Dixie Group Inc (DXYN) 2010 Q4 法說會逐字稿

Good day and welcome to the Dixie Group Incorporation Fourth 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. Please go ahead sir.

Thank you Ryan and welcome everyone. I have with me today Jon Faulkner, our Chief Financial Officer. Our Safe Harbor Statement is included by reference to our website and our Press Release.

Fortunately for Dixie, 2010 marked the beginning of improvement for the luxury Carpet market. The first nine months our carpet sales were up more than 10% over the previous year. While the industry was essentially flat. In the fourth quarter, this trend was even more pronounced with our carpet sales up 23%, and the industry up only 1.3%. Sales of all of our brands were up for the year and for the quarter. Both Commercial carpet sales and Residential sales were up over 20% in the fourth quarter. We believe our continuation of differentiated product offerings in the upper end of the market has helped position us for solid growth as the market improves. Obviously the sales growth we experienced enable us to operate our facilities at higher production rates, which lowered our cost and aided our profitability.

Jon Faulkner will review our fourth quarter and annual financial results, after which I will comment further on market conditions and our sales experience so far in the first quarter. Jon?

Thank you Dan. Sales for the quarter were $65.1 million of 23.4%, versus last year of sales for the year of $231.3 million. An increase of 13.7% versus the prior year. Historically, the fourth quarter is our best sales quarter. For the quarter end dollars, total carpet sales for Dixie were up 23% while the industry was up 1.3%. Commercial products was up 22% while the industry was up 8.6%. Residential products were up 22% while the industry was down 3.8%. For the year, total carpet sales for Dixie was up 13.8% while the industry was up 0.5%.

Commercial products were up 3.7% while the industry was up 1.7%. Residential products were up 18.3% while the industry was actually down 0.2% Both Residential and Commercial sales were seasonally higher, up 15% from the third quarter. We saw barbell recovery in the fourth quarter with our Masland and Fabrica wool lines, and our ColorTron Masland Avenue products continuing to show higher rates of growth at the upper end of the market. While our Dixie Home Stainmaster and Durosil polyester products continued strong growth at more moderate price points. This barbell effect mirrors the effect of the year.

Fourth quarter gross margin was 25.3%. Down from 27.6% in the same quarter the prior year. The year comparison is 24.5% in 2010, versus 25.6% in 2009. Gross margin was positively affected in the quarter as a result of significantly higher manufacturing volumes, due to lows and general improvement in the business. Our order activity did not slack at the end of the year, nor in January as it typical. Particularly strong in 2011, has been increase in Commercial business since the 2010 year end.

Carpet production was up 7% versus the third quarter, and up 39% versus prior year due to higher sales. For the entire year, production was up 35% over 2009. Inventory turns were 3.30, up from 2.71 in the fourth quarter of 2009. Inventory decreased $1.1 million in the quarter, but is up $3.1 million year-to-date due to higher-level business. Expenses associated with consolidation of operations was $918,000 during the quarter. We are still attempting to ramp our Coleman facility.

The fourth quarter SG&A comparison was a decrease of $1.2 million or 21.3%, versus 28.6% for the same period a year ago. The fourth quarter is more representative of 2011 spending levels in the first part of 2010. The 2010 SG&A was 24.8% of sales. Operating income in the quarter $1.6 million, compared to a loss of $4.1 million in 2009. Excluding the effect of facility consolidation, operating income was $2.5 million or $3.3 million improvement over last year's loss. For the year, our operating losses $2.6 million. And operating loss included $1.6 million in unusual items 2010, compared to $37 million in facility consolidation and impairment of assets in goodwill in 2009.

Our interest expense decreased $375,000 in the fourth quarter versus prior year to the lower interest rate. For the year, interest was down $1.4 million despite higher debt levels. Our effective income tax benefit rate was 8% in the fourth quarter, due to a true-up for the year, and 37% for the year of 2010. Our normal rate in 2011 at normal levels of profitability will be approximately 38%. Diluted earnings per share continuing operations was $0.05 in the fourth quarter. Continuing operations in the quarter, when excluding unusual items, was $0.09 per share, versus $0.11 loss in the same basis for the same quarter of 2009.

