Dixie Group Inc (DXYN) 2009 Q4 法說會逐字稿

Good day and welcome to the Dixie Group Inc. fourth 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, Anne; and welcome, everyone, to our fourth-quarter conference call. I have with me today Jon Faulkner, our Chief Financial Officer; and Jeff Laseter, our Corporate Controller. Our Safe Harbor Statement is included by reference to our website and press release.

As we entered 2009, it was obvious that the industry would continue to see carpet sales decline. However, the magnitude of the decrease was greater than we anticipated. 2009 will go on record as the most challenging period in the history of the carpet business.

Carpet sales during the year were down 20% for the industry and were down 40% in units from the peak in early 2006. Our focus during this period has been on reducing costs, improving operations, strengthening our balance sheet by reducing debt and continuing to bring to market beautiful differentiated product.

Starting in 2008 and continuing through 2009, we've taken a number of actions to lower our costs and return to profitability. We reduced salaries, eliminated our 401(k) match, significantly reduced inventories and capital expenditures, combined several manufacturing operations, realigned our three residential organizations and reduced our number of associates by 28%.

These actions have resulted in improved margins in each successive quarter of this year as Jon Faulkner will point out. Our carpet sales this year were down 31% for the first nine months but only 14% in the fourth quarter. The carpet industry was down 21% for the first nine months but also 14% for the fourth quarter.

At this time, I would like to ask Jon Faulkner to review our financial results, after which I will comment on current market conditions and our outlook for 2010. John?

Thank you, Dan. Our fourth-quarter sales were $52.8 million, down 14.8% versus last year. For the year, sales were $203.5 million, down 28% versus last year.

For the quarter, total carpet sales were off 13.8% for Dixie and off 13.7% for the industry. Commercial products were down 30.8% for Dixie and down 19% for the industry. Our residential products were off 4.6% while the industry was down 9.7%.

For the year, total carpet sales were down 27.3% and the industry was off 20%. Commercial products were down 36% and the industry was off 21% while residential products were off 21% for Dixie and the industry was off 18%.

In the fourth quarter, we continue to see improvement in the market. We've seen signs that our residential business is improving versus both the industry and the prior year. Commercial sector continues to be unpredictable with no signs of clear improvement.

The fourth-quarter gross margin was 27.7%, up from 26.9% in the third quarter of 2009 and up from 26.1% a year ago. The year comparison was 25.6% versus 27.6% in 2008.

Gross margins have improved every quarter this year when comparing results excluding the effect of LIFO tier liquidation gain with the fourth quarter at 27.7% and the third quarter at 26.7%, second at 25.3% and the first quarter of 2009 at 20.2%. This improvement reflects the effect of our ongoing cost reduction initiative.

Carpet production was flat in the fourth quarter versus the third quarter and down 30% versus prior year for the year due to lower [sale and] inventory reduction. Inventories were lower $4 million in the fourth quarter and $20 million for the year.

Lower inventories also resulted in LIFO tier liquidation which improved gross margins by $1.1 million for the year. Expenses associated with our cost reduction initiatives were $3.3 million in the fourth quarter and $5.6 million for the year. $1.5 million of the expense was non-cash for both the quarter and the year.

Expenses associated with the consolidation of our East and West Coast facilities which are now substantially complete were $1.3 million for the quarter and $3.2 million for the year. We expect approximately $120,000 additional expense in the first quarter primarily related to systems migration.

Expenses to realign our organizational structure and combine our three residential carpet units were $465,000 for the quarter and $850,000 for the year. Looking at our selling and administrative expenses, the fourth quarter comparison with 28.6% versus 31.3% a year ago. For the year, the comparison was 29.7% versus 26.9% a year ago.

Selling and administrative expenses were reduced by $4.3 million in the fourth quarter and $15.7 million for the year compared with the same period a year ago. The lower selling and administrative expenses reflects the effect of our organizational realignment, our cost reduction initiatives, lower variable selling expenses and tight control of discretionary spending. As a percentage of net sales, the expenses were below levels of a year ago for the quarter but still above last year due to the lower sales volumes.

Looking at our operating income, the operating loss of $4 million in the fourth quarter was worse than the $1.7 million in the third quarter of 2009. However, if you exclude the effect of facility consolidation and severance expenses of $563,000 in Q3 and $3.3 million in the fourth quarter, the results were improved with a loss of $737,000 in the fourth quarter versus a loss of $1.1 million in the third quarter.

The operating loss for the year was $45.3 million compared to a loss of $28.4 million for the prior year. For 2009, year-to-date results included $5.6 million of consolidation and sevrence expense, $31.4 million of non-cash goodwill write-off and $1.1 million of income from the LIFO tier liquidation.

Our interest expense decreased $273,000 in the fourth quarter and $444,000 for the year versus the prior year due to lower levels of debt and capitalized interest in 2008 which did not repeat this year. Interest expense for the full year was $5.5 million.

The effective income tax benefit rate was 35.8% in the fourth quarter and 17.5% for the year. The effective income tax rate differed from the expected 36% rate principally due to [permit] tax differences in the non-deductible goodwill write-off for the first half of the year.

