Dixie Group Inc (DXYN) 2012 Q2 法說會逐字稿

Good day and welcome to the Dixie Group's second-quarter 2012 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 Chairman and Chief Executive Officer Dan Frierson. Please go ahead sir.

Thank you Alicia, and welcome, everyone, to our second-quarter conference call. I have with me Jon Faulkner, our Chief Financial Officer. Our Safe Harbor statement is included by reference both to our website and press release.

With the industry and Dixie, this year appears to be a replay of the past in many ways. Business started off stronger than the previous year, but was -- has retreated as the spring progressed. The second quarter was not as strong as the first on a relative basis, and we appear to be in a wait-and-see period.

Dixie had strong residential growth in the quarter, however a 5.6% improvement in sales compared to a decline for the industry. Excluding mass merchants, our residential brands grew over 11% during the quarter.

Our commercial business began slowing in the last half of last year. And during the second quarter, this trend continued. We have been disappointed in our commercial sales and are in the process of changing leadership to enhance our results.

Over the last several years we have experienced continued raw material increases and have passed those on in the way of carpet price increases. It appears this trend has ended, at least we are hopeful it has. However, our industry continues to experience a difficult period, but we believe conditions are beginning to change.

At this time, I'd like to ask Jon Faulkner to review our financial report.

Thank you Dan.

Looking at our sales, second-quarter sales were $66.6 million, down 3.8% versus last year. For the quarter in dollars, our total carpet sales were down 3.7% while the industry was up marginally. Our commercial products were down 25% while the industry was up in the mid single digits. And our residential products were up 5.6% while the industry was down in the low single digits.

For the quarter, Fabrica, Masland Residential and Dixie Home Retail segments were up over 11%, while the Mass Merchant segment was down 28%. Further, during the third quarter of last year, we had a one-time rollbar special order for over $4 million that will not repeat during this current quarter. At this point, we anticipate we will get some increase in the Mass Merchant segment in the fourth quarter once the new TruSoft products are released.

Our commercial sector was down against a strong quarter in 2011. Sales had noticeably slowed since the second half of 2011, and in an effort to strengthen our performance in the commercial sector, we will be bringing in new leadership for our commercial business.

For the quarter, gross profit margin at 23.6% was 0.6% decline from the same quarter a year ago. Operating margin was impacted by approximately $540,000 in manufacturing realignment expense relative to moving tufting equipment to Eton on and shearheads down to Atmore.

We have spent approximately $750,000 year-to-date and anticipate spending another $325,000 in the third quarter. That effort has proven successful, improving output and lowering costs.

Sales incurred approximately $450,000, primarily in the second quarter, developing new fiber systems. Introduction of these technically challenging fibers has caused additional expense, now largely behind us, that impacted the first half of the year.

SG&A, at 23.6% of sales, was above last year's 21.6% for the same period. We were impacted by higher sample expense of $900,000 above last year. We are investing heavily in Stainmaster TruSoft, one of two suppliers to the industry, to have this fiber, and Permaset, the only supplier in the industry with a peach dyeable wool.

Our operating income in the quarter of a $40,000 loss compared to a gain of $2.3 million last year. The combination of the manufacturing realignment expense, higher product develop cost and increased sampling expenses during the quarter had a negative impact of $1.9 million. The prior year's quarter had an operating income of $1.8 million when excluding the $536,000 gain due to the settlement of our Pullman facility lease termination.

Our interest expense, at $762,000 for the quarter, reflected lower interest rates as compared to $900,000 in the prior-year quarter.

Our effective income tax benefit rate for the quarter was 43%. This was due to the domestic manufacturing credit change in our state evaluation allowances, interest expenses associated with our 2009 and prior tax audit, and our year-to-date true-up. Our normal rate going forward at reasonable levels of profitability should be in the 35% range.

Earnings from continuing operations in the quarter was a loss of $404,000, or $0.03 per diluted share.

Looking at our balance sheet, receivables increased $441,000 during the quarter. Inventories increased $5.5 million during the second quarter, our normal seasonal high.

Capital leases and expenditures were $1.7 million for the year-to-date, while depreciation and amortization was $4.8 million. We anticipate capital expenditures for 2012 between $4 million and $5 million and depreciation and amortization of $9.5 million.

Our debt has increased $2.2 million for the quarter, and we ended the quarter with availability under our loan agreements of $19.3 million. Our updated investor presentation is on our website at www.theDixieGroup.com. Dan?