Looking at our balance sheet. Our debt stood at $65.2 million at the end of the year, down $2.6 million for the year. Our debt has decreased -- again $2.6 million for the year versus $2.3 million in the quarter. Capital expenditures was $1.8 million for the year, and depreciation and amortization was $11.4 million. We had planned capital expenditures for 2011 at $6 million, by depreciation amortization it is expected to be approximately $9.7 million.

We restated fiscal years 2000 and 2000 -- 2009 and 2008, to correct errors related to reserves from environmental liabilities in Canadian import duties. The effects which are not believed to be material. We ended the quarter with availability under our loan agreement of $11.7 million, and today our availability is $10.1 million. Dan?

Thank you Jon. Looking at our industry overall, is difficult to determine what growth the residential market is experiencing in the first quarter. While we believe the quarter started slowly, due to weather conditions, it appears the market has improved somewhat as the quarter has progressed. Certainly the upper end of the market seems to be experiencing greater growth than the market in general. The Commercial market is more predictable due to strengthening the replacement end of the government hospitality and corporate sectors. Modular sales, appear to be strong in continue to take market share from broadloom Commercial products. As we have indicated previously, traditionally the fourth quarter is our strongest one. And with sales up 23%, we feel we have returned to our normal seasonality. We would not expect sales to continue to increase at the fourth quarter percentage level.

The force -- the first quarter began more slowly, as weather conditions throughout the country were not conducive to store traffic. Our January sales increased only about 10% from year ago levels. However, February sales were up over 18% from last year. Through the first 10 weeks of the quarter, our sales are up approximately 13%. While weather hampered the first part of the quarter, the price increase seemed to help sales in the February time frame. Order entry for both Residential and Commercial carpet was up significantly more than sales. With all brands showing increases over the year ago period.

Our Residential Replacement business has begun to improve, and the Commercial business continues to increase, driven by the modular sales. Our first quarter this year has five additional shipping days, or 7% more than last year. So based on sales to date, we would expect quarterly sales to be up to the 20% range. However, average weekly sales should be at the lowest level for the year. The additional sales volume has helped us run facilities more efficiently, and take advantage of operational improvements. With capital expenditures of $6 million, we will continue to under-spend our depreciation. However we are investing in Filament Yarn Technology and machinery, to ensure we have the yarn capacity to continue growing our Carpet business. The investment will also lower costs and increase styling capabilities.

The recent raw material price increase has had a negative impact on margins in the fourth quarter, and the first quarter of this year. It is anticipated that the recently implemented price increases will mitigate cost increases in the second quarter. As a product driven Company, we have continued to emphasize new innovative product introductions. We believe this strategy positions us for growth as the market improves. This strategy has been enhanced by the ColorTron hollow needle products, and the new wool collections at the upper end of the market. And new value oriented Stainmaster products and our Durosil polyester products.

Going forward our focus continues to be on satisfying our customers with beautiful quality products. Reducing internal costs and improving inventory and fixed asset leverage. While maintaining outstanding service to our customer. We continue to concentrate on increasing profitability without negatively impacting our ability to respond quickly to better business conditions.

At this time, we would be glad to open up the call for questions. Ryan?

(Operator Instructions)

We'll take our first question from Keith Hughes with SunTrust.

Thank you. Two questions. Number one, on raw materials. We've seen a lot of crude acceleration in the last couple of weeks, are you seeing your inputs go up yet again? I know there was a big surge late last year, early this year. But are we heading to a new level of price that is higher?

I guess number two, on the demand. You had talked about February picking up from January. Was there any sort of pre-buy associated with that ahead of the price increase, do you think that affected the numbers?

Let me answer the second question, first. Keith, the price increase, normally does have some impact on pre-buying. We see it more in our commercial carpet business than our residential business. Because most of our residential business is almost all of it is cut order. We are not selling or stocking rolls.

We did see more on the commercial side than residential. Trying -- there is no way to quantify what impact that really had. But as I did indicate, our order entry for both residential and commercial were higher than our sales for the first 10 weeks of the year. And that is unusual in the first quarter.

