Dixie Group Inc (DXYN) 2011 Q2 法說會逐字稿

Good day, everyone. Welcome to the Dixie Group Incorporated Second Quarter 2011 Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to the Chairman and Chief Executive Officer, Dan Frierson. Please go ahead, sir.

Thanks, Diane, and welcome everyone to our second 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 our press release.

Continued uncertainty in the economy, along with high unemployment and weak recovery in the housing sector, meant the second quarter would continue to be challenging for the industry. The improvement in the commercial market was most welcome but not enough to create a positive environment for the industry. During the quarter, we believe the industry experienced decline in unit volume and a slight increase in dollar sales due to higher prices driven by continued raw material cost increases.

Despite this difficult environment, we were able to show solid top line growth at 17%, and all of our brands participated in this growth. Our profitability was a disappointment due to the rapid escalation of raw material costs and the time lag in recovering these costs through carpet price increases.

Jon Faulkner will review our second quarter financial results, after which I will comment further on market conditions and our market expectations for business in the third quarter. Jon?

Thank you, Dan.

Looking at our results, second quarter sales were $69.2 million, up 17.2% on a fiscal period basis versus last year. For the quarter, total carpet sales for the Dixie Group were up 17.2% while the industry was up slightly. Commercial products were up 20.4% while the industry was up in the low double-digit range. Residential products were up 15.6% while the industry was down slightly. All brands were up during the quarter.

Reflecting our continued investment in new products, Dixie had gains in all residential brands while the residential market was down slightly. Our commercial business, marked by strong sales in modular and the retail store planning sectors outperforming industry, so the market was up for the fourth quarter in a row.

Our gross profit margin at $16.7 million is 9.8% above in dollars versus a year ago. Margin was positive due to higher manufacturing volume. Order started off stronger, but retail activity slowed noticeably in June. Both businesses had price increases during the quarter. Margins were compressed by the offset of the timing to receive the price increase as compared to the immediate cost increases under LIFO. Carpet production was down 13% versus a prior quarter as we adjusted run rate to a lower sales rate late in the quarter.

SG&A at $14.9 million and 21.6% of sales is below last year's percentage of 25.4%. We completed the buyout of the Pullman lease, resulting in a gain of $563,000 during the quarter, and therefore we have completed all the restructuring plans we have put in place during the downturn.

The operating income in the quarter of $2.3 million compared to an income of $59,000 in 2010. Our interest expense at $900,000 decreased $182,000 versus the prior year due to lower interest rates despite higher debt levels. Our effective income tax rate was 42% in the quarter due to truing it up to a higher-than-planned tax expenditure as we are unlikely to utilize the full reserve state tax net operating losses to a degree originally anticipated. On normal rate going forward, at the current levels of profitability, should be in the 34% range. Diluted earnings per share for continuing operations was $0.06 in the quarter.

Looking at our balance sheet, receivables increased $664,000 during the quarter, of which trade receivables increased $940,000, offset by other receivables and a decrease in bad debt during the quarter of $90,000. For the year, receivables increased $2 million. Our trade accounts receivable days outstanding increased by two days versus the prior quarter and are the same as last year. Inventories increased $2 million in the quarter. The LIFO reserve has increased $2.8 million in the quarter and $7.2 million since yearend as we have absorbed higher raw material costs. Inventory churn stayed flat at 3.08 for the quarter.

Capital expenditures were $2.1 million for the six months and depreciation and amortization was $4.9 million. We anticipate capital expenditures for 2011 at $6.2 million. Our debt stood at $72.3 million at the end of the period, up $4 million for the quarter. The current portion of long-term debt now includes the $9.7 million in convertible subordinated debt that's due in May of 2012.

We are in the due diligence phase with potential lenders regarding a replacement of our current revolving and term credit agreements. The purpose of such transactions is to repay the $9.7 million of convertible subordinated debentures due in May of 2012 to extend our financing for another five-year period, and to provide the funding needed to continue our growth. Our updated investor presentation is on our website at thedixiegroup.com.

Dan?

Thank you, Jon.

For the industry, the start of the third quarter does not appear to be much different from the environment in the second quarter, plus the debt ceiling debate has probably been a negative for consumers. Our plans are to continue our successful strategy of improving market share by continuing to invest in new products and processes, and strive to maintain our goal of being the fashion leader in the industry.

