. We are going through a freezing of new hiring for jobs that have been vacated and we are also going through job reductions.

The net effect of this will be to reduce our number of associates by about 8% and this should be accomplished in the next couple -- finished in the next couple of weeks. We are also looking at other areas of cost reduction in almost every part of the Company. We do anticipate that this will obviously have a major impact on us with those kinds of reductions.

Can you put some numbers to that full year run rate in terms of savings?

I would rather not do that at this time. We have not announced anything internally with a number on it. I would be happy to speak to that later, but it's clearly something that we feel will have a significant impact and, quite honestly, we don't think this will impact our ability to respond if business does improve significantly.

Based on your assumptions now regarding raw material pricing and your ability to pass that on for the balance of the year, relative to the first quarter gross margin, how do you see the rest of 2008 shaking out?

As you know we had a price increase in raw materials during the quarter and then, subsequently, had a price increase of our products which will become fully effective in the second quarter. So we were adversely impacted somewhat by raw material price increases in the first quarter. Being on LIFO, those costs flow through immediately.

We believe we have had increases, additional increases in latex and carpet backing; and we believe there will be another increase of raw material, nylon principally, late in the second quarter and we think there will also -- we will have a price increase on carpet in the industry, late in the second quarter.

Again, there will be some delay in recouping the cost increases, but typically, we are able to recoup those and build in a little bit for future increases. So that's basically how we see it for the remainder of the year.

In terms of the big box channel, what trend did you see throughout the quarter, particularly was there any change for better or for worse in the latter half of March and what has transpired thus far in April?

Basically what we are seeing is a reverse of a year ago. If you will recall, a year ago, we were dramatically off with the big boxes. This year so far we are up with the big boxes and that has continued through April.

And that was pretty relatively even throughout January, February, March?

I'm not sure what your question is.

What -- the pacing of that improvement, was that pretty much -- that improvement uniform throughout the quarter or did it -- were there -- was it relatively choppy?

I would say relatively uniform, but any time you are dealing with the big boxes there are -- there seem to be times when they are advertising and this year and they weren't last year or vice versa. But basically we are seeing the ongoing business up from a year ago in the first quarter and in April.

And on the commercial side, have you seen anything in the way of order cancellations?

We have not seen any order cancellations on the contract or commercial side. I do think anecdotally we are hearing that in the A&D community some people are laying some of their staff off. Not huge layoffs, but that the activity level has slowed somewhat. It was pretty feverish prior to that.

So I think most people looking at that business and, as we've stated, we think toward the end of the year that business will level off and not grow as it has in the last couple of years.

Also within Commercial, are there pockets of strength or weakness that you could speak to, with respect to geography or customer categories?

It is not as geographically specific as the Residential business is. The Residential business, the West Coast and Florida, are clearly the weak spots. From a commercial standpoint, it is not -- we couldn't point to one area and say that it is particularly weak or particularly strong. It seems to be more -- less specific to the geography and the residential climate.

Sam Darkatsh with Raymond James.

You had about $70 million in sales this quarter and it was roughly breakeven. What with your new cost containment initiatives, at least on the drawing board, what do you suspect that your new breakeven level will be on a quarterly or annual basis to try and give us a little bit of a sense of the profitability of the whole enterprise at this point?

I'm not going to try to duck your question, but let me clarify. We have already started moving on these cost reductions. It is not something that's just on the drawing board. Action has been taken on a significant portion of it and there's more action to be taken.

Clearly if we were at breakeven in the first quarter, one would anticipate everything else being equal in terms of raw material pricing and our carpet prices and so forth that, with these reductions, that would be lowered somewhat. I cannot give you an exact figure today.

Meaningfully so? I mean $60 million, $65 million or would it be perhaps a little less than that? Ballpark, I'm just looking for directionally.

I would think that you would be -- that if you are talking that kind of decline that the cost reductions would not be enough to offset that. But let's remember, first quarter is our most difficult quarter. Always our slowest quarter. It usually is about 22% of our annual volume and typically that as comparing to a year ago, it was the most difficult quarter for us and I think you'll say that almost every year. So we are already seeing a higher level of business activity in April.

