Dixie Group Inc (DXYN) 2011 Q3 法說會逐字稿

Good day, and welcome to the Dixie Group, Inc. third quarter 2011 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, Mr. Dan Frierson. Please go ahead, sir.

Thank you, Lauren. Welcome to all of you to our third quarter conference call. I have with me today Jon Faulkner, our Vice President and Chief Financial Officer.

Our Safe Harbor Statement is included by reference, both to our website and our recent press release.

During the third quarter, there was no relief in home sales, nor any clear picture of when the housing market will improve. The many negative factors facing the industry have not changed appreciably. Because no path to improvement is apparent, we continue as an industry to experience plant closures and staff reductions. In the third quarter, the carpet industry continued to show a decline in units, with perhaps small improvement in sales. Residential business continues to be difficult, although the commercial business is experiencing better conditions.

With this backdrop, we were pleased with the solid sales growth we continued to have in the third quarter. Our residential business grew by 26%, in part due to a one-time special. And our commercial business was up 14%. Modular continues to gain market share in the commercial sector. The other major event for us was the refinancing of our senior credit facility and the retirement of our convertible debentures.

Jon Faulkner will review our third quarter financial results, after which I will continue further on market conditions. Jon?

Thank you, Dan. Looking at our results, third quarter sales were $69.1 million, up 22.8% on a fiscal period basis versus last year. For the quarter, total carpet sales for the Dixie Group were up 22.9%, while the industry we believe was up slightly. Commercial products were up 14.2% for Dixie while the industry, we believe, was up in the single-digit range. And residential products were up 26.1%, while the industry was down slightly. All brands were up during the quarter, reflecting our continued investment in new product. Dixie had gains in all residential brands, while the residential market was down slightly. The quarter included a one-time customer special that added 6% to our sales. Our commercial business, marked by strong sales in modular and retail store planning, outperformed the industry, though the market was up for the fifth quarter in a row. We continue our investment in new products especially those aimed at the upper-end consumer utilizing features such as Stainmaster's SolarMax and TruSoft fiber technologies.

Gross profit at $15.8 million was 25% above the year ago in dollars. As a percent of sales, gross profit was 22.7% versus a prior year of 22.2%. Margin was positive versus the prior year due to higher manufacturing volume. The quarter started off stronger with the added volume from the one-time customer special. And retail activity slowed noticeably in August before seasonally picking back up in September.

SG&A at $14.5 million and 20.8% of sales was below last year at 24.9%. The operating income in the quarter of $1.2 million compared to a loss of $1.9 million in 2010. Other expenses included $317,000 of financing and debt extinguishment costs related to the new senior debt facility. Our interest expense at $904,000 was the same versus the prior year due to lower interest rates offset by higher debt levels.

Our effective income tax rate for the year-to-date is 31%. We had a trueup in the quarter that resulted in a credit greater than our pre-tax loss. Our normal rate going forward at a reasonable level of profitability would be in the 34% range. Diluted earnings per share from continuing operations was zero in the quarter. And our earnings per share from continuing operations, adjusting for the one-time financing expense, would have been $0.02 per share.

Looking at our balance sheet, our receivables increased $2.1 million during the quarter, of which trade receivables increased $1.1 million with other receivables and increase in bad debt during the quarter of $1 million. For the year-to-date, receivables increased $4.1 million. Our trade AR days outstanding increased by 3 days versus the prior quarter, primarily due to a shift in customer mix. Our inventories decreased by $2.5 million in the quarter.

Capital Expenditures were $4.2 million for the nine months. And depreciation and amortization was $7.3 million. We anticipate capital expenditures for 2011 at $6.8 million. Our debt stood at $74.8 million at the end of the period, up $2.5 million for the quarter. The current portion of long-term debt includes the $9.7 million convertible subordinated debt due. Convertible debt was paid in full on October 5. We ended the quarter with availability under our loan agreement of $22.6 million. As of today, our debt is $69.4 million and our availability is $27.1 million.

Our updated investor presentation is on our website at www.thedixiegroup.com. Dan?

