Dixie Group Inc (DXYN) 2011 Q4 法說會逐字稿

Good day and welcome to the Dixie Group Incorporated fourth quarter 2011 conference. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to the Chairman and Chief Executive Officer, Dan Frierson. Please go ahead, sir.

Thank you Kelly. Welcome to our year-end and fourth-quarter conference call. Our Safe Harbor statement is included by reference to our website and our Press Release. I have with me Jon Faulkner, our Chief Financial Officer. Dixie was able to return to profitability in 2011 for the first time since the severe downturn of 2008 and 2009. Our industry experienced a decline of unprecedented magnitude, and is still struggling to return to more normal times. We are fortunate that the luxury segment of the market, which we service, appears to be performing better than the market in general. Since the 2009 trough, the industry has grown less than 5% while Dixie has experienced 33% growth in carpet sales.

In 2011, we had sales growth in all of our brands, which further indicates that the upper end business is in the process of recovering from this historic downturn. Last year, our sales of residential products were up 16% compared to a slight decline for the industry. Our commercial products also outperformed the industry with sales up 11% versus the industry growth of approximately 7%. We have been in the process of further aligning our processes to fit our new operational structure. In 2011, we implemented a new planning system to streamline inventory control and enhance customer service, successfully developed our wool tufting center of excellence in our California facility, and introduced new heat setting technology in our yarn operation, and continued refinement of our realigned residential sales organization. Over the next year, we will continue to further refine our mission for each of our operations with emphasis on flexibility to respond quickly to changes in market conditions. Our fourth quarter sales were up mid-single digits on comparable calendar week basis, taking into account our year-end calendar relative to the holiday period this year versus last year though sales were flat compared with a year ago on a fiscal period basis. Our residential sales were up over 8% in the quarter, while our commercial sales were hurt by a slower fourth quarter in that market segment.

Our fourth quarter profitability was impacted negatively due to higher investments in new products. However, we believe that this investment will continue our above industry average sales growth in 2012. From a financial standpoint during the year, we successfully negotiated a new credit facility, allowing us to pay off our subordinated debt early and lower our annual principal and interest payments. In 2012, we will continue our focus on the balance sheet with modest capital expenditures, improved inventory leverage and tight cost controls. Our capital expenditures are expected to be $6 million, while our depreciation and amortization to be approximately $9.5 million in 2012.

At this time, Jon Faulkner will review our financial results.

Thank you, Dan. Looking at sales for the year, our sales were $270.1 million, an increase of 16.8% over 2010 on a fiscal calendar basis. However, on a comparable 52-week basis, they were up 14.7%. Fourth quarter sales were $65.3 million, up 0.3% on a fiscal period basis versus last year. Sales were up 4.6% on a comparable holiday schedule for the quarter. [If you] look at total carpet sales for the year, again on a 52-week basis, our carpet sales were up 14.7%, while the industry was up in the low single digits. Commercial products were up 11.2% while the industry was up in the high single digits, and residential products were up 16.2% while the industry was down a few percent. For the quarter, also on a holiday comparable basis, our total carpet sales were up 4.9% while the industry was up low single digits. Our commercial products were down 3.9% while the industry was actually up mid-single digits.

Finally, our residential products were up 8.4%, while the industry was up slightly. All of our brands were up for the year. For the fourth quarter, our upper end residential brands were up. Dixie Home was impacted by weaker sales [for] the mass merchant category. We continue to outperform the industry and the residential sector of the market. We believe our continued investment in new products for the discriminating consumer is allowing us to gain share at the upper end. In 2012, we will continue our investment in new products, utilizing features such as [Stainmaster], SolarMax and TruSoft fiber technologies. Our commercial business, though up for the year, was down during the fourth quarter. For the year, gross profit was 24.3% of net sales, as compared to 24.5% for the prior year. For the fourth quarter, gross profit dollars were flat with a year ago, and as a percent of sales, gross profit was 25.2% versus the prior year of 25.3%. The quarter started off strong with a stronger fall selling season but slowed significantly during the holidays.

