Dixie Group Inc (DXYN) 2009 Q1 法說會逐字稿

Good day everyone, and welcome to the Dixie Group, Inc., first quarter 2009 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, Dan Frierson. Please go ahead sir.

Thank you Robby. I have with me today Gary Harmon, are Chief Financial Officer, and Gene Lasater, our Corporate Controller.

Our Safe Harbor statement is included by reference. It's both on the press release and on our website.

As we stated in our fourth quarter conference call, we believed that sales volume would continue climbing during the first quarter and would require us to continue cutting costs. Unfortunately we were correct.

Sales for the first quarter of 2009 were down 33% from the previous year and 23% from the fourth quarter of 2008.

We also stated that if industry conditions continued to deteriorate, we would take additional steps to reduce expenses aggressively and improve liquidity. To improve liquidity we limited production and reduced inventories by 12% from year-end levels and 20% from year-ago levels.

Capital expenditures were only $1 million for the quarter or 29% of depreciation and amortization.

On the cost side we completed the consolidation of our East Coast manufacturing, reduced the level of compensation of all of our exempt salaried associates, and reduced staffing significantly.

Following our valuation of Fabrica's business, we concluded that our customers can best be served by consolidating our Santa Anna tufting plant into our Santa Anna dying, finishing, and distribution facility. The consolidation will trim operations and costs to better align with Fabrica's business activity levels.

All of the actions taken have reduced headcount from early 2008 by 26% and reduced debt from year-end levels by $9.6 million. We continue looking for opportunities to reduce costs and improve liquidity. In April our inventories have continued to decline as has our total debt.

Gary Harmon will review our financial results, after which I will have additional comments on the future. Gary?

Thank you Dan.

Looking at sales, sales were $47.6 million, down 33%, as you indicated. Just looking at carpet sales, they were down 32% with the residential products being down 28% and commercial products down 39%. Sales in April continue to run significantly below prior-year levels, however our business has seen seasonal improvements since the low point in January. April [order] (technical difficulty) [entry] for both residential and commercial products continued to reflect this seasonal improvement.

Our daily sales began declining significantly in August of last year and declined every month through January of this year. The largest decline was in January, which appears to have been the bottom. Sales has improved every month since January.

Another bright spot is our carpet, tile, and wool products, which grew 13% and 74%, respectively in the first quarter versus a year ago.

Looking at gross margins, first quarter gross margins were 20.2% versus 29.1% a year ago. Despite significant reductions in raw material and energy costs and our cost reduction initiatives, our gross margin as a percentage of sales declined due to the effect of much lower production, which had a negative effect on fixed cost absorption and manufacturing efficiencies.

Production was down over 50% in the first quarter compared with the same quarter of a year ago. We reduced production well below sales to reduce inventories. Production should improve going forward due to better sales and smaller inventory reductions.

Expenses associated with our cost reduction plans were $1.6 million in the first quarter. These expenses were primarily to complete the East Coast tufting consolidation and additional severance costs. As Dan indicated, total employment was reduced to an additional 13% in the first quarter, primarily late in March, bringing total employment down by 26% since the beginning of 2008.

The estimated cost for the Santa Ana consolidation and any remaining expenses for the East Coast consolidation are expected to be approximately $400,000, which should be reported in the second and third quarters of this year.

Selling and administrative expenses declined $3.3 million or 18% compared with the first quarter of 2008 due to our cost reduction initiatives and lower sales. However, as a percentage of sales, these expenses increased due to the low sales volume. The first quarter percentage comparison was 32.8% versus 26.8%, year ago. The first-quarter operating loss reflected the effect of lower sales volume and $33 million of impairment of goodwill and consolidation and severance costs, of which $31.4 million was noncash. Excluding the usual items, the loss was $6.1 million versus a profit of $1.5 million in the prior year.

Interest expense was slightly up in the first quarter due to higher interest rates. Interest expense for 2009 is now expected to be slightly below $6 million

Our effective income tax rate was 12.2% in the first quarter, primarily due to the nondeductible goodwill impairment. We expect the effective tax rate to be approximately 36% going forward.

Diluted earnings per share from continuing operations, excluding the unusual items, the first-quarter comparison was a loss of $0.48 versus a $0.01 profit a year ago. Including the unusual items, the comparison was a loss of $2.90 versus $0.01 profit.

