Dixie Group Inc (DXYN) 2010 Q2 法說會逐字稿

Good day, and welcome to The Dixie Group Incorporated second-quarter 2010 conference call. Today's 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, Dan Frierson. Mr. Frierson, please go ahead.

Thank you, Michael, and welcome everyone to our second-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 to both our website and press release.

During the second quarter, the carpet industry continued to see slight improvement in unit volume compared with the year-ago period. In the second quarter, square yard shipments were up approximately 1%, just as they were in the first quarter. Before this year, square yard shipments had not shown improvement from the year-ago quarter since 2005.

Sales dollar volume of carpets was up approximately 2% and this is the first quarter-to-quarter favorable comparison for dollar sales since the second quarter of 2006. These favorable comparisons appear to indicate that the industry has indeed bottomed and is beginning to improve. Much like the first quarter, our sales for the second quarter continued to outperform the industry. Our carpet sales were 12.8% above the same quarter last year and our units were up over 20% again this quarter. The growth was concentrated in our residential business with volume increases in all three brands, Fabrica, Masland and Dixie Home.

Our cost reduction efforts are continuing, as we drive down costs to restrict controls on spending and overtime and as we continue improving our operating efficiencies.

At this time, Jon Faulkner will review our second-quarter financial results, after which I will comment on current market conditions and our outlook for the future. Jon?

Thank you, Dan. Turning to sales, our second-quarter sales were $59.1 million, up 12.3% versus last year, and up from $50.5 million in the first quarter. Historically, the first quarter is our lowest sales quarter. For the quarter, total carpet sales for The Dixie Group were up 12.8%, while the industry was up 1.7%. Our commercial products were down 0.3%, while the industry was off 1.6%. Residential products were up 19.3% for the quarter, while the industry was up 3.9%.

The second quarter saw continued improvements in the residential business. As Dan alluded, we saw above-average growth in our Fabrica wool line, our Masland Avenue products utilizing the ColorTron technology, and our Dixie Home Durasilk products.

The second-quarter gross margin was 25.8%, up from 24.5% in the first quarter, but down from 27.3% in the same quarter of the prior year, which included a favorable $1 million in LIFO tier liquidation gain, or on a comparable basis would have lowered margins in the prior-year quarter by 1.9%. Gross margins were impacted by timing of our residential price increase relative to our cost increase since we're on LIFO accounting. The full effect of our price increase will be felt in the third quarter. Both our residential and commercial businesses had less favorable product mix relative to a year ago due to the larger share of lower-margin products, but both did improve over the first quarter.

Carpet production was up 18% versus the first quarter and up 27% versus prior year due to higher sales. Inventory turns improved by 27% versus the year ago and 10% over the first quarter, again due to higher sales. Inventories seasonally increased to $59.2 million, up $3.3 million versus the prior quarter.

Expenses associated with consolidations of our West Coast operations were $122,000 during the quarter. We are still attempting to rent our Pullman facility. Our selling, general and administrative expenses for the second quarter, the comparison was 25.4% versus 28.3% a year ago. Versus the prior quarter, the comparison was 25.4% versus 28.5% in Q1.

The operating income of $59,000 in the quarter was improved versus the loss of $458,000 in 2009. Excluding the effect of facility consolidation, there was an improvement of an income of $181,000 in the second quarter versus a loss of $341,000 in 2009.

Interest expense decreased $328,000 in the second quarter versus the prior year due to lower levels of debt. Other expenses, as a result of the turmoil in the debt markets, we elected in June to exercise our right to terminate the $25 million interest rate swap we'd entered into in May and replaced it with a new swap at a rate 96 basis points lower or a fixed rate of 4.17% versus 5.13%, and accordingly recognized a $300,000 expense associated with termination of the agreement. The savings from the new lower rate is $690,000.

The effective income tax benefit rate was 48.2% in the quarter. Our rate for the year-to-date is 35%. Effective income tax rate deferred primarily due to a true-up in the second quarter and our going-forward rate for the rest of the year will be 35%.

Our diluted earnings per share from continuing operations was $0.05 loss in the second quarter versus $0.08 loss for the same quarter last year.

Looking at our balance sheet, we ended the quarter with a total debt of $62 million, up $1 million for the quarter, and down $17.9 million from this same time a year ago. Capital expenditures were $156,000 for the quarter, and depreciation and amortization was $3 million. We expect capital expenditures for 2010 to be between $2.5 million and $3 million, while depreciation and amortization is expected to be approximately $11.7 million. And we ended the quarter with availability under our loan agreement of $10.7 million. Dan?