Not as -- as I mentioned we are flat with last year so far, but we do anticipate second quarter will be somewhat behind last year's second quarter. But that was a big increase from first quarter.

Your capacity utilization now versus where you expected to be at peak this year. It sounds like you are going to take a little bit of production down near term because of the inventories, but at peak this year, whether it's third quarter or fourth quarter where that might be versus where you are now? Help us understand that and would there be the any hard capacity coming offline?

No. No hard capacity coming offline. Not any units being shut down or anything of that sort. We would love to have our capacity tested. I think we could respond very well, quickly and in pretty significant volumes.

Where would you suppose this year at peak, your -- I'm guessing your Yarn capacity is probably where you have the highest utilization rates. Where might they be at peak this year?

At peak? Maybe in the 70% range. But there again we can add capacity pretty quickly there. We have the building, we have the heat setting equipment, and simply would be adding cabling capacity. So we don't really foresee any major capacity constraints for the next several years.

I guess what my point was is that would there be a point where not so much where your capacity would be constrained, but you would feel that you would need to take some hard capacity off-line? What is your opportunity to do so? What would have to happen for that sort of decision to be made?

I don't know what you mean by hard capacity off-line, but when we reduced our number of people by 8%, effectively you are taking some capacity out throughout the organization.

On the labor side, but I was thinking about on the facility side.

We are down a very few facilities, so it simply means standing some equipment not taking it off-line or in any way where it can't be reused.

Got you. The cost-cutting initiatives that you have undertaken and perspectively, could you give us a magnitude of the charge, if any, that you are looking to incur near term?

We will not incur any charge.

This is primarily direct labor not either indirect or white-collar?

It's all of the above plus other items, marketing. We are not cutting salespeople. We are not cutting back on the amount of new products going into the field. Those have really been determined for the year. But every other category of expense is being examined and reviewed and acted on.

But not to the extent where there would be a need for the charge either with severance costs or what have you?

No. There will not be a significant charge of any sort.

Got you. And you mentioned that April was flat, but it sounds like you have a fairly easy comparison perhaps because of the holiday. May and June become much more difficult comparisons or you are just forecasting things to be a little more difficult because of the holiday in April? Help us understand what you are thinking about May and June versus what you're seeing in April?

I appreciate you saying we were estimating not guessing. I could tell you almost said guessing.

I didn't say that though.

That's right. We just think the second quarter is a tough quarter. It is going -- a year ago quarter was pretty strong in therefore we think it is going to be difficult to be at second quarter levels. That was the strongest quarter for us last year so that's really why we don't think we will be at those levels. Getting into the third and fourth quarter, the comparisons get easier and the fact that we had last year in the first part of April the Easter holiday and did not this year means that we are probably running a little behind, and we anticipate running behind in the second quarter, but think in the third and fourth that we ought to get closer to year ago levels.

Final questions and thin I will defer to others. The majority of your debt, as I recall, comes due in 2010. Is that correct, Gary?

Yes.

Are there covenants attached to them where we, as investors, may need to be cognizant of? Or how does the -- how are the debt constraints determined?

We don't have any maintenance type financial covenants in any of our debt facilities.

John Baugh with Stifel Nicolaus.

Good morning. This is actually Stanley sitting in for John. Quick questions on the raw material side. Can you comment specifically on nylon?

First of all I already mentioned that both latex and backing have gone up since the last price increase and it is our sense with where oil is and what we're hearing in the marketplace that others are considering price increases, both our suppliers and our competitors. We would anticipate there will probably be an increase in raw material pricing late second quarter, probably 1st of June, something like that and probably carpet price increases at the same time.

Perfect. As far as the inventories being up 10% in the quarter, can you give us a little more color on that and maybe the composition breakdown, raw materials versus finished goods, so forth?

The bulk of that was in raw material. We were anticipating a little higher level of business activity and we were also building inventory in our raw material in order to get our new products to market more quickly. We have accomplished that and, at this point, we are reducing our raw material inventory.