Our diluted earnings per share from continuing operations was a $0.27 loss in the fourth quarter versus a $2.59 loss for the same quarter last year. The year comparison was $3.39 loss versus $2.50 loss last year.

Looking at our balance sheet, we ended the fourth quarter with a total debt of $67.8 million, down $9.4 million for the quarter and down $26.1 million from the end of 2008 when it was $93.8 million. Capital expenditures were $2.4 million for 2009 and depreciation and amortization was $13.5 million.

We expect capital expenditures for 2010 to be approximately $3 million, while depreciation and amortization is expected to be approximately $11.8 million. We ended the year with availability under our loan agreements of $10.4 million. We also anticipate a tax refund in the first half of 2010 of approximately $6 million.

Thank you, Jon. In the last few months, we have begun to experience order entry at levels above a year ago. Hopefully this is an indication that sales in 2010 will show improvement from 2009 levels.

We approached this year with the same commitment to cutting costs and improving operations so we can return to profitability. As we look forward, the commercial carpet business will continue to experience a difficult environment in 2010. Fortunately, our commercial carpet business is well diversified. Consequently we are currently running at levels very close to last year.

Our residential business is beginning to improve as the confidence level of the upper end consumer is returning. We have continued to introduce new products which we believe better position us for growth as the market improves.

We are particularly pleased with the new wool collections at Masland and Fabrica which are continuing to show solid growth as they did last year. We are also experiencing strong growth in our new polyester Durisol products which provide a very soft hand at more affordable price points.

We have also introduced a broad array of Luxurell nylon products in Fabrica, Masland and Dixie Home which are generating sales in our Stainmaster branded product category. From a financial standpoint we continue to make strides in de-leveraging our balance sheet.

Through lower capital expenditures, decreasing inventory and stringent expense controls; we were able to reduce debt last year by $26.1 million or about 28%. In 2010 we will continue our debt reduction plan with modest capital expenditures and further inventory reduction and will receive the tax refund to which Jon just referred.

We will also continue our SG&A and other cost reductions which should improve our profitability. Like the rest of the industry, we have experienced escalation of raw material costs. Therefore we have announced price increases which will be effective in the first quarter.

Going forward, our focus will continue to be on lowering costs through quality and efficiency improvement, improving inventory turns while maintaining outstanding service to our customers, improving profitability without impacting our capability while taking advantage of improved business conditions.

The last year has been a very difficult one for our Company, our suppliers and our customers. We believe the most difficult period is behind us and due to our investments in new technology and new products, we think we are in a position to once again grow at a pace faster than the industry.

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

(Operator Instructions) Arnold Brief, Goldsmith and Harris.

Could you give us some idea of if you look at all the cost cutting and consolidation and savings that you've put into place, how much has actually been realized and how much has actually been done but not fallen into your P&L statement which will fall into 2010? And then as an adjunct to that, how much more additional cost savings do you anticipate realizing in 2010 (inaudible) initiative that you haven't started yet?

Well for instance, our depreciation and amortization will go from 13.5 down to 11.8 and that will be a '10 effect. And then we have additional selling expenses of several million dollars that will be in 2010 relative to 2009. The overall cost reduction, so from 2009 to 2010, we had projected about an $8 million swing and that is still in line with where we expect it to be.

So there's another $8 million to be realized this year?

No, I'm saying that we implemented between last year and this year.

Some of that was realized in the fourth quarter, some in the third quarter but will not totally be realized until 2010.

And that number to be realized in 2010 that was not realized in 2009 is $2 million or $8 million? You're confusing me.

Well depreciation and amortization --

Excluding that, excluding interest and depreciation.

Excluding that?

Yes.

In the order of a few million.

Another $2 million. Do you anticipate any other additional cost savings that you haven't announced yet that will fall into 2010?

We are always working on further cost reductions and we do have plans for further cost reductions that we will be implementing during the year. And I cannot give you a number on that.

So if I look at your fourth quarter run rate of sales and the amount of operating losses excluding write-offs and whatever in the fourth quarter; looking at depreciation, interest and the $2 million of additional savings; at a $200 million sales level in 2010, you would be about a breakeven, give or take a little bit.

That assumes the product mix does not change.

Right, right, right. Mix doesn't change and revenue doesn't change. You would be about a breakeven in the current run rate.

That's the fourth quarter run rate.

Right, plus the additional savings to be realized.

Yes.

So could you get into -- I'm sure as a result of all of these cost savings, you have lowered your breakeven fairly substantially but gross margins are down. Could you give us some insight into your incremental profit margin? Has that changed much, where your breakeven might be?

I think you just calculated it.

All right. How about the incremental margin?

In terms of (multiple speakers)

20, 25%? 20%?

In terms of the margin, our margins have continued to improve as I talked about in the fourth quarter, If you look at the numbers I just gave you. Fourth quarter, our -- if you are taking out any effect of LIFO, fourth-quarter margin was 27.7% and that is an improvement of over 2 percentage points from the second quarter and 7 percentage points from the first quarter of the year. But I think those margins have settled down. They will not change dramatically, continue to increase at that rate.

