Dixie Group Inc (DXYN) 2011 Q1 法說會逐字稿

Good day and welcome to The Dixie Group first quarter 2011 conference call. As a reminder, 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, Katie. Welcome, everyone, to our first quarter conference call. I have with me today Jon Faulkner, our Chief Financial Officer. Our Safe Harbor statement is included by reference to our website and press release.

The luxury end of the carpet market began to gain momentum in the fourth quarter of last year. After a brief weather delay in January, that momentum continued to build during the first quarter. Our sales adjusted for the extra week we had in the first quarter of this year were 21.4% above year-ago levels. Both our residential and commercial carpet sales improved significantly.

Our carpet sales increased 21.5% from the year-ago quarter, with residential carpet sales up 22.5% and commercial carpet sales up 18.5%. We believe our continued investment in new products during the economic downturn has positioned us to continue outperforming the industry as we have done for the past five quarters.

Wool carpet collections by Masland and Fabrica continued the growth trend we have experienced since they were introduced. Our Stainmaster products are performing well in all of our price points from the mass merchant through the upper end retail and designer channels of distribution. The growth of our commercial carpet business reflects the success of our modular carpet tiled products as well as continued growth in our commercial end user markets.

With dollar sales and units up significantly, we were able to show operational improvement and better financial results despite significant raw material increases during the quarter.

Jon Faulkner will review our first quarter results after which I will comment further on current market conditions and our sales so far in the second quarter. Jon?

Thank you, Dan. First quarter sales were $66 million, up 30.7% on a fiscal period basis versus last year, however, they were up 21.4% on a comparative 13-week basis. We had 14 weeks in the first quarter of 2011 versus 13 weeks in the same quarter last year.

For the quarter, our total carpet sales, adjusted for the 13-week period, were up 21.5% while the industry was up 2.3%. Our commercial products were up 18.6% while the industry was up 7.7%. Our residential products were up 22.5% while the industry was down 1.4%. Reflecting our continued investment in new products, Dixie had gains in all residential brands while the residential market was flat.

The commercial business, marked by strong sales in modular and the retail store planning, outperformed the industry though the market was up for the third quarter in a row. Our gross profit at $16.6 million was 34% above a year ago. Gross profit margin was positive partly due to higher manufacturing volumes. Carpet production was up 46% versus the prior year due to higher sales, inventory rebuilding and sample production.

The first quarter selling and administrative expenses comparison was 23.3% of sales compared to 28.5% last year. Selling and administrative expenses were in line despite an unusual $625,000 charge for worker's compensation insurance that hit retention limits. We had no expense for the facility consolidation during the quarter.

Other operating income included a $492,000 tax-free insurance gain. The operating income in the quarter of $1.7 million compared to a loss of $2.3 million in 2010. When adjusting for facility consolidation expenses and one-time expenses, the worker's compensation retention and the tax-free insurance gain, improvement in operating income versus a year ago was $3.9 million.

Our interest expense at $932,000 decreased $303,000 in the first quarter versus the prior year due to lower interest rates despite higher debt levels. Our effective income tax rate was 14.5% in the quarter due to the tax-free insurance gain. Our normal rate at current levels of profitability will be in line with our statutory rates.

Diluted earnings per share from continuing operations was $0.05 in the quarter. Looking at our balance sheet, receivables increased $1.3 million during the quarter. Our trade account receivable days outstanding was flat versus the prior quarter, but is three days higher than the same time last year due to a higher mix of sales from mass merchant accounts.

Inventories increased $8.5 million in the quarter. Unit inventories increased due to higher levels of work in process and finished goods to support the higher levels of business during the period. Inventory turns at 3.08 for the quarter improved by 12% versus a year ago primarily due to higher sales. Capital expenditures were $1.1 million for the quarter and depreciation/amortization was $2.5 million. We've planned capital expenditures for 2011 at $6.1 million. Our debt has increased $3 million for the quarter.

We ended the quarter with availability under our loan agreement of $10.1 million. Currently our availability is $12.4 million. We will refinance our bank lines in the second half of the year. This will increase our availability for continued growth as well as provide funding to cover the final payment under our convertible subordinated debentures that are due in May of 2012. Our updated investor presentation is on our website at www.thedixiegroup.com. Dan?