Looking at our balance sheet, we ended the first quarter with $84.3 million of debt or 53.9% of total capitalization. That's down $9.6 million from the end of 2008.

We typically consume cash in the first quarter, but that was not the case this year.

We have reduced debt over $3 million so far in [April] (technical difficulty). The lower debt reflects a $14.1 million reduction in working capital and lower capital expenditures.

Inventories were down $9.3 million compared with the end of 2008 and $16.4 million compared with first-quarter of a year ago. Our goal is to reduce inventories another $5 million to $6 million this year.

Receivables were down $9.8 million. Of that decrease, trade receivables were down $3.2 million, income tax receivables were down $2.9 million, and miscellaneous receivables were down $3.7 million.

Capital expenditures were $1 million in the first quarter, and depreciation and amortization was $3.6 million. We expect capital expenditures to be $7 million for 2009, or about half of our depreciation and amortization. Our maintenance capital expenditure level in the $3 million to $4 million range.

We expect to reduce debt by $12 million to $15 million this year.

Our bad debt write-offs were up marginally from last year in the first quarter, and we have seen more customers experiencing financial difficulties in recent months. Our bad debt reserve was increased $72,000 in the first quarter.

Thank you Gary. As we have stated often, our high-end business activity seems to be driven by consumer confidence and the stock market. During the first quarter both the market and consumer confidence seemed to hit bottom. And the good news is that both have improved since then.

Also the first quarter is traditionally our slowest time of the year. As we look at current order entry, we see better activity levels as well as seasonal improvement. While business continues well behind year-ago levels, it is definitely better than the first-quarter levels. Additionally, the lack of absorption of fixed costs due to the large inventory reduction will not repeat in the second quarter.

Looking at the marketplace, we are experiencing an excellent reception for new residential products. The Masland Avenue collection, which will enter the market in the second quarter, is a new category of product produced on new technology. Our Fabrica and Masland wool collections continue to grow despite a very difficult environment, and the new polyester products have reenergized our Dixie Home business in the $10 to 15 price range.

On the commercial side, the order entry and backlog continue to improve from first-quarter levels, and modular carpet continues to show positive growth.

As a company our pricing levels continue to be about $2 above year-ago levels. Increased sales and higher prices along with lower raw material, energy, and internal costs should improve our results.

Our plan is to continue identifying cost reductions, manage for improved cash flow, and return to profitable operations in 2009.

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

(Operator Instructions) Sam Darkatsh, Raymond James.

Good morning everyone. This is actually T. J. [McConville] filling in for Sam this morning. Thanks for taking my question. The first question I had was for you, Gary. You talked about the daily sales rate improving throughout the quarter and since January. Any quantification on that or maybe an order of magnitude of how it progressed throughout the quarter? And maybe what we expect in the coming couple of months?

I think what we have seen so far is the normal type of seasonal improvement that we have historically seen over the years in our sales. Our order entry has actually moved up higher than those levels.

And can you remind us again, on the -- on both plant consolidations here what type of anticipated savings that we are looking at for those? Potentially?

It's fairly significant. It's really hard to quantify unless you are preparing -- comparing it to a specific period because it has been going on for quite a while. But I think we would say that all of our savings put together versus the first quarter going forward, that we think we will probably see in the $3 million to $5 million range, depending on sales volume levels.

Okay. Great. That's (multiple speakers)

Per quarter. Per quarter.

Okay. I was going to say, is that per quarter? That's really helpful. I appreciate that.

Now as far as production, I know you had mentioned that you had anticipated returning as sales improve? When do you think, if you would venture a guess or entertain it, that the production would be in line with the sales rate?

T. J., we're very close to that today. Earlier in April we did reduce inventories further. We probably will continue to reduce them gradually, but we are essentially at our sales rate or right below it today and would anticipate staying there. Not only did we have much lower production, but we also had much smaller runs or lot sizes. So both of those things have been changed now and should not be adversely impacting second quarter.

Okay. And then on the -- both the raw material deflation that we saw, is that -- are you seeing any impact on pricing that you're having to pass along there, or is that flowing through to you guys directly?

We have not seen any major change in pricing in the marketplace. I think the lower-priced products tend to be more competitive as you would expect, and there's probably been more movement there. But overall in the marketplace there has not been much movement, and of course I think everybody in the industry is suffering from unobserved fixed costs, which have tended to bring down margins even though raw materials have gone down.