Finally and then I'll get off and let somebody else get on, assuming the economy continues to recover and your sales recover, do you feel that you will be capital constrained at all in terms of being able to meet the financial demands of higher revenue?

We would love to have the challenge. We do not think we would be capital constrained.

(Operator Instructions) Sam Darkatsh, Raymond James.

Dan, you're pretty much entirely at the high end which would then presume that you would feel pressure versus the industry simply because of the industry mix gravitating more towards the lower price points. And I'm curious as to and encouraged quite frankly about the share gains versus the marketplace in the fourth quarter down 4% or 5% versus the market down about 10% on the residential side. And then I'm also curious as to you had been gaining share in commercial and now you are not. So if you could give a little bit of color as to the share directions and some explanations therein and what you expect for future share situations over the next few quarters?

Sam, during the downturn, we've continued developing a significant number of new products in various fibers that we run. First of all in wool, as I mentioned our sales have grown during this period which obviously is contra market.

They have grown nicely both at Masland and at Fabrica and that's on the very high end. Now in the more competitively priced category, our business is polyester, our Durasilk products have grown dramatically during the last year and beginning or continuing into this year. And that along with some soft Luxurell nylon products that we introduced in the fall, I think it helped us gain market share and we will continue to help us gain market share as we go forward.

A number of our competitors did pull back significantly on new products. We did not. We felt like our business is very product sensitive and therefore we needed to continue to fund those products and we did and I think that's now having an impact on our residential business.

You mentioned the commercial business. We did lose -- I think we underperformed in the commercial business last year. Again, we have a number of new products there and so far this year I think we are probably performing better than the marketplace. But that's -- the commercial business is going to be very difficult this year.

Outside of the wool and polyester new products, was your sales down similar to the industry or -- I'm just trying to get a sense of how much that is helping right now.

It probably was but some of the newer softer nylon products that we've introduced in the fall have been very well received and have taken off, improved our sales position very nicely.

And on the commercial side then, if you could remind us what your office exposure is versus some of the non-office end markets. Is it almost entirely office?

No, we are probably a little over one third dedicated to office or corporate, as we call it.

Robert Moses, RGM Capital.

Just a couple questions, first on the balance sheet. Congrats on continuing the debt paydown. Just trying to understand with some of the numbers you've given us just how we think about perhaps debt paydown or at least capability this year. Think you said there will be about a $9 million spread roughly between depreciation, amortization, CapEx. I think you said we would hope to bring inventory down a little bit. I don't know if that's -- maybe call it a couple of million bucks. I assume we can't take a whole lot more; and then a $6 million tax refund.

If we assume revenue remains kind of in the low $50 million per quarter, that would kind of say EBIT covers interest expense or you're kind of neutral. That seems to be kind of a $17 million number. Without giving specific guidance, are there flaws or things you'd want to add to that calculation?

No, I would say in essence, you have got it correct. The depreciation and amortization of 11.8 versus 3. So you've got $8 million there and then you've got the $6 million tax refund and some decrease in inventories. So I think you are on target.

Okay, and I guess if inventory and receivables do grow, it's probably good news because it means that revenue has grown as well?

That's correct. And our borrowing under our loan is -- part of it is dependent on inventories and receivables so they fluctuate.

Okay, maybe Dan you mentioned some qualitative comments about orders being above a year ago; I think you said the last couple, maybe the last few months knowing that there's always typically a seasonality in the fourth quarter to the first quarter for your business. I assume that's still happening as we see it today. I guess we're a couple months, almost a couple of months through the year.

But could you just talk about any other detail you can give us on what that really means? Does that mean we are running above year ago levels potentially in revenue or -- just trying to understand the seasonality and kind of the commentary you have given us.

Rob, we began to see order entry above year ago levels really starting in the late November, early December timeframe. That has continued in the first quarter. There is always a lag between that and actual shipments and what we're actually seeing in the first quarter to date is sales about flat with a year ago.

Got it, that's helpful. I guess just the last question. I think there was a question earlier about incremental margins. Maybe just another way to think about it, if we are going to remain kind in the low 50s per quarter, let's say we kind of spike up to the mid-50s to high 50s per quarter. Just thinking about kind of the variable costs and fixed costs both on the operating expense as well as the cost of goods line, just give us some sense as to what -- obviously it's raw material costs going through but what other type of fixed versus variable cost may be in your income statement today?

Well if you -- our selling expenses are largely variable because our salespeople are on commission. And so beyond the gross margin percentage, really the major variable expense is really the commissions that we pay on the sales themselves. Beyond that, pretty much everything is more of a fixed nature.

Great.

(multiple speakers) as you know, as business declines, your costs go up. As business improves, your costs go down.

With no further questions in the queue, I would like to turn the conference back to Dan Frierson for any additional or closing remarks.

Anne, thank you very much and thank all of you for being with us today. We certainly hope and believe 2010 will be a very different year from 2009 and we are working to make it that way. Thank you for being with us.

This does conclude today's conference. We thank you for your participation.