SG&A for the year was 22.5% of sales, or 2.3% below a year ago. For the fourth quarter, SG&A was 24.2% of sales, above last year's 21.3%, primarily due to added selling experience for new product development we incurred in the quarter. Operating income was $5.7 million for the year as compared to a loss of $2.6 million a year ago, a swing of $8.2 million. Unusual charges were an additional loss of $1.6 million in 2010, and a gain of $600,000 in 2011. For the fourth quarter, we had an operating income of $520,000, compared to an income of $1.6 million in 2010. Unusual charges in the fourth quarter of 2010 were $900,000.

Our interest expense at $3.5 million was down 16% from the prior year due to lower interest rates. For the fourth quarter, interest expense of $735,000 was below the prior year due to lower interest rates offset by higher debt levels. Our effective income tax rate for the year was 35%. Our normal rate going forward at reasonable levels of profitability should be in the 32% range. Diluted earnings from continuing operations for 2011 is $0.10 per share, as compared to a loss of $0.35 per share in 2010. Non-GAAP income from continuing operations for the year of 2011 was $0.12 per share. Fourth quarter, we had a loss of $0.02 per share as compared to earnings of $0.05 per share in the fourth quarter of 2010.

Looking at our balance sheet, our receivables decreased $2.2 million during the year. Inventories increased $5.7 million during the year of 2011. This was largely driven by price increase for our raw materials. Capital expenditures were $6.7 million for 2011, and depreciation and amortization was [$9.6] million. We anticipate capital expenditures for 2012 of $6 million, and depreciation and amortization of $9.5 million. Our debt stood at $68.1 million at the end of the period, up $2.9 million for the year. The current portion of our long-term debt is $2.7 million at this year-end as compared to $7.1 million at the end of 2010. We ended the year with availability under our loan agreements of $25.7 million.

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

Thank you, Jon. We continue to innovate by differentiating our products through multiple yarn systems that vary luster and shade, along with our expertise in pattern and color. Looking into 2012, we are excited about our new Stainmaster products, particularly our SolarMax products, with inherent stain and fade resistance and TruSoft products, the new standard for soft floor covering. In addition, we have developed technology that would allow us to offer unlimited custom color selection in wool, a Fabrica exclusive. This and other technologies enable us to offer differentiated products, thus separating us from the competition.

In the first quarter, our residential business is off to a strong start in most areas, with favorable comps compared to a year ago, except in the mass merchant category, which is down from a very strong quarter a year ago. The commercial business, after a year of strong growth in the market, seems to be moderating, and our sales to that market reflect this moderation. We are up slightly for the quarter through the first 9 weeks. We continue to develop new styling in the modular area, and have been recognized for superior styling. Our total carpet sales for the first 9 weeks of this quarter are up high single digits. Remember, however, the first quarter of last year had 14 weeks, and we will only have 13 weeks this year. Raw material cost increases continue to be an issue for the industry. In January, there was an industry-wide price increase for residential products, which appears to have been implemented successfully.

Going forward, our goal continues to be satisfying our customers with beautiful products and outstanding service. Our plan in 2012 is to take advantage of better business conditions through increased sales and increasing profitability. We will maintain our focus on reducing costs through better quality, efficiency, and improved inventory and fixed asset utilization. We believe that as we leave behind the most difficult period ever experienced by our industry and our Company, we must continue striving for sustained and profitability growth. Due to our investments in new technology and new products, we are in a position to continue to grow at a faster pace than the industry. We have reached the point where improved sales should have a significant impact on profitability.

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

(Operator Instructions) Sam Darkatsh with Raymond James.

Good morning, Dan, Jon. How are you?

Fine, Sam. How are you? Sam?

(Operator Instructions) Sam, your line is reopened.

Okay, sorry about that. Dan, you can hear me okay?

Yes, we can, Sam.