Thank you, Jon. For the industry, the start of the fourth quarter looks very much like the third quarter. There appears to be little, if any, improvement in the residential business. And possibly some slowing on the commercial side. Having completed seven consecutive quarters of sales growth in excess of the industry, we believe that continued emphasis on new product introductions is the correct strategy to enhance our position within the high end of the market.

As Jon indicated, all of our residential brands had growth in the third quarter. And continued to grow relative to the year-ago period. Although the comparison is more difficult. This is the reason we continued to invest in expanding capacity and new products servicing the upper-end segments of the market. We have recently introduced new products made with INVISTA's SolarMax solution-dyed nylon. And will soon introduce products made from INVISTA's new TruSoft fiber. In addition, we're expanding our wool offerings which have continued to grow for us during the entire downturn. And our new Infinity wool rugs are well-accepted by the designer community.

Our commercial business continues to show growth. And modular has made a significant contribution to that growth this year. We have also seen growth in our end-user accounts.

Our total carpet sales are up for the first nine months by more than 20%. We do not expect the fourth quarter to experience such gains. Last year's fourth quarter was significantly better than the first nine months. And the calendar does not work in our favor. Nevertheless, we're continuing to grow our core high-end business at Fabrica, Masland and Dixie Home. And are up in total sales for the first four weeks of this quarter.

In the fourth quarter we anticipate the favorable mix change in our residential and commercial businesses will improve our margins. However, we do anticipate higher sales expense due to higher sampling costs of introducing more products. We have numerous initiatives which are designed to lower our costs and improve customer service. These initiatives have helped us improve on-time delivery and reduce operating costs despite the introduction of many new products.

Our capital expenditures this year and next year are at a level of two-thirds of our depreciation and are focused on insuring that we have the yarn capacity to sustain significant growth and at lowering our costs in our facility. The industry appears to be moving toward lower price points due to the growth of the multi-family sector and the growth of the home centers' market share. The growth of polyester products at retail also impacts the average price points, which are growing. Despite these trends, we see strong growth at the upper end of the market and are pleased with the improvement in sales of all of our brands. Our average selling price at the Company continues to be in the $20 per square yard range.

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

(Operator Instructions) Sam Darkatsh with Raymond James.

This is Josh filling in for Sam actually. Congratulations on the nice share gains in the quarter. Your last comments on price lead well into my question. There seems to have been some turmoil, I guess I'll call it, in some of the other players and other points in the industry as far as what pricing should look like. What sense do you all have about where you fit in, in terms of pricing? And since you play more at the high end with potentially less price sensitivity, do you have greater availability to be more of a price maker or a price leader going forward?

Josh, I'm not exactly sure what the question is. I do think price, obviously, is less important in the higher end. It's more about style, design, color, texture, and other product attributes and less about price. Obviously as you go down to the less expensive products, it becomes much more of a price game. We all have experienced raw material increases this year. We have had, like the industry has had, two price increases. There continued to be some raw material increases after the second increase. But I think, at this point, prices have stabilized.

Dillard Watt with Stifel Nicolaus.

Wondering what you could talk about in terms of the strength in the commercial market with modular. What sort of demand are you seeing on an end-use basis and from what markets? And also if you could talk a little bit about the deceleration you said you saw towards the end of the third and the beginning of the fourth quarter.

Let me start, Dillard, with the deceleration. We did see late third quarter, early fourth quarter order entry declining slightly. I don't know whether that's a trend or an aberration at this point. Obviously, as we've mentioned, we've seen good growth in modular this year. But we've also seen growth in broadloom. So it's been a good year in terms of the overall commercial business. As we are in the fourth quarter now, I think we will have a good year but I don't think the fourth quarter will be maybe as strong as it was a year ago.

In terms of end-use markets, we play in the hospitality area considerably, and that has been fairly good for us. Obviously the corporate sector has been strong, as has our carpet for retail stores.

(Operator Instructions) It appears there are no further questions at this time. Mr. Frierson, I'd like to turn the conference back to you for any additional or closing remarks.

Lauren, thank you very much. We appreciate each of you being with us here on our third quarter conference call. Obviously we were pleased with our top line third quarter, and are optimistic about improving our bottom line going forward as we continue to improve our top line. Thank you.

This concludes today's conference. Thank you for your participation.