In terms of raw materials, is you recall, the industry -- several companies in the industry announced price increases. Then later decided to increase those increases rather than have two increases in the first quarter. So, the price increase was probably the delayed a couple of weeks overall. But, was of a greater magnitude than originally I think intended or announced.

The fear now, which you alluded to, is with oil at $100 plus, if it were to stay at that level or continue to go up, there probably would need to be -- there probably will be cost increases to us that will need to be passed on at some point in the future. But, I think for right now, we are concentrating on getting this first price increase fully implemented and feel like it will be by the end of the first quarter.

(Operator Instructions)

We will take our next question with Arnold Brief with Goldsmith & Harris.

You introduced a lot of new products. Could you give us some idea of how that, on balance , affects your average price per yard. Is it going up, is it going down from some of the other products. How is

That is a little difficult to respond to because we introduced product all across the price spectrum that we service. The lowest price being the polyester products, the highest price being the wool products. We've introduced a significant number of nylon along with those.

I would say our average price has come down slightly. We are still in the $19 to $20 range in terms of our average price as a Company. That includes commercial as well as residential. Residential would be a little higher than that. Probably.

Okay. Secondly, you have some impairment or nonrecurring costs in the quarter. Did they -- could you give some idea if they're still on the SG&A line and cost of goods sold line. Can we get some idea of the normalized percentages there?

Arnie, we separate the facility consolidation costs. Which during the quarter was $918,000. And that is nonrecurring.

That is on the cost of goods sold?

No. That is in the SG&A.

That is SG&A?

Right. But on the press release you will see is separated on the back page.

I thought I looked at it. I missed it somehow. Just to get clear, I think we talked about this before Jon, but just to be clear. You've indicated your breakeven about $240 million? But that seems to be based on a 25% gross margin.

If your gross margin was normalized were returned to former -- roughly formal levels, maybe not peak levels, but formal levels. It looks to me like your breakeven is closer to $200 million.

Could you give us some idea how you look -- the outlook for gross margins? With volumes recovering, obviously there's some leverage on fixed costs. Price cost increases are another issue. Could you talk about that a little bit and what the outlook is? Longer term. I'm not looking for the next quarter, but longer term.

Okay. Our gross margin percentages, of course in the current quarter will be a little bit depressed because of the price increase won't be fully implemented. But going forward, our gross margin percentage typically would get stronger as we go throughout the year. And that is more of a function of the upper end being stronger in the fourth quarter, than earlier in the year.

What is the possibility in your minds of getting back to a 30% gross margin, over time?

Arnie, that is obviously difficult to respond to directly. But clearly, our margins are lower than they historically have been. And candidly, our core businesses -- have held up pretty well. It's some of the added volume, it's some of the higher cost due to lower volume in the facilities. So as all of that comes back together we would anticipate margins would move north.

Okay. Could you give us a little more color on the SG&A line. I think it was -- I don't have the number in front of me, 13.8% in the quarter. There was some non-recurring items in there that we could take out. But there was also some cost cutting I would think, that had some effect on expenses, number one. Number two, probably not all that expense efficiencies were realized in the quarter. Could you give us some idea of what the ongoing run rate is there?

The fourth quarter is more in line with our 2011 experience, then it was the first three quarters of the year. The fourth quarter, we had already established, what I would consider, our normal level. Whereas the first three quarters of the year, we had higher expenses primarily to new product introductions. So, I would say that would be a good indicator of what 2011 will look like.

Excluding -- excluding the $900,000?

Yes, the 13.8% does not include the $918,000. That is below the line. If you are looking strictly at the 13.849%, that is --

The run rate for that level of volume?

Right, that level of volume. That's correct.

Okay thank you.

(Operator Instructions)

We have no further questions at this time.

Thank you Ryan we appreciate everybody being with us for the fourth quarter conference call. This is a little later than we normally have this call. It is almost old news in terms of where the industry was for the fourth quarter. But we look forward to this year having a better year and appreciate your being with us. Thank you.

That concludes today's call, thank you for your participation.