Dixie Group Inc (DXYN) 2008 Q3 法說會逐字稿

Good day and welcome to The Dixie Group third quarter 2008 conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to the Chairman and Chief Executive Officer, Mr. Dan Frierson. Please go ahead, sir.

Thank you, Dustin, and welcome to our third quarter conference call. I have with me Gary Harmon, our Chief Financial Officer, and Gene Lasater, our Corporate Controller. Our Safe Harbor statement is included by reference. You will find it on the website and in the press release.

The third quarter began with the perfect storm, much higher raw material prices and significantly lower unit volume. We increased our carpet prices to reflect the large June and July raw material increases. However, the increases were not fully implemented until the fourth quarter. The unit volume decreases lead to lower operating efficiencies and higher unabsorbed fixed costs.

Our carpet sales declined 10.7% in the third quarter compared with the third quarter a year ago. Residential carpet sales were down 12.1% and commercial carpet was down 8.5%. Due to the large reduction in sales, we developed and began implementing the consolidation and cost reduction plans described in our press release. We feel these plans will not compromise our ability to grow in the future.

At this time I would ask Gary Harmon to give you our financial review, after which I will make some comments about current market conditions. Gary?

Thank you, Dan. Starting out looking at sales. Third quarter of sales was $72.9 million, down to 11.4%. For the nine months sales were at $220.8 million, down 8.4%. For the quarter total carpet sales were down 10.7% with commercial products down 8.5% and residential products down 12.1%. For the nine months total carpet sales were down 7.1% with commercial products down 1.6% and residential products down 10.2%.

Third quarter residential and commercial sales continued to decline due to contracting residential and commercial building, credit conditions, and consumer confidence. We have not seen an improvement in sales in October for this year.

Looking at gross margins, third quarter gross margins were 25.9% versus 29.7% a year ago. The nine month comparison was 28.1% versus 30.1%. Margins were negatively affected by significantly higher raw material and energy costs and lower unit volume. Raw material and energy costs increased over 12% this year with approximately two-thirds of this increase occurring in June and July. Effectively, the cost increased over 8% in the third quarter.

The higher cost is reflected by the change in our life flow reserve which increased $3 million in the third quarter and $5.8 million for the first nine months of this year. We increased our selling prices late in the first quarter and again at the end of June and July to recoup this higher cost. The increased cost will pressure margins until the new selling prices are fully in place in the fourth quarter of this year.

Decreased unit volume lead to lower operating efficiencies and higher unabsorbed fixed costs. In response to the difficult conditions we began implementing a plan to consolidate operations and make organizational changes to reduce staff and expenses. Both our East Coast and West Coast tufting, dying, and finishing operations are being consolidated. The East Coast operations will be consolidated in our Atmore, Alabama, facility and our West Coast operations will be consolidated into our Susan Street, Santa Anna, California, facility.

Our Eton, Georgia facility will continue to be a distribution center and produce samples. Our leased facility in Santa Ana, California, will be vacated. The facility consolidations and organizational changes should reduce total employment by approximately 6% on top of the 9% staffing reductions that took place during the second quarter of this year.

The consolidations are expected to be completed in the first quarter of next year and cost approximately $3 million to $3.5 million of which approximately $600,000 will be non-cash. Approximately 60% of this cost will be incurred in the fourth quarter with the remainder in the first quarter of next year. The payback on this investment should be less than one year.

Selling and administrative expenses in the third quarter comparison was 25.7% versus 23.5% a year ago. The nine months comparison was 25.7% versus 24.7%. Selling and administrative expenses were reduced $638,000 in the third quarter and $2.9 million for the first nine months compared to the same period in the prior year. The lower selling and administrative expenses reflect tighter control of discretionary spending, but increased as a percentage of sales due to slower sales volume.

Operating income was essentially at breakeven in the third quarter down from 6.2% a year ago. The nine-month comparison was 2.3% versus 5.3%. Modular carpet tile and wool products continue to be very positive. Both of these product groups are profitable and continue to grow rapidly.

Looking at interest expense, interest expense decreased $130,000 in the third quarter and $425,000 for the first nine months due to lower interest rates. Interest expense for the full year is now expected to be approximately $6.1 million.

Our effective income tax rate was a benefit of 43.3% in the third quarter and a provision of 29.1% for the first nine months of 2008. The effective income tax rate differs from the expected 36.5% rate due to the effect of permanent differences on lower taxable income. The effective income tax rate is expected to be approximately 30% in the fourth quarter of this year.

Diluted earnings per share, the quarterly comparison, was a $0.06 loss versus $0.17 a year ago. The nine-month comparison was $0.05 versus $0.39 a year ago.

Looking at our balance sheet we ended the second quarter with total debt of $93.9 million or 40% of total capitalization. That is seasonally up $5.3 million from the end of 2007. We expect that to decline to the $89 million to $91 million range by year end.

Last week we amended our $84.6 million senior loan and security agreement to extend its term through May 11, 2013. The available credit and structural agreement are substantially unchanged but interest rates applicable to borrowings under the credit facility were increased approximately 0.5% to more current market rates. The facility continues to not have ongoing financial covenants.

Capital expenditures were $6.3 million during the first nine months of 2008 and depreciation and amortization was $10.4 million. We expect capital expenditures for the 2008 year to be approximately $11 million while depreciation and amortization is expected to be approximately $13.7 million. Our preliminary estimate of capital expenditures for 2009 is approximately $7 million to $8 million and depreciation and amortization should be a little over $14 million.