Thank you Jon. As Jon has pointed out, the results of the second quarter were less than satisfactory, but influenced by several unusual items. The movement of tufting machines to North Georgia from our Atmore plant negatively impacted results but already is showing both cost and quality improvements at our Eton and Atmore facilities. The opportunity to be the only one of two manufacturers bringing TruSoft Stainmaster to market was an unusual opportunity but increased our costs of development and sampling for the quarter and the year. Both of these investments will impact current earnings, but should facilitate significant growth starting in the fourth quarter of this year.

As we look to the future of our contract carpet business, we felt we needed new leadership to help take advantage of the growth in the modular part of the business. Hopefully, these changes will be completed soon, and we will return to a pattern of growing faster than the market.

As we look back at the last several years, the industry and we experienced a significant decline, but now have begun to grow again as a company and as an industry. Our growth is outpacing the industry and we believe will continue to do so.

We are currently bringing TruSoft product to the marketplace and believe this new soft fiber will be the new standard in the industry. In the wool arena, we are introducing our Permaset products which offer our customers a wide range of choice of color in wool, which is new for the industry.

In the commercial market, we are experiencing great reception to our new chrome collection, and with the introduction of new -- other new value products, this should enhance our market position.

The housing industry finally appears to have bottomed and beginning to show the signs of improvement that will lead to sustained market growth. Units of both new homes and home resales are well above year-ago levels. And the median price for both are above year-ago levels. These conditions are leading to higher forecasted sales for homes in the future which we believe leads to better conditions in the carpet industry at some point next year. Until then, the focus on operational improvement and better utilization of assets will continue. With our investment in people, equipment and product, we will be well-positioned to take advantage of any improvement in the marketplace.

At this time, we'd like to open up the call to questions.

(Operator Instructions). Sam Darkatsh, Raymond James.

Good morning Dan, Jon. How are you? I'm doing well, thank you. First, a housekeeping question and then I'll ask some strategic ones. Jon, do you have a sense of what the LIFO reserve was at the end of the second quarter on the balance sheet?

Balance sheet -- let me -- let me just doublecheck that.

I'll ask my second and third questions while you look that up, that's fine.

Why don't you do that?

Dan, how big do you think TruSoft can be for you? I know you had some initial costs. Just trying to get a sense of what the potential returns might be.

Sam, as you know, it is a new fiber. It is very different from any fiber we have processed before. And therefore, there were significant development and technical costs and development costs involved. However, the products are beautiful and they are soft, and we think it can have a major impact on the business going forward. But it is higher priced. That's obviously where we tend to play. And therefore, I don't think it will have maybe the volume of some other lower-priced products, but we think it will be a significant player for INVISTA and Stainmaster going forward.

That's going to be offered throughout your residential end markets and customers, or just Mass Merchant? How widespread will the --?

No, we will have product in the market later this year at Fabrica, Masland, and Dixie Home. So it does cover the waterfront in terms of our brands.

Okay. Second question. What are you seeing in terms of your own pricing as well as industry pricing, knowing that some of the input costs at least for Shaw and Mohawk will have likely already receded?

And I guess the follow-up question to that would be at what point do you believe that your yarn would start to see some relief from a pricing standpoint due to raw materials and what are you seeing in selling prices as a result?

As you know, we tend to play in the higher end and there's less volatility there. I think what you're speaking of would first surface in the very low end of the market where we are not a day-to-day player. So, we are probably not the best ones to ask that question. But we have not seen any major decreases in base fiber prices, any decreases in base fiber prices of significance. We have seen some declines in other materials we buy. But a year ago we were faced with increases in all these areas. We did have an increase in our residential pricing earlier in the year and we had an increase in our commercial pricing just about a month or so ago. And I think Jon is ready to give you the LIFO information.

LIFO is at $15.3 million at the end of June, and it was at $14. -- well, $14.99 million at the end of December.

Okay. And then you're saying that June and July softened up. Are you seeing the promotional environment begin to stiffen a little bit with the softer demand trends of late?

That's usually what happens. I would say our business has really been pretty steady March through July on the residential side. But we haven't seen the uptick in the spring that sometimes we see. That was -- but we do continue to outperform the industry there. But I do think you will -- we will be in a period like this, a wait-and-see period as I called it earlier, really until probably fourth quarter some time.

And the last question and then I'll defer to others. So after the equipment resets, what do you peg your capacity utilization at right now? And if it is real low, do you have -- do you want to keep it with your dry powder in case demand comes back over the next few years, or are there opportunities to take some capacity out?

