Dixie Group Inc (DXYN) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Dixie Group Second Quarter 2009 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd 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 everyone to our second quarter conference call. I have with me here today Gary Harmon our Chief Financial Officer; and Gene Lasater our Corporate Controller.

Our Safe Harbor statement is included by a reference to our website and our press release.

In the second quarter, our sales continued to trail year-ago levels by over 30%. However, the financial results improved from first quarter due to cost reductions and higher sales rate than the first quarter and better plant utilization, due to a smaller inventory reduction. It appears to me that business activity will not improve quickly; therefore, we are embarking on a realignment of our organizational structure. We will combine our three residential corporate units into one business with three distinct brands. The result will mean our residential business will be organized much like our commercial business and more like the rest of the industry.

Under the new structure, Kennedy Frierson will become Chief Operating Officer of the Company with responsibility for all sales and manufacturing; Paul Comiskey will assume the leadership of our Residential Sales and Marketing; and Ken Dempsey will continue leading Commercial Sales and Marketing. Gary Harmon has announced his plans to retire as Chief Financial Officer at the end of the third quarter and will be replaced by John Faulkner at that time. Gary has agreed to continue as a consultant to Dixie for a two-year period following his retirement. David Polley will be retiring from Dixie in the fourth quarter of this year.

The new structure should enable us to lower cost yet improve responsiveness to our customers' changing needs and market conditions, as well as enhance our operating capability. These and other actions will reduce costs for 2010 by $8 million to $10 million from our current levels.

At this time, I would like to ask Gary Harmon to review our financial results, after which I will have additional comments about the future.

Thank you, Dan. Looking at sales, sales were $52.6 million in the second quarter and $100.2 million for the first six months, both down 32% from a year ago. For the quarter, total carpet sales were down 31.6%, with commercial products down 36.5%, and residential products down 28.7%.

For the six months, total carpet sales were down 31.9%, with commercial products down 37.6%, and residential products down 28.3%. Sales grew seasonally in the second quarter, up 10% from the first quarter level; however, market weakness continues and we cannot predict when volume will improve.

Looking at gross margin, the second quarter gross margin was 27.3% - that's up from 20.2% in the first quarter of 2009, but down from 29.2% in the second quarter a year ago. The six months comparison was 23.9% versus 29.2%. The improved gross margins compared to the first quarter of this year reflect the effects of our cost reduction initiatives and higher levels of production due to higher sales and less inventory reductions.

Compared with the prior year, gross margins declined despite significant reduction in raw material, energy cost, and our cost reduction initiatives, due to much lower production levels which had a negative impact on fixed cost absorption and manufacturing efficiencies.

Unit carpet production was down 28% in the second quarter and 40% for the first six months due to lower sales and inventories. Inventories were reduced $2.2 million in the second quarter and $11.5 million for the first six months of this year. Lower inventories also resulted in LIFO tier liquidations which improved gross margin about $1 million in the second quarter and for the first six months of 2009.

Expenses associated with our cost reduction initiative in 2009 were $117,000 in the second quarter and $1.7 million for the first six months. These expenses were primarily associated with the consolidation of our East Coast tufting facilities which is now complete. The West Coast facilities' consolidation should be complete by year-end. Expenses to complete this consolidation should be approximately $300,000.

Expenses to realign our organizational restructure and then combine our three residential carpet units are expected to be in the $500,000 to $700,000 range and incurred during the last half of this year. We expect this initiative and other cost reductions to reduce expenses $8 million to $10 million in 2010 compared to current expense levels.

Selling and administrative expenses -- second quarter percentage comparison was 28.3% versus 24.7%. For the six month, the comparison was 30.4% versus 25.7%. Selling and administrative expenses were reduced $4.2 million in the second quarter and $7.5 million for the first six months compared with the prior year. These expenses reflect the effect of our cost reduction initiatives, lower and variable selling expenses, and tight control of discretionary spending. As a percentage of sales, these expenses increased due to the lower sales volume.

Looking at our operating results, the $458,000 operating loss in the second quarter was significantly improved compared to the $39.2 million operating loss in the first quarter of 2009, but down from $3.4 million of operating profit in the second quarter a year ago. The second quarter of 2009 results include the $117,000 of consolidation and severance expenses and the $1 million of income from the LIFO tier liquidations. The first quarter of 2009 operating loss included $33 million of goodwill write-offs and consolidations and severance expenses.