We purchased 237,186 shares of our common stock at an average price of $5.97 per share in the third quarter. We discontinued our 10b-18 common stock repurchase plan at the end of the third quarter of this year. Approximately $5 million remains available for common stock repurchases under our $10 million repurchase authorization. While we have the ability to continue stock repurchases under our credit agreement, we have elected to discontinue such purposes to maintain a relatively conservative capital structure during this period of uncertainty.

Thank you, Gary. Over the last five years Dixie's sales have continued to outperform the industry. However, in the third quarter Dixie sales declined more than those in the industry. We believe this decline was due partially to a number of competitors' promotional sales made early in the quarter. We also believe the multi-family segment has held up better than other parts of the residential market and we do not participate in this lower end part of the market.

Our commercial sales volume was at the same level as the second quarter of the year but down 8.5% from the third quarter of last year, which was our strongest quarter last year. By the end of the quarter all indications are that our level of activity was in line with the industry performance just as it is year-to-date.

The credit crisis along with the housing situation and the slowing of the commercial business are continuing to have an impact on Dixie and the industry as we enter and progress through the fourth quarter. We believe that consolidations and cost reductions which Gary just discussed along with raw material decreases and lower energy costs are expected to return our operations to profitable levels.

While the residential business has declined, we have been pleased with our movement into wool products which have outperformed our expectations and enhanced our position as a market leader. In the commercial market our tile business or modular business has continued to grow and is over twice the size it was a year ago.

Looking forward we are pleased with the extension of our credit agreement. We also will lower our capital expenditures until we experience better conditions. The current year's capital expenditures will be under plan and our expenditures going forward will be at a rate of about 50% of our depreciation and amortization. We will continue evaluating the need for other cost reductions until the market improves.

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

Thank you, sir (Operator Instructions) Jeff Reda, Raymond James.

Good morning, gentlemen. Sam is on the road and wasn't able to make the call. I just have a couple of questions for you. Towards the end of the call you mentioned promotional activity in the quarter. Can you talk a little bit more about that, whether you see that continuing now and what your expectations are for Q4?

The promotional activity I mentioned was earlier in the quarter which was about that time of the price increase in July or right before that. I think as business as weakened and some raw material prices are coming down that you will probably see more promotional sales going forward.

Okay. Second question has to do with the recent pullback in raw materials. I'm wondering if you see any relief at any point along the chain in terms of the yarn products you are buying?

Clearly, we have seen energy reduction as you have seen natural gas come down; that is a big component of our manufacturing. Other raw materials are beginning to come down. I would not say at this time that we have seen major reductions. But if oil stays at the price range it's in today relative where it was just a few months ago I think it's very likely we will see additional raw material decreases.

Thank you.

(Operator Instructions) Arnold Brief, Goldsmith & Harris.

Just two questions, could you give us -- you sort of gave a hint already but could you give us some idea whether you think the -- in this weak economic environment the prices will hold? Or do you think the prices will hold, but will be more promotional activity? Do think on balance the realized prices are going to decline whether it's from promotional activity or just lower pricing?

And secondly, could you give us some idea -- I am sure given the economic environment that the rate of decline in sales has increased. Could you give us some perspective on that? How bad from mid-September to October is versus earlier in the quarter?

Arnie, I think looking at the third quarter probably September was the toughest month. I think that had to do with the whole credit crisis and economic situation, the global economic situation. I would say we really haven't seen much change in that in the October time frame up or down.

In terms of the promotional pricing, obviously as some raw materials have come down, for instance backing material, I think you will see first promotional activity. Depending on the magnitude of the price decreases, at some points you may actually see new introductions being priced more competitively. And the last would be just a general price decrease.

I think it is worth noting and as you can tell from our numbers, we have lost margin as prices have gone up. We would certainly hope to regain that margin as prices come down.

Thank you.

There are currently no further questions in the queue. (Operator Instructions) Tom Lewis, Century Management.

Good morning. Just one thing real quick, I didn't hear clearly, Gary, you said something about payback on the consolidating efforts that you made.

We think it will be less than a year, Tom.

Oh, you were just talking to time as opposed to dollars then?

Well, I was talking to dollars versus the investment.

All right --

$3 million to $3.5 million.

Okay, I think I got you then. Thanks.

Arnold Brief, Goldsmith & Harris.

On the stock buyback, you are producing some cash from the differential between capital expenditures and depreciation. You have indicated you expect to be profitable, I would assume that you expect to be profitable at this lower rate of sales once you are done with the cost cutting. What would prompt you then to go back into the market then to buy stock at this level which is half a book?

Arnie, that would be a Board decision but, obviously, with the global financial situation the way it is I think the desire to be conservative, if that were to change that may change the way we look at that.

Thank you.

And with no further questions I would like to turn the conference back over to Mr. Frierson for any additional or closing comments.

Thank you, Dustin. As we stated earlier, we believe the consolidations and cost reductions will improve our under absorption of fixed costs and the raw material and energy cost reductions will enhance our margins. We will continue to be very cautious about new expenditures until we experience more favorable business conditions. Thank you very much for being with us. Have a good day.

And that does conclude today's conference call. Again, we thank you for your participation and you may disconnect at this time.