First four weeks of this quarter, we have continued to see solid growth in all of our brands. Our commercial business has experienced significant growth of our modular products and continued demand for more products from our end-user accounts. The luxury or fashion end of the residential market appears to continue outperforming the residential market in general. Our investment in new technologies and new products has enabled us to stay ahead of the competition and grow our business in a difficult market.

Due to the industry weakness we saw late in the second quarter, we have taken advantage of one-time opportunities for additional business during the third quarter, which will increase sales, likely compress margins, and lower our SG&A percentage. During the quarter, we will also experience the full impact of our price increase which was implemented in the second quarter. This time, it is difficult to determine if raw material costs will continue to trend upward or moderate.

As Jon mentioned, our capital expenditures are expected to be in the $6 million range and will be focused on expanding our yarn capacity and processing capability. This investment should position us for significant growth in the future.

We continue to focus on internal operations and have experienced significant improvement over the last year in areas of customer service and cost reduction. Based on the sales growth we experienced in July and the one-time opportunities we've taken advantage of in the third quarter, we anticipate our sales will grow in the quarter more than the percentage increase we experienced in the second quarter, which was 17%.

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

Thank you very much. (Operator Instructions).

We'll take our first question from Arnold Brief with Goldsmith & Harris.

I guess I need a little explanation. I thought the raw material cost pressures were greater in the first quarter than the second quarter because I thought you'd get some price increases in the second quarter that you didn't have in the first quarter. So, were there some other cost increases, or could you explain what happened second quarter versus first quarter?

Arnie, there was a second round of price increases in the April timeframe, and we had a second round of carpet price increases implemented in mid to late April which obviously were not effective during most of the second quarter.

So, the pressure from raw material costs were greater in the second quarter than they were in the first quarter?

I haven't looked at it quite that way. There was a lag from the first quarter to the second quarter, and I would say by the end of second quarter we have caught up with our raw material increases.

Okay. Could you give us the extent of the price increases, so we have some idea of the organic -- the unit volume growth? How much were the price increases?

Arnie, the two price increases combined, we're looking at a little bit below double-digits. In terms of raw material costs, it was -- of course, raw material costs will be eventually offset, but the timing of that [clerical] clarification, with the major increases really came through in the 1st of February and then also came through in April. So the time, we had two major timing increases, and that's why we had compressed margins throughout the whole first six months.

Okay. On the commercial, I'm sure you're not going to give numbers, but maybe anecdotally, could you -- are your commercial margins lower than the corporate average? And is the tile segment of the commercial market lower than the commercial average?

The commercial -- well, first of all, let me turn to tile. Tiles can be comparable to our broadloom margins, but as we are starting with a lower volume, we don't have as good a manufacturing variances we would like to have. As our volume grows, obviously, those diminish in terms of our margins. But over long term, we don't see any reason why those can't be similar margins.

The first part of your question, can you repeat one time?

Commercial in general versus your corporate assets?

Our margins actually are similar on both sides of the house. You have a high end of the commercial and a high end of the residential which have similar margins, and likewise, at the more volume-driven end of the market, they have similar margins. So they're not dramatically dissimilar. It's more a function of what's selling at that point in time. We had unusually heavy large volume shipments or large volume customer shipments in the first half relative to commercial, so our margins were more compressed there. But over the course of the year, that will even out.

Okay. And finally, could you be a little more explicit on this one-time opportunity? This is -- was this a one-time opportunity to catch an ongoing business or just a one-time opportunity that's going to hit sales in the third quarter and then disappear?

The latter. It will hit sales in the third quarter, increase sales, but will not repeat.

Not repeat, okay. Thank you.

Thank you, Arnie.

(Operator Instructions). We'll take our next question from Sam Darkatsh from Raymond James.

Good morning, Dan and Jon. This is actually Josh filling in for Sam. How are you?

Fine, Josh.

I was wanting to get a little bit more sense of how the quarter progressed. Could you talk about it maybe on sort of a month-by-month basis what you were seeing in the industry in your own business?

Let me start, and then if Jon wants to add, please fill in.

Basically, business was better earlier in the quarter than it was in June. April and May were certainly stronger than June at retail on the residential side. Commercial was pretty much the same throughout, but on the residential side, which is the bigger part of our business, April and May were stronger than June.

I will add though that our average selling price continued to go up during the quarter due to these price increases that I mentioned already. And our average selling price for the quarter for all of our business was still in that $20 per yard range.