The operating loss for the first six months of 2009 was $39.6 million, compared with an operating profit of $5 million in the first six months a year ago. The 2009 results included $1.7 million of consolidation and severance expenses and $31.4 million of non-cash goodwill write-offs and $1 million of income from LIFO tier liquidations.

Interest expense was down slightly in 2009 due to lower levels of debt and capitalized interest expense in 2008 that did not repeat this year. Interest expense for the full year is expected to be approximately $5.7 million.

Looking at our income tax, our effective income tax benefit rate was 46.9% in the second quarter and 13.7% for the first six months of 2009. The effective income tax rate differs from our expected 36% rate principally due to adjustments in our tax valuation reserves in the second quarter and the non-deductible goodwill write-off for the six months of 2009. Going forward, we expect our income tax rate to be approximately 36% during the last half of the year.

Diluted earnings per share -- the quarter comparison was a $0.08 loss, this is from continuing operations versus $0.10 profit. The six months comparison was $2.97 loss versus $0.11 profit.

Looking at our balance sheet, we ended the second quarter with total debt of $79.9 million, that's down $13.9 million from the end of 2008 and $4.4 million from the end of first quarter. We expect debt to decline in the last half of the year to the low to mid $70 million range.

In July, we voluntarily reduced the size of our revolving credit facility from $70 million to $55 million to better size the facility to our anticipated levels of trade, accounts receivables, and inventory. This reduction did not affect and is not anticipated to affect our available borrowing capacity but should reduce bank fees by approximately $50,000 annually.

Capital expenditures were $1.8 million during the first six months of 2009 and depreciation and amortization was $7.1 million. We expect capital expenditures for the 2009 year to be approximately $6 million while depreciation and amortization is expected to be approximately $14 million. Expenditures this year will be split between new tufting equipment and maintenance capital expenditures.

Thank you, Gary. Although the industry is experiencing a very difficult period, and we see no immediate signs of recovery, we are encouraged by several factors. First of all, our modular tile business is doing much better than our broadloom commercial tile and has been profitable since the third quarter of 2007.

The Masland and Fabrica wool collections have been accepted broadly and sales and profitability there have exceeded our expectations. With Dixie Home, the lifestyles collection, which is a group of patterned nylon products and polyester products has been growing in the environment which we've been experiencing recently. Our Masland Avenue collection, which is the new technology which simulates woven appearance, has just gotten into the marketplace and has had excellent acceptance.

The realignment of our organizational structure in the last half of this year obviously will reduce our cost significantly and I think make us a more reflective and positive supplier to our customers.

Operationally, we continue to show improvement in our manufacturing and quality. We also have invested heavily in the last couple of years so that we are able to lower our capital expenditures as we go forward. As Gary mentioned, we reduced debt $13.9 million in 2009 and our capital expenditures this year will be less that half of our depreciation and amortization.

And we also believe that the reduction that we've seen in inventories will continue in the last half of this year and into next year. Our capital expenditures for 2010 are anticipated to be about $3 million with these additional inventory reductions. We feel that we have positioned the Company to endure the downturn and prosper when business improves.

At this time, we would like to open up the call, if there are any questions.

(Operator Instructions). And we do have a question today from Sam Darkatsh, Raymond James.

Good morning Dan, good morning Gary.

Good morning Sam.

Good morning Sam.

Few questions here -- number one, the $8 million to $10 million in savings, ballpark, how much of that do you think is structural and permit and how much of that do you think is variable with sales?

Sam, we're not prepared to do that today. This is a process that we're going through. Most of this is structural, although some of it -- if better business returned, obviously, may not be as impactful, but we will be, for instance, cutting our nine Corporate Vice Presidents to six. There are a number of associates that will be impacted here, but most of this, we feel, will be felt late fourth quarter and in 2010.

Okay. Second question, could you talk about what you're seeing in terms of raw materials, both on an input cost trend basis, and then also, as it relates to any further LIFO inventory adjustments that might be required?

Sam, we have seen a few increases in raw material whether they are permanent or not is certainly up for debate. In terms of the major inputs, we really haven't seen increases at this time.

So you -- right now what are they running on a year-on-year basis? What's the percentage benefit to you, ballpark, on the fiber cost?

