Dixie Group Inc (DXYN) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to The Dixie Group Inc. third-quarter 2009 conference call. Today 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, Mr. Dan Frierson. Please go ahead, sir.

Thank you, Robbie, and welcome, everyone, to our third-quarter conference call. I have with me today Jon Faulkner, our Chief Financial Officer, and Gene Lasater, our Corporate Controller. Our Safe Harbor statement is included by reference both to our website and press release.

The third quarter appeared to be a continuation of the second quarter with sales above first-quarter levels but about 30% behind last year. Due to these market conditions our focus continued to be on reducing costs, improving operations, and strengthening our balance sheet by reducing debt. The announced realignment of our residential sales structure and other cost reductions have lowered our breakeven sales level, which will be felt more strongly in the current quarter and be fully effective in 2010.

The reduction of inventory levels and the low level of capital expenditures have enabled us to reduce debt by over $16 million in the last three quarters in spite of the difficult operating environment. Jon Faulkner will review our financial results after which I will have additional comments about the current market conditions. Jon?

Thank you, Dan. Looking at sales our third-quarter sales were $50.5 million, down 30.8% versus last year. For the nine months sales were $150.7 million, down 31.7% versus last year. For the total -- for the quarter, total carpet sales were down 29.4%.

Commercial products were down 38.8% while residential products were down 23.7%. For the nine months total carpet sales were down 31.1%, commercial products were down 37.8%, and residential products were down 26.8%.

In the third quarter we continue to see weakness in the market. However, we have seen signs that the residential market is beginning to turn the corner. We have yet to see signs of improvement in the commercial sector.

Our third-quarter gross margin was 26.9%, down from 27.3% in the second quarter of 2009 and up from 25.9% a year ago. The nine month comparison was 24.9% versus 28.1% in 2008. Gross margins, though down from the second quarter, improved when comparing results excluding the effect of LIFO tier liquidation gains with the third quarter at 26.7% versus the second quarter at 25.3%. This improvement reflects the effects of our ongoing cost reduction initiatives.

Carpet production was down 4.5% in the third quarter versus the second quarter and down 34% versus the prior year for the first nine months due to lower sales and inventory reductions. Inventories were lowered $4.5 million in the third quarter and $16 million in the first nine months of this year. Lower inventories also resulted in the LIFO tier liquidations which improved gross margins by $0.1 million in the third quarter and $1.1 million in the first nine months.

Expenses associated with our cost reduction initiatives were $563,000 in the third quarter and $2.3 million for the first nine months. These expenses associated with the consolidation of our East Coast facilities, which are now complete; consolidation of our West Coast facilities, which will be complete in the fourth quarter, for $178,000. We expect approximately $137,000 additional expense in the fourth quarter not including the expense associated with the subleasing of our now moved West Coast tufting facility.

Expenses to realign our organizational structure and combine our three residential carpet units were $385,000 in the third quarter. We expect to incur an additional $380,000 in the last quarter of this year where we expect to reduce expenses another $8 million to $10 million in 2010 compared with our second quarter.

Looking at our selling and administrative expenses the third-quarter comparison was 29.4% versus 25.7% a year ago. For the nine-month comparison it was 30.1% versus 25.7% a year ago. Selling and administrative expenses were reduced $3.9 million in the third quarter and $11.4 million for the first nine months compared with the same period in the prior year.

The lower selling and administrative expenses reflects the effect of our cost reduction initiatives, lower variable selling expenses, and tight control over discretionary spending. As a percentage of net sales these expenses increased due to lower sales volume.

The operating loss of $1.7 million in the third quarter was worse than the $458,000 loss in the second quarter of 2009. However, the two quarters were comparable without the effect of LIFO gains or a $1.3 million loss in Q3 versus a $1.4 million loss in Q2. Operating profit in the third quarter of 2008 was $33,000. The third-quarter loss included $563,000 of consolidation severance expenses and $116,000 of income from LIFO tier liquidation.