Thank you, Jon. Although business has improved, the carpet industry like the economy continues to experience fluctuations in demand, which we believe are driven by the uncertainty concerning our economy. Consumer confidence has traditionally been an accurate indicator of our business and certainly today confidence continues to be shaken by many of the actions taken in Washington.

Despite this uncertainty, we have experienced better demand for residential carpet. Sales for the industry were up 3.9% in the second quarter and our sales were up over 19%. Interestingly, we saw the growth at the very top end of the market with our wool products at Masland and Fabrica, as well as the more popular priced Durasilk and Stainmaster value products in our Dixie Home offerings. We believe the residential markets, while still very competitive, will continue to show growth.

The commercial market continues to be flat for us and the industry, although we do see growth of modular products at the expense of broadloom. During the quarter, we experienced additional raw material cost increases, which precipitated an industry-wide carpet price increase in May. While we experienced these cost increases during the current quarter, we felt little impact from the price increase in the second quarter, but it will be an effect for the third quarter. We have experienced significant reductions in inventory over the last year-and-a-half and now are experiencing better inventory turns and better plant utilization, as we produce to meet current demand.

Through better utilization of our facilities, we've been able to continue improving our operating efficiencies. It is difficult to project margins for the future because of the raw material increases and the change in product mix in certain markets. However, we are hopeful that margins will improve, as the price increases become effective and plant utilization improves.

The volatility in the marketplace makes planning very difficult. In the first quarter, we began slowly and gained momentum during the quarter. In the second quarter, we started strongly and finished weaker due to the slowdown in June. This trend may have been accentuated by the carpet price increase, which pulled business forward into May.

Due to the slow start in early July, third-quarter sales are currently below second quarter, but ahead of last year with residential again leading the way. Total sales are above last year in the mid to high single-digit range. Due to mix changes, our unit volume continues to be up significantly more than our sales dollars.

As we look forward, we will continue introducing new, innovative and differentiated products that will maintain stringent controls on spending and will maintain a low level of capital expenditures for the foreseeable future.

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

(Operator Instructions) We will take our first question from Sam Darkatsh of Raymond James.

Good morning, Dan. Good morning, Jon. How are you?

Fine, Sam.

Talk about, Dan, if you could -- I mean it seems concerning obviously the June trends, I think you mentioned in your prepared remarks that there may have been some pull-forward into May, but wouldn't there have also been potentially some pull-forward into June because of the July price increases? Or am I looking at it wrong or what else do you think happened in June per se and was that industry-wide or was it just something you were seeing? And was it both residential and commercial? Give us a little bit more meat on the donut as it relates to what you're seeing in June?

Sam, I think it's more in the residential area. Commercial area, as we have said, has been pretty flat, although -- and the price increase on commercial products was a little earlier in the quarter. So I really was speaking more to the residential side. I do believe it was due to the consumer confidence that decreased in June. Generally, I don't think it was just our industry, but it certainly did impact the carpet industry, as well as other industries and as well as us.

What we've seen in July is a little weaker start to the month, but certainly beginning to gain momentum. So, as I indicated, it's very difficult in this kind of environment to try and project into the future. But currently, we are running at -- overall, commercial and residential together in the mid to single high digits ahead of last year. And I would say the latter part of the month has been better than the first part of the month.

Have you seen industry prices, from a competitive standpoint, not the price increases themselves, but as things begin to slow in June and into July, were you seeing a little bit of an increased discounting?

I would say in the lower-end products probably so, but not overall. And, as I indicated earlier, it's very competitive out there, no question. I do believe, however, that we've probably seen the cost increases max out and begin to ease a little. So I think the cost increases that certainly impacted second quarter adversely are not there today. It doesn't mean if all were to change that they wouldn't be there again.

But I think that has maxed out and we're beginning to see some -- get some help there. But this quarter like last quarter, we think, will continue to be a relatively difficult environment in terms of volume. We are seeing, as I mentioned, that our unit increases are greater than our dollar increases due to the mix that we have today relative to year ago.

And my last question, if I could, you've mentioned in your presentation -- your PowerPoint presentation that your breakevens, essentially I think it was about $235 or so, $235, $245. You are there now from a quarterly run rate. I'm guessing there may have been some inefficiency issues that would not be recurring.