I apologize for that. So you have been gaining share for some time now, largely as a result of your mix of the high end compared to the industry. What visibility do you have, Dan, as to your market share within your specific price points, if you could talk about that? I don't know what visibility that the industry allows for that, but to the extent you can discuss that?

Sam, there's no good, hard data that we can go to and give you a specific quantifiable answer to that question. I think everything is anecdotal. I would -- as an example, our wool business has grown every year for the last four years, despite this severe downturn. Of course that's the very high end of the high end. So I think the fact it's continued to grow throughout this downturn is indicative of the fact we have picked up market share, but again, we don't have any numbers or any way to quantify that.

Next question would be, what do you peg at this point, first week of March, where do you think the industry shakes out for first quarter growth, both residential and commercial?

Well, obviously we don't have any hard numbers that we can look at. From what we hear, I think the industry is up on the residential side. I really couldn't tell you how much. I think we are up much more than the industry, from talking to retailers. On the commercial side, I believe business has softened. We've seen that reflected in the marketplace. It's probably up slightly, but not up a lot. Remember, however, on the commercial side, you're beginning to compare to prior year a good period. So it makes it a little more difficult.

And then lastly, if you could talk with respect to your commercial business in the fourth quarter, I'm sure that there may have been some disproportionate effects from certain customers' ordering patterns, but it seems to have come off versus the industry, whereas in prior periods, you were gaining pretty tangible share in commercial. What happened in the fourth quarter, and why would the share trends either stabilize or improve going forward?

Sam, that's a good question. Our commercial business is up such a size that small product -- excuse me, large products tend to have a disproportionate impact. Possibly we had some of those last year and not this year. I can only say in the first nine weeks of this quarter, we're slightly ahead of a year ago. So, and I think that's pretty reflective of where the market is. Back to your previous question on the residential side, what I think we're seeing is pretty strong growth in the upper end, the luxury end of the market. Probably pretty strong growth in the very low end, particularly in polyester fiber and lower weight products designed specifically for multifamily housing, but the middle part of the market I think is still very, very sluggish.

Thank you much. I appreciate it.

Thank you, Sam.

(Operator Instructions) Arnold Brief with Goldsmith & Harris.

Yes, could you give us some idea of how much the lag in raw material costs and price increases affected your gross margins last year? The second question would be, you had some high market expenses for new products in the fourth quarter. Do you expect for the year 2012 those expenses will be higher than 2011, or the same, or less?

Let me answer that second question first. I think our sample expense in 2011 will be about -- excuse me, in 2012, will be about what was in 2011. However, I think it will be spread more evenly over the year. On your first question, Arnie, there were a couple of major raw material price increases in the first half of the year. I really can't quantify the impact there, but if you've noticed, our LIFO reserve did go up pretty dramatically during the year, and it always takes us a while to get these increases passed along to all of our customers.

We have already had an increase this year in raw material. The industry announced a price increase in January, and as far as we can tell, it has been successfully implemented, and probably came a little ahead of the fiber increase, although there have been other increases in backing and latex that effects all of the business. The fiber increase only impacted the residential business. But the price increase that we announced on the residential side, as I say, I think has been successfully implemented, and by the end of the quarter should be certainly all in place.

Could you give us some idea -- I know mix varies, and it's hard to do, but maybe a ballpark on how much your average prices are today versus a year ago?

Arnie, it's pretty interesting. We've stayed in that $20 range as a Company for a couple of years, despite the fact we have some polyester products on the residential side, and we have had some end user accounts for more volume-oriented on the commercial side. I think we've made up for that with higher end [tile] modular products, and higher end wool and other residential products. So our average selling price continues to be at about $20, which is about two to three times the industry average.

Thank you.

Thank you, Arnie.

Gentlemen, we have no further questions at this time.

Thank you, Kelly, and I appreciate everyone being with us today. We look forward to 2012, and seeing you next quarter.

That will conclude today's conference. Thank you all for joining us.