Thank you, Jon. From our perspective, uncertainty in the economy generally, and specifically in the housing market, do not provide a positive backdrop for the carpet business today. The dramatic increases in our raw material costs also complicate our planning for the future.

Despite these issues, we continue to be optimistic about our future. We are less dependent than the industry upon new construction and are driven by remodeling or refurbishing of existing homes and commercial facilities. We also believe the upper end of the market, which we service, will remodel before the market in general.

For these reasons, we continue to invest in new product offering and sales people. Despite these investments, our SG&A in the first quarter was down 5 percentage points from the first quarter of last year. The escalation of raw material costs was also an issue in the first quarter, and our LIFO full reserve increased $4.4 million.

The carpet prices which were increased in mid-February were fully implemented by the end of the quarter. We have also announced another price increase in April, which should be fully implemented by the end of the current quarter.

In a period of so much uncertainty, we continue to focus our effort on better utilization of our assets and operational improvement. These efforts, along with the sales improvement led to our profitability in the first quarter which is typically our weakest time of year.

Last year, the second quarter was significantly stronger than the first or the third quarter. Therefore, our comps will be much more difficult in the second quarter than they were in the first. We have now completed the first 5 weeks of our second quarter. All of our brands continue to show solid growth; therefore, we see noticeable improvement in both the commercial and residential businesses.

Our new introductions are beginning to reach the market and are having a positive impact on our sales volume. Currently, our carpet sales are more than 15% over last year's levels in the second quarter. We anticipate we will, again, outperform the industry on the top line and continue working on operational improvements internally to improve the bottom line.

Although our current bank loan is not due until May of 2013, we plan to refinance our loan to ensure that we have liquidity to finance the potential growth over the next few years if we continue to outperform the industry, and make the final payment due in May of 2012 under our convertible subordinated debenture. At this time, we'd like to open up the meeting for questions.

Thank you.

(Operator Instructions)

Your first question will come from Sam Darkatsh with Raymond James.

Good morning, this is actually Josh filling in for Sam. Congratulations on the great quarter. A couple quick questions as we look forward. First, where were your average selling prices year-over-year in the quarter and where do you see them in the next quarter?

Josh, there hasn't been a major change in our average selling price of all of the businesses. We have seen some movement to the lower end. We've seen some movement to the very end with our wool products. We still bounce around that $19 to $20 average selling price per square yard for our Company.

Okay. And then do you have any sense of a dollar amount of what the effect of the raw material inflation was for the quarter?

Our increase in LIFO of $4.4 million was largely due to the raw material cost, so that gives you an idea of the effect relative to what we had put in for inventory, but I don't have a percentage on the cost of goods sold side. We generally saw two price increases, which were in the mid-single digits, that should be fully effective by the end of the second quarter.

Okay. And that leads me to my last question. Where do you peg your incremental margins going forward?

Our incremental margins have been above 25%, and I would anticipate they'll continue in that range.

Above 25%?

Yes.

Thank you very much.

Your next question comes from John Baugh with Stifel Nicolaus.

Good morning, Dan, Jon. A couple of things. You mentioned a five-week, 15% ahead. Any breakdown between what you've realized in price year-over-year versus units in that number?

John, we haven't looked at it quite that closely yet. We're just closing April, as we speak. It was a five-week month for us. For us, I think prices are up. Our prices in early April, versus first quarter simply because of the price increases that have been implemented.

Okay.

Does that answer your question?

That's helpful. And then with the second increase that is either gone through or going through, I'm never sure at what stage of the process it is. I'm wondering, we've seen oil pull back here in the last week or so. Have you got the increases through to where there won't be any pushback or is it still in process and there may be some larger customers pushing back in saying -- well, wait a minute now. I'm just curious where that is.

John, that would be speculation at this point. The prices were implemented in mid-April, and there will be a few that obviously linger longer, but we would anticipate the increases will be implemented as discussed. I will say, we've seen no raw material decreases.

I'm like you, I watch oil every day, and you see oil prices come down, and it seems encouraging. But we have seen no raw material decreases at this time, and candidly, I don't think the increases ever really caught up to the price of oil. I would anticipate that these increases will go through as described, and I'm hopeful that that will be it for the year. Obviously if oil were to increase dramatically, we will see more.