I would point to three things, and then ask Jon if he sees anything else. Number one, the swap cost was $300,000 that was in the quarter that obviously will not be -- not only not repeating, but our interest costs will be lower because of that going forward. Number two, the price increase began implementing in early May, probably not fully effective, certainly not fully effective until early July. So, you will have the price increase -- our price increase effective in the third quarter, which was not for most of the second quarter, although we had the cost increases for most of the second quarter.

The third item would be that we were gearing up to run more volume in the second quarter. We had higher training costs and some one-time costs there gearing up and that is not -- would not repeat. So as you indicated, we have indicated in the $235 to $240 range we ought to be at a breakeven with the current product mix and current costs and I wouldn't say that we still believe that.

Thank you very much for your help.

Jon, you have any comments?

No, I just concur with what Dan said in that also is our business has smoothed out, but we do see some more operating efficiencies at the [plant] level than we've had in the second quarter.

Thank you both, very helpful.

Thanks, Sam.

And we will take our next question from Keith Hughes of SunTrust.

Thank you. Just a couple, you talked about the mix, you gave us the dollars and units within Dixie. Is that almost entirely in your residential segment or do you see some mix compression in commercial as well?

I'm not sure what you mean by mix compression, but I think I understand it.

(inaudible) dollars below units.

Right. It is happening both on commercial and residential and I think it has to do with the different end users that are doing well on the commercial side, not any major change in our overall product mix, but we're seeing better demand in some of our corporate customers as opposed to our general commercial line.

Okay. And second question, you talked about how third quarter [would start at] mid to high single digits. I assume that's a dollar number, is that correct?

That is correct. I indicated volume would be much higher than that. Volume units in the first and second quarter were above 20% and we are very close to that in the third quarter.

And I guess final question on inventory and production. Given this kind of choppy environment you've seen in the last couple of months, are you continuing to ramp up production with some still positive numbers ramping down, how do you look at that in balancing inventory right now?

Currently, we're operating in line with sales and this is our seasonal peak for inventories. So we would expect that inventories would come down along with activity by the end of the year. But currently, we are not producing beyond our sales levels, but are producing in line with sales. The second quarter, we did produce ahead of our sales level, partly because our inventory stocks had gotten so low in certain key areas. At this point in time, we're no longer doing that.

All right. Thanks a lot.

Thank you, Keith.

(Operator Instructions) We will take the next question from John Baugh of Stifel Nicolaus.

Good morning, Dan.

Good morning, John.

Jon, I remember your comments years ago that you could almost track Masland and Fabrica's orders with the fluctuations in the stock market and it sounds like that's almost working again here in recent, at least the first six months of this year. I'm curious though on the residential, when you look at your incoming order rates, are you seeing it uptick in July? Where are you seeing it? Are you seeing at the high-end stuff, is it at the low-end stuff? Is there any pattern to the recent strength and the weakness before that? Thank you.

John, as we indicated, in the quarter all three brands, Fabrica, Masland and Dixie Home showed growth in the second quarter. And I think it's the same today, but obviously, you're right. We do follow -- I think our sales tend to follow the stock market and consumer confidence. And there we've got stock market going up in July and consumer confidence coming down, so I'm not sure where that leads.

But we are seeing some improvement in order entry and shipments the further along we go in July. And where we're really seeing the most growth interestingly enough over the last couple of months and it's continuing into July is in the very high end with our wool offerings. And that's extremely high end and in the lower end with our Durasilk polyester products. So it seems to be almost a barbell effect.

Interesting. And then I think you've had two residential price increases in the first half of the year? And you mentioned that here in July those increases are more or less fully in effect? What roughly are you getting in terms of a net price increase on the same piece of goods you're selling today versus a year ago?

John, it's very difficult to give you a straight answer to that, because if you're selling a $10 product, it's very different from a $50 product. And we don't publish those numbers, but I will say this; the increase in May was significantly more than the increase early in the year.

When you put it all in the blender, would a sort of mid single-digit increase between the two increases combined be unreasonable, high, low?

Again, if you're talking products priced at the industry average, which is around $7, probably so.

Okay.

But if you're talking about products at $40 a yard, probably not.

Got you. Okay. Super. Thanks for that color, and good luck.

Thank you, John.

And that does conclude the question-and-answer session. I will now turn the conference back to Dan Frierson for any further and closing comments.

Thank you, Michael, and thank you all for joining us this morning. Again, we are continuing to watch our expenses, our capital expenditures and improve our efficiencies and we'll again, I hope, have positive growth this quarter. Thank you very much.

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