The operating loss for the first nine months of 2009 was $41.3 million compared to $5 million the first nine months of the prior year. 2009 year-to-date results included $2.3 million of consolidation and severance expenses, $31.4 million of non-cash goodwill write-offs, and $1.1 million of income from the LIFO tier liquidation.

Our interest expense decreased $136,000 in the third quarter and $171,000 for the nine months due to lower levels of debt and capitalized interest in 2008 which did not repeat this year. Interest expense for the full year is now expected to be approximately $5.7 million.

The effective income tax benefit rate was 36.7% in the third quarter and 15.3% for the first nine months of 2009. The effective income tax rate differed from the expected 36% rate principally due to permanent tax differences and the non-deductible goodwill write-off for the first half of the year. The effective income tax rate is expected to be approximately 34% in the last quarter of the year.

Our diluted earnings per share from continuing operations was a $0.16 loss in the third quarter versus a $0.06 loss for the same quarter last year. The nine-month comparison was a $3.13 loss versus a $0.05 profit last year.

Looking at our balance sheet, we ended the third quarter with a total debt of $77.2 million, down $16.6 million from $93.8 million at the end of 2008 and down $2.7 million from the $79.9 million at the end of the second quarter of this year. Capital expenditures were $2.2 million during the first nine months of 2009 and depreciation and amortization was $10.5 million. We expect capital expenditures for the 2009 year to be approximately $3 million, while depreciation and amortization is expected to be approximately $13.6 million.

We entered into an operating lease in the third quarter for equipment utilizing new manufacturing technology, thus reducing our planned capital expenditures by $3.2 million from what we have stated previously. Our availability under our loan agreement was $7.4 million at the quarter's end and is up a couple of million to date.

Thank you, Jon. As we entered the fourth quarter the commercial carpet market continued to suffer. This segment typically lags the residential business and has in this downturn. Carpet tile is outperforming broad loom, but the commercial market will continue to be under pressure this quarter and next year.

The residential market is beginning to show signs of improvement. The comparisons to a year ago will certainly be better in the fourth quarter and next year due to the weakness a year ago. It appears that the favorable housing statistics, improved consumer confidence, and higher stock market are helping order entry in the fourth quarter. The current activity level is up from the third quarter and hopefully that trend will continue.

Again, our objective is to reduce costs so that we can be profitable at the business levels of the second and third quarters and we feel we can be at these cost levels in 2010. Despite the difficulties of the marketplace we are encouraged by several factors. Our continued quality and efficiency improvements. Our continued inventory reductions as we progress through the fourth quarter.

Our gross margin improvement in the third quarter compared with the year-ago quarter, 26.9 versus 25.9, despite production being down significantly. This shows that the cost reductions have more than offset the LIFO absorption of fixed cost at today's volumes.

The low level of capital expenditure is relative to our depreciation. Our capital expenditures next year should remain in the $3 million range, and our depreciation and amortization should be somewhat over $12 million. The other encouraging sign has been the large level of introductions of new product, which are helping fuel the improvement in the market place. The growth, both in our wool area, our wool products at the upper end, and in our soft polyester products and nylon products in the value end of the market have both had a positive impact on our business.

At this time we would be glad to open up the call to questions.

(Operator Instructions) Sam Darkatsh, Raymond James.

Good morning, Dan, Jon, Gene. A couple of housekeeping questions. Jon, you mentioned a couple of items in the fourth quarter -- $137,000 and $380,000. What were those for again? Was one of them restructuring and maybe one of them was a LIFO adjustment? I didn't quite catch it.

The $137,000 was to finish up the consolidation of our West Coast facility and the $380,000 was the organizational restructuring expenses we expect in the fourth quarter. Combined those restructuring costs are $520,000 in the fourth quarter.

Okay. Do you anticipate more LIFO adjustments, gains in the fourth quarter? Have you already finished with the tier true-ups?

We expect maybe some small LIFO reductions, but nothing significant.

It's pretty much done at this point?

Well, it's kind of the levels of LIFO we are into at this point in time are not significantly different.

Got you.

We do anticipate continuing to lower our inventories.