Dan, I'd heard that polypropylene went up a few weeks ago again. Had that been the only chemical that's really moved in the last four or five weeks? And, you mentioned you hadn't seen any decreases, so anything else that's going up other than polypropylene?

I think it's almost a matter of timing of when you're buying something. We certainly have seen polyester prices, or in the last month or so have been up. Nylon chip has been up, but I think right now, the whole industry is suffering from higher raw material costs than they've been able to pass along to date. Hopefully by the end of the second quarter that will be in equilibrium.

On your own mix, you mentioned your wool as, I assume, up nicely year-over-year. I think carpet tile is up nicely. Those are the things that would pull mix up. You're increasing your presence of polyester and I would assume that would be something that pulls mix down. Any commentary on the net pluses and minuses on margin?

Interestingly, the business that got hit the most, John, and you understand and know our business, the brand that got hit the most in the downturn was Fabrica. So obviously, you would -- it's not hard to understand that we're now seeing bigger percentage increases there than we are in some of the other parts of the business. That's on nylon as well as wool. So pretty well across the board we are seeing these increases.

Great. Thank you.

(Operator Instructions)

Your next question comes from Arnold Brief with Goldsmith & Harris.

Historically, your gross margins were 30% or better going back in time. Given the changes in mix and customer base, raw material costs, what would it take to get back there in terms of the two major components? One would be price increases or the capacity utilization.

Okay. Arne, I would say the -- really the effects that would have to be would be overall top-line growth to get it back into that $300 million range from where we were a few years ago. And that would be a significant change. Then as Dan said, the upper end really got hurt worse during the downturn than the middle part of the market. So it would be a restoration of Fabrica in line with the sales volumes they had a few years ago. Those are really the two things that I would expect --

Given all the consolidations and cost cutting that you've done, could you get back to that 30% gross margin on a lower level of sales than you had in the past or is the cost increases and raw materials, et cetera, mix, would they require you to get back all the way up, so to speak?

Arne, the mix certainly is having an impact on this, but not that dramatic because our average selling price has not changed that much. It's really been more a function of volume and units. As we see that improve, we're seeing our margins -- our actual margins, go up, and as Jon just stated, if we were in that $300 million level of sales -- that we would anticipate we'd be in that 30% range. However, I think the other thing you'd see is our SG&A would be a lower percentage than it was --

That was all part of it, yes, yes. You've indicated that your increases in market share are due to new products, et cetera, wool, tile, whatever. But in fact, you also indicated the Stainmaster product is doing very well, which is more -- I don't know how to describe it, more of a standard product. What would you attribute the success in the Stainmaster line to?

In Stainmaster, we've also brought out a lot of new products. They are Stainmaster products, but the ones that have really helped us are a lot of our new products, more highly styled, longer color lines, more selection for the consumer. That's where we really shine.

Stainmaster is in the upper end of the business, being type 6/6 nylon and branded. We see that as a real key part of our business, and it's continued to improve. And we see them doing things from a product development standpoint that we believe will be able to help us continue that growth. They also have grown significantly in the mass merchant or the big box area, and we've been a participant in that as well.

I just want to be clear. On the $15 million SG&A, that includes $650,000 of a nonrecurring expenditure?

Yes, it's $625,000.

$625,000, okay. Last question. If I make the assumption that raw material prices decline as we go through the year, what do you think your ability would be to hold your price levels?

I would say in the upper end of the market, typically we are able to hold. That's why we're not as aggressive when things go up there maybe. But, in the lower end of the business, particularly the polyester business, tends to be much more competitive, so it's a function of which end of the market you're participating in or concentrating on.

Typically, the industry will do better in that kind of environment. First of all, we've got to catch up with the increases that we've already seen --

I understand that. I phrased the question, it was my assumption. On balance, if raw material prices declined, if you put it altogether, your margins would probably balance out.

We would certainly hope.

You should hold enough of the price increases to -- (multiple speakers)

That's been the history, Arne.

Thank you.

(Operator Instructions)

With no further questions in the queue, I'll turn it back to our speakers for any additional or closing comments.

Thank you, Katie. Thank all of you all for being with us on our first quarter conference call. We're certainly looking forward to improvement in the business, which we have mentioned to you already in the second quarter, and look forward to meeting with you again at the end of the second quarter. Thank you.

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