I'm not sure how to answer that question. We have not seen much movement this year in raw material costs.

Okay. Then, by that order then, no more LIFO adjustments would be required near term?

Well, the LIFO adjustment we had was a result of inventory liquidation.

Oh, I see what you're saying. Okay. Got you.

And if we continued reducing inventory, which we anticipate we will, there may well be some more liquidation there.

The liquidation that you took from the inventory standpoint -- was it -- versus your plans, was the majority of that taken out in Q2, or is this -- I'm just trying to get a sense of how to model for the adjustments going forward.

It was taken out in Q2 as far as the effect, and that's when we determined it wouldn't be replaced.

Okay. Talk about what you are seeing. I know you're going to be combining the three brands under one operation, but talk about what you are seeing in Masland versus Fabrica versus Home. Are you seeing any sort of different trends via price point, meaning as you go higher in the price point things are getting worse, or is it -- is it by end markets? If you could put little more color in terms of what you are seeing with mix?

Sam, I think, in that regard, this recession is different from previous ones. And I think all you have to do is look at higher-end brands and you can see that the impact there has been more dramatic probably than the rest of the business, and certainly we have felt it that way. Our Fabrica, being the highest end, has been impacted more than Masland, Masland more than Dixie Home, so it is related to where you're positioned in the marketplace and the higher in you go, the more impact that it has had. If you go back over a two or three-year period, however, all of these brands have outperformed the industry. But clearly, in this recession, the higher end has been impacted more than the rest of the market in general.

Last question and then I'll defer to others.

Okay.

If the year-on-year comparisons really ease up on you by Q4, which would indicate perhaps that you'll see some moderation in the year-on-year declines, as the year progresses, simply because of the easier comparisons -- do you, based on what you are seeing -- I know that your visibility is somewhat limited from your order patterns, but any reason to think that would not occur? Or, is business just worsening or how should you -- how should we look at demand trends over the next two to three quarters, best you can tell?

Well, as we stated, second quarter was about 10% over first quarter but still about the same amount down from last year. And your point is well taken. As you get into weaker quarters last year, our comparison to last year ought to look better. However, we haven't seen no ground swell of business activity that leads us to believe that volumes are going to be significantly different than what we're looking at now, and that's why we are embarking on further cost reductions.

Thanks much. Very helpful.

Okay.

We will go next to John Baugh with Stifel Nicolaus.

Good morning.

Good morning John.

Good morning John.

Could you -- I came in a little late, so if you addressed this I apologize. But, did you make a comment between commercial and residential and what the trend is. I sense the commercial is worse but I'm wondering what you are seeing?

Yes, John, I did tell those, but I'll roll them again. For the quarter, the commercial sales were down 36.5% and the residential was down 28.7%. And for the six months, the commercial was down 37.6% and the residential 28.3%.

Okay.

We also indicated, John, that the modular business obviously was much better than the broadloom business on the commercial side.

Okay. And when does that broadloom commercial comparison get easier -- kind of following up on sales question, how long did that stay strong last year?

I would say fourth quarter it would get easier.

Okay. And could you comment on -- it seems like in the residential side of the world -- I know you are operating with very high-end brands but it seems like there's all this interest around polyester or derivatives thereof as the fiber for the future versus nylon. Any color on that, as you think about your business on the residential side, and how to address that?

John, I mentioned that our Lifestyles collection in Dixie Home grew nicely this year in an environment where the market was not growing. Half of that business, or that line, virtually half, is polyester. And what that allows you to do is to go back to price points that nylon really priced itself out of over a period of time. So we see it as a growing fiber, one that constructed properly can be -- and produced properly can certainly be a beautiful product and one that will perform. So, we, like others, are seeing growth in filament polyester.

Okay. And then -- again, I apologize if you addressed it -- could you comment on the health of your customers and what your receivable experience has been and sort of what you're seeing out there in terms of stress, number of doors you're selling through today, or just a year ago, whatever color? Thank you.

John, we have seen more customers that have experienced financial difficulties; however, we are very comfortable with our credit people and their offices aren't significant.

It's certainly a tougher environment out there but we tend to do business with higher-end people which are not as impacted maybe as some others, John.

Okay good luck, thank you.

Thank you.

(Operator Instructions). We will go next to Arnold Brief with Goldsmith & Harris.