Okay. If sales are similar in Q4 than they were in Q3, do you have a sense of what either EBIT might be or something along those lines? There are some moving parts with the cost takeouts and the savings. Give us a sense of what translates in Q4 versus what is to come in 2010.

Sam, as you know, we don't give projections. But I think the way to look at it is that the realignment that we went through in the third quarter will begin to be felt in the fourth quarter and will be fully implemented in 2010 as will our previous restructuring. So obviously our costs should be somewhat lower in the fourth quarter and lower still in 2010, and as we stated our intent is to be profitable at the level of business in the second and third quarter.

Okay. So then by definition if you are looking at $50 million as the breakeven or better that would not necessarily be achieved in Q4 with that type of run rate? It would be more of a 2010 type of target? If you were to do $50 million top line in Q4 --

We expect the savings to recruit fully in 2010 and we would expect that our run rate will not be fully achieved in Q4. That reduction in cost.

Okay. And then last question, where are you pegging inventories at year-end? And I will defer to others after that.

Inventories we are expecting to be down a little bit, a few million dollars beyond where we are in Q3.

Thank you much.

Tom Lewis, High Road Value Research.

Yes, good morning. First question, is there anything you can share with us about -- you mentioned entering into this operating lease to the tune of $3-plus million. Is there anything you can share with us about what this is going to do for you? It seems like it would be something pretty special at a time like this to be spending like that.

Tom, the equipment which we leased is new technology and we have new products in the field. One of which is a product collection we call Maslin Avenue which has really hit in the third quarter and is beginning to build and is part of -- I mentioned new products and the excitement around new products. That is one of the categories that is off to a good start and doing well and it's very different from anything else in the marketplace.

At Surfaces in January we will have additional products off another machine, which was included in this lease, which also is different from anything else in the marketplace at this time. Again, one of the keys to our business is beautiful, new product and we continue to bring out and brought out a record number of new products this year.

So it sounds like a large part of what this is going to do for you is to be able to deliver on product that was well received at recent shows?

Either well received at recent shows or we anticipate will be well received at Surfaces.

In addition to the stuff that you will put out there and see how it goes. Okay.

And your comment about order input being higher in the fourth quarter as opposed to the third quarter, should we understand that as specific to residential?

Yes, that is specific to residential. I tried to make it clear that we don't anticipate the commercial business will be up in the fourth quarter or next year.

Yes, just making sure I had that -- yes.

It typically lags residential by a significant amount of time.

And is there anything else you would point to besides order input and the kinds of broad macro numbers that we all see in the paper that point to this improved -- prospect of improvement in the residential part of your business?

Well, first of all, let me say that we have seen improvement in the residential side. Again, we don't know if that is a trend or an aberration at this point but we certainly hope it's a trend. But we are seeing the newer products also impact our level of business which is obviously welcome. But I do think it will be a slow improvement and not a rapid improvement in business.

Okay, thanks a lot. That is helpful.

(Operator Instructions) Arnold Brief, Goldsmith & Harris.

You have $8-million-some-odd of debt maturing in the fourth quarter and I am assuming some continued losses, so I am looking for about $10 million in cash in the fourth quarter to meet your obligations. I can pick up about $5 million from inventory and depreciation.

(multiple speakers) borrowing power I understand, but I don't know how much of it is asset based and whether that declines with the inventories and receivables. Could you give us some reassurance about meeting your financial obligations in the fourth quarter?

Arnie, first of all, we don't have $8 million coming due in the fourth quarter. I am not sure what you are referring to there.

Short-term debt on the balance sheet.

That is over the next year.

Okay.

And we certainly would depreciate -- with our capital expenditures as low as they are and with continued inventory reductions and improved operations we would anticipate continuing to generate cash.

Okay, thank you.

(Operator Instructions) It appears we have no further questions. I would like to turn it back over to management for any closing comments.

Robbie, thank you very much. We thank all of you for joining us today for the third-quarter conference call. We certainly hope and believe that as business improves we can take advantage of that as we move into 2010. Thank you.

That does conclude today's conference. Thank you for your participation.