All right. And any quantification between those two things in the quarter? I know you said that the fixed costs certainly more than offset the raw materials, but any order of magnitude on those two items and their impact?

No. But I think the $3 million to $5 million per quarter that Gary mentioned earlier included raw material as well as other cost reductions.

All right. All right guys. Those were my questions. I appreciate it. And best of luck in the coming quarters here.

Tom Lewis, High Road Value.

Yes. Good morning. first question. Could you help me out with a little bit -- how important is your credit, if you will, with your customers? I'm curious about the degree to which they effectively -- they need your credit to do business, as opposed to getting paid in advance for the floor covering that's eventually going to be installed. Any feel for how that is or how it compares to how some of the more mass products companies are able to operate?

Tom, I'm not sure what your question is. But remember, we are basically in the upper-end of the market and do business -- mostly with larger, well-established customers. Now, obviously there are people that are having financial issues, but it has not been a major issue for us to date.

Okay. So there has been some need to increase your allowance for bad debt, but you wouldn't deem it chronic.

No, I would not. We actually did increase it in first quarter, but our experience in '08 was better than our experience in '07.

Okay. Is there anything you can say about either relative to where it was or in absolute terms where your breakeven level revenues are now?

We have made so many changes in so many areas that -- and I think that would -- it would really get very close to try and making predictions, which we don't do. But again, we feel like we will return to profitability in '09, and we continue identifying and implementing cost reductions as we go forward.

Okay. And just with respect to what you are doing in (technical difficulty) Santa Ana. Is that going to be an effective reduction in capacity? Or maybe (technical difficulty) put another way, can you talk about how much additional -- how much room for growth might be left once you complete this consolidation?

Tom, there will be plenty of room for growth. What this does, it gets us out of a leased facility and totally into an owned facility, so we will obviously want to sublet the -- our Pullman Street plant, and that would be a savings to us, plus the savings of just putting everything into one operation, and then that will entail some reductions, which mostly have already taken place. But in terms of capacity, I don't foresee that being an issue at all.

(Operator Instructions) Arnold Brief, Goldsmith & Harris.

You may have answered one of my questions. The Santa Ana facility that you're subletting, if it's not sublet could you give us some idea of what the ongoing cost is? And how long the lease runs? And are you getting any cash out of this move at all?

Arnie, the annual cost of that lease is about $800,000 a year, and I think there's about 3.5 years left on it.

But yes, we have gotten -- we have -- combining operations allows us to reduce our costs and our headcount as well, so there are other savings in addition to the lease cost reduction.

Is there any real hope of subletting this facility?

Arnie, there is always hope, but as you know or are probably aware, that in today's environment I wouldn't think that will happen quickly.

Could you give us some idea of when all the savings have been realized, what is your run rate in SG&A? (technical difficulty) make any -- work off the first-quarter volume (multiple speakers)

Obviously, it's going to determine volume, but you know I think at current levels, in the $16 million range a quarter is probably what we would expect next quarter, given expecting some higher sales.

So you have quite a lot of work to do in terms of getting your volume and gross margins up to a breakeven level, then?

No comment on it?

Well, that's going to depend on sales levels. With the $3 million to $5 million reduction in costs, we would obviously need higher sales than we have in the first quarter.

I just want to be sure, you said you had no debt covenants relating to --?

We don't have any financial covenants.

You don't anticipate any problems, given what you've indicated on depreciation and inventory reductions, even on a breakeven basis, you'd be able to pay your interest expense?

Yes. We don't -- at this point we do not anticipate a problem with our debt.

(Operator Instructions). It appears at this time we have no further questions in queue.

Well, we appreciate everyone being with us today. There were a couple of filings that were made recently that I would like to just refer to. We have a new shareholder with 12% ownership of the company, and that is Bob Shaw. Bob has been interested in Dixie for a number of years. He has been a shareholder for a number of years. We do business with a company that he is an investor in, and we welcome his interest and look forward to working closely with somebody who is very knowledgeable of the industry. He's very much as an innovator, and we are, as I say, working closely with a company in which he has an interest today.

We appreciate everyone being with us today. We look forward to better business in the second quarter.

Thank you very much.

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