Just a few quickies. One, Jog my memory, if you will, if I recall, is there normally a lag of three to six months in terms of your business versus a turn in the housing market. Is that correct?

Arnie, I don't think -- it depends on what you mean by a turn in the housing market. Remember, our business is not oriented toward new housing. It is more oriented to home resales. And, typically, from the numbers and statistics we've been able to get, a large percentage of people either re-carpet in the three months before they sell a house or the three months after they buy a house. So, I think that home resales is a better indicator for us than housing starts, but of course, home resales has been down significantly as well.

Yeah, I bring it up because the latest numbers indicate that maybe there is a turn coming and I was just trying to get that lag period.

Well, we are all encouraged by new housing sales being up and the fact that home resales were up three months in a row for the first time since 2005.

Actually, prices were up a little bit, too.

Still haven't seen the ground swell in order entry yet.

That's why I got -- I asked the question about the lag period. Secondly, it would seem to me that, based on the cost initiatives that you just announced today, the level of your current losses, and even assuming a very modest increase in sales next year that it would be pretty safe, I know you don't like to give guidance so I'm not asking for specific numbers, but it seems to me that you got a strong likelihood of being in the black next year.

Arnie, we've said repeatedly -- our intent is to cut our costs so that we can be profitable at the level of business that we anticipate. And, candidly, we've been chasing business down and we're off a third. We didn't think it would be that bad but that's why we're down to reducing costs, so that we can operate profitably in the kind of environment with which we are faced.

Okay. Next to last question, could you give us some better idea of how much further you plan to cut inventory? I ask the question because I'm looking for some perspective or better comfort level. You've implied that the debt repayment is not an issue, but $8.7 million -- you've done a lot of inventory reductions already and it's not -- it's been pretty much eaten up so I don't know where the cash comes from the 8 -- to pay off the $8.7 million short-term debt unless you've got some further significant inventory reductions coming. Could you discuss that a little bit?

Arnie, I'm going to turn to Gary in just a moment, but remember our capital expenditure for next year will be about $3 million and our depreciation and amortization in the $12 million range, but we do anticipate some additional inventory reduction so that our inventory more clearly, or more closely, mirrors our sales level. Gary, do you have comments there?

Well, we would plan -- our goal, as we said, is $15 million this year and we plan and think we can reduce inventories a good bit next year.

When is the $8.7 million due? It's obviously short-term, so it's within 12 months, but when is it due?

Well, the majority is due next May. That's our biggest maturities when we pay the $2.5 million on the debentures. The rest of it is pretty well spread over the other months

Okay. And, has there been any further activity from offshore?

Arnie, would you identify or what do you mean by activity?

Wasn't he a buyer of your stock?

He has been and he filed and he is a -- I think it's a 12% holder of our stock. He is obviously an extremely knowledgeable and helpful person in understanding the industry and where it's going, but there has been no further activity in the stock within.

No further activity? So just -- there was just that -- okay . Okay. Thank you.

Thank you, Arnie.

We will go next to Keith Hughes with SunTrust.

Thank you. Just real quickly, can you give us some sort of indication what raw materials were in the second quarter versus prior year? Total cost or however you want to do it?

Keith, basically, we got back, first of this year, the increases that occurred in 2008.

Got back the increases -- I don't understand what you mean?

The price came down.

...came down about to the extent that they went up last year, so we kind of backed it....

End of '07 range, or something like that?

In '07, first quarter of '08 actually.

And, are you willing to say, dollar wise, how much that is?

No, I don't have that number with me.

Alright, that's all. Thank you.

Thank you.

Gentlemen, at this time, there appear to be no further questions.

Thank you, Dustin. And in closing, I'd just like to thank Gary Harmon. Gary will be retiring at the end of third quarter. Jon Faulkner, who has been with us for a number of years, as Vice President of Planning and Development, will be taking his place as CFO. Personally, I want to thank Gary for his help and hard work and dedication for 30-some-odd years with Dixie. He asked to retire a year ago. We asked him to stay with us until we got through some things earlier this year, and he will be retiring at the end of third quarter. And, Gary, do you have any comments?

No, not at this time. Thanks.

Okay. Thank you all for being with us. Goodbye.

That does conclude today's conference call. Again, we thank you for your participation.