Jon, do you have any further comments?

Only that July had turned out more favorable than we would have thought a few weeks ago.

Okay, that helps. And were there any -- can you drill down a little bit deeper into some of the different end-markets? Are there particular industries where you were seeing more strength, and do you expect that to continue?

You're talking about third quarter now?

Well, what was in the quarter and what do you see going forward?

Well, I think we have -- what we're seeing is that the higher-end products, higher-end brands, are doing -- did well in the second quarter and are doing well in the third quarter. All of our brands were up in the first quarter, second quarter, and are up in the third quarter. So what we're seeing is pretty much across the board the higher end is doing better than the market in general.

Now we have taken advantage, as we mentioned. There's some other opportunities and one large one in the third quarter, which is obviously not higher-margin business. But we're continuing to see growth in both the residential and commercial business in the third quarter, but I'm not sure that's indicative of the industry. I think because we're in the high end, we see that. But if I had to anticipate where the industry is, I would say the commercial business is continuing to improve relative to a year ago. And the residential business is still very challenged relative to a year ago.

Thank you very much.

Thank you, Josh.

And we'll take a follow-up from Arnold Brief with Goldsmith & Harris.

I'm just wondering whether you could give us some idea of the -- what your gross margins might have been in the second quarter if the price increase had been in effect for the full quarter. I'm trying to get some idea of what your normalized earnings power should be if you go out on time. Part of that is a function of your volume, obviously, versus fixed costs, and part of that is restoring your relationship with your raw material costs. I'm just wondering whether you could help us do that for the second quarter if that price increase had been there.

Arnie, let me start by just saying, it's a function of volume, as you pointed out, it's a function of mix of our products, and it was a function of recovering the cost increases. And I can't give you a specific answer to that question.

Well, let me rephrase the question. How much higher would your revenues have been if the price increase was in effect for the full quarter?

Arnie, I'm not sure I can really answer that, and the only reason is because the introduction of the price increases in the second quarter had a little unusual phenomena in that we had our annual May sale right in the middle of the price increase period. So we had a sales period which had lower selling prices because of that just planned event on top of the price increase going in. And so we had a little bit of a double-whammy in the month of May. So I'm not real sure I can give you an accurate number.

The one thing I will say is that in terms of the timing of that, it really was near the end of the quarter that we started to really feel the effect, and that means in the June timeframe. We didn't feel much effect in the first two months.

Arnie, I'd also add, and one reason it's so difficult to give a specific answer is, and this is for the industry more so than us, but it also impacts us, whenever you go through a price increase, particularly one of the magnitude that we've gone through, you're going to see consumers trading down or trading to a price point. And I think that's why, for the industry, for instance, why [Aster Solomon] has become such a large percentage of the market so quickly is that there are certain price points at retail that allows you to hit, and therefore the consumer is not going to pay the higher price but is going to buy another product.

Let me try to pursue it from one other stand point. You had two price increases in the quarter, were they divided very roughly equally?

No, those -- one was in February-March timeframe, the other was April-early May timeframe.

Yes. But the February really didn't hit till April, and the other one didn't hit till June, late June. So if you look at the impact of the two price increases, were they roughly equal?

Yes, they were roughly equal.

That will help a little bit. I guess I'm trying to figure out what is it going to take for you guys to get back to the 30% gross margin. Obviously -- I think you can get back to that on less than the peak sales that you had in the past which I think were somewhere around 330 million, because you've lowered your fixed cost structure.

I think --

So that's part of it. But the other part of it is, of course, is restoring your raw material prices. And I'm just, well, I'm trying to get some feel for whether, as we look in the third quarter from the price standpoint, not the volume versus fixed cost, but from the price standpoint, are you sort of back to where you want to be at this point?

Well, we're never where we want to be. But you mentioned the 330 million and 30% margin, and obviously we ought to be able to get back to that margin, at somewhat less than that number due to all the cost reductions that we've had. We're not running at a rate that would allow us to do that today, but as we continue to increase our business, that would be, certainly, be our goal.

Okay. Thank you.

Thank you.

And with no further questions in the queue, I would like to turn it back to Dan Frierson for any additional and closing remarks.

Thank you, Diane, and thank you for being with us today. Obviously, the industry is in a, as I mentioned earlier, challenged position, but we continue to think we could outperform the industry going forward. Good-bye.

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