And, finally, can you discuss the balancing act between the buybacks $7 million that you have remaining on the authorization and debt levels and of how aggressive given where the stocks trading net right now should we be expecting going forward?

At 40% debt to total capitalization, we are very comfortable and we would continue buying at the prices as we see out there today which are about tangible with the value.

The way the restrictions are, it is difficult to buy a whole lot of shares. So without some private transaction, $1 million worth (inaudible) quarter is about the maximum we can buy.

Perfect. Thank you very much. Good luck.

(OPERATOR INSTRUCTIONS). [Tom Lewis] with Century Management.

Good morning. Yes, my questions have been substantially answered, but could you just tell us, in terms of managing through this weak environment and the prospect of maybe -- maybe commercial slows way down before residential starts to get better, it is good to hear that you have a cost-cutting effort underway. But how far along are you in your ability to manage just by adjusting shifts and in terms of how you schedule shifts and seasonal downtime and stuff like that? Have you pretty much played that out or is there more room to go without having to stand up equipment?

Tom, I'm not quite sure how to answer that. We have a fair amount of flexibility in all of our facilities to either cut back hours or cut back days or run selective equipment and not run other. So there's a lot of flexibility built in there.

But my point, my question is, have you used some of that, half of that, most of that flexibility? Or could you manage additional slowness in that way, relative to what we have been slogging through here for the last three or four quarters already?

I can't answer that quantitatively. We basically have a lot of flexibility but, obviously, when we get to these levels of production your fixed costs become a bigger and bigger factor. I am not as concerned about the variable costs as I am the fixed costs at that point.

All right. Fair enough. Thanks.

Arnold Brief with Goldsmith & Harris.

Three short ones. Hopefully, they are short. I will give them all at once because they are separate issues. One, just curious if you are looking for an increase in raw material costs and as we go through this quarter, why would you want to be cutting inventories? I think you would be glad to have the inventories you have if not increasing them.

Two, could you discuss mix at all and the impact on the margins as you go out through this year? I'm thinking you've got a lot of cost currents. Fabrica, which is I think strong on the West Coast is probably getting killed out there in this high margin. Dixie is growing a little bit which is low margin. On the other hand, tiles are improving, wool is probably a positive impact. Could you discuss trends and mix a little bit and how it is going to affect the margins for the rest of year?

Finally, a question which I should remember, but I don't. What percentage of your raw material -- to what degree do you do your own [extrusion] and are there any plans of increasing it?

First of all we have no extrusion ourselves. We sold that one right before we sold our North Georgia operations. It just did not fit into our branded strategy. So that's a nonissue.

On inventory, inventories' prices on raw material are going up. However we feel like we are long on raw material and we will be addressing that as we go forward.

The next question is a good one. Let me say first of all, Fabrica is located on the West Coast but it is truly national in its distribution. It is not disproportionately West Coast and, therefore, is not being hit significantly harder than the industry totally.

Tile is growing more rapidly than in our Broadloom commercial business which -- tile is a higher priced product. Wool is growing disproportionately. The introductions of the Masland and Fabrica wool products has been exceptionally good and better than planned; and we are seeing in the very high-end that consumers are still buying and so our pricing there is well above our pricing in the nylon category.

You put all of this together and, basically, our average selling price per square yard is still in that $20 to $21 a square yard. Hasn't changed significantly. Still about three times the industry average. So I don't think mix is going to dramatically change our margins going forward.

Gentlemen, with no additional questions in the queue, I would like to turn the conference back over to Dan Frierson.

Thank you, Katy, and we certainly appreciate all of you being with us today. We are going through a very difficult period as an industry. We are trying to address that internally with productions. Obviously, if things get worse we will work harder at that and look at additional cuts. But we do feel like we can continue to outperform the industry. The acceptance of our new products and particularly our higher end products has been really gratifying as we have gone through the first quarter. We certainly hope and believe that we can continue to outperform the industry going forward.

Thank you and we will talk to you next quarter.

Thank you. That will conclude our conference call today. We appreciate your participation. You may disconnect at this time.