They are not major opportunities to take capacity out. We simply don't run tufting machines as much or don't run as many of them when that happens. The pinch point on capacity for us and for the industry really is in yarn, in yarn processing. And we have added capacity there as we've announced previously, and we've added about 20 some-odd% percent, 25% capacity this year, so we have plenty of capacity for growth, but during the slower periods, we simply will not run that capacity.

Understood, thank you.

Nick Halen, Sidoti & Co.

Good morning guys. The first question I had was on the commercial side. I guess what, in your opinion -- I guess why in your opinion have you guys underperformed the industry so much? Is that just a product of the higher price points that you guys sell your products at? And if so, have you thought at all about rolling out impossibly some less expensive products to the commercial side?

To answer your question, the real divergence from the industry has been in the modular side of the business. We've only been in the modular business four or five years, and we have not had the growth in the modular that many of our competitors have experienced. Actually, our Broadloom business has held up pretty well and Masland. But we are very much in the upper end of the business, and I think your point is appropriate. We will be introducing product that is well styled, and quality product, but at more competitive prices going forward.

Okay. And I know you mentioned a little bit on the Mass Merchant side, obviously 2000 was a great year and we're seeing a little bit of a pullback. But is there any way you guys can really build that business back up? Is it purely just I guess new product introductions? Are you guys -- are you pretty much dependent on retailers offering promotions and advertising and things like that? Is that basically what's going to drive any growth in the Mass Merchant side?

I'm not quite sure how to answer that. We think we will see growth as Lowe's introduces the new TruSoft fiber in the fall. That will certainly give us a boost there. But that business -- what we call is lumpy. It comes in lumps and it goes in lumps. And we would anticipate that, with TruSoft, our business there would improve significantly.

Okay. And then just lastly, I know you guys don't give guidance, but I guess, just given the weakness that you're seeing in commercial on the commercial side, and the margin pressures and investments you guys are making in new products, do you guys anticipate being profitable in 2012? Do think that's a possibility?

Your first assumption was correct. We do not give guidance, and that would be giving guidance. We certainly think, in the fourth quarter, our -- the introduction of TruSoft, the introduction of our Permaset wool products will have a positive impact and we will not have the cost of developing the products. We will have sample costs but we will not have costs of moving equipment and the manufacturing realignment that we went through, so we certainly think that, starting in the fourth quarter, things should be significantly better.

Great, thanks guys.

John Baugh, Stifel Nicolaus.

Thanks. Good morning Dan and John. Could you comment? I'm not sure I heard all of the commentary around the home center channel in Q2. I've heard that their business in carpet is off materially and year-over-year and I was wondering if that's what you've seen, and whether or not that is a product of their own lack of promoting or advertising that particular product, or a broader read on the consumer.

First of all, we are a minor player. As you know, most of our products are higher priced and the retail -- other retail is where we concentrate our effort and energy and that's why I said in the second quarter we were up 11%. Fabrica, Masland, and Dixie Home through traditional retailers were up 11%.

The mass merchants, we are not big enough with them to really know across their whole product line if for instance, one, they introduce a new category, does it take business from the others or is their business off totally? We just don't have exposure or ability to get to that data.

Okay. And on carpet tile, my recollection was you were in price points generally north of $30 a yard.

No, we were in the $25 to $30 range. Obviously the sweet spot has moved south, and we have not been as aggressive in doing that as we probably should have been. And we are undergoing some changes there that I think we will be very effective in that arena. But as you know, our commercial business was more Broadloom, much more Broadloom, and therefore we have not been as aggressive in the modular side, and need to be.

I apologize. I didn't have time to see the product launch at NeoCon, but are those -- were those at these newer and lower price points, and if so, where are you targeting?

No. We will bring out additional product here in the late third quarter.

Okay. Terrific, thanks. Good luck.

Arnold Brief, Goldsmith and Harris.

I'm going from memory now; I don't have all my notes in front of me. But you were doing very well in the tile business for -- after it was introduced for a number of years, if I recall. Did something happen competitively which changed that trend, or am I remembering inaccurately?

Arnie, I think Jon's comments sort of summarized it. We did get off to a good start in tile. We had good growth. The first year, we had been dropped back in '09, like I think most people did, then had growth in '10 and '11. But we are not experiencing that growth today, and I think the price points in that business have changed significantly. And I think that's had a lot to do with our lack of growth this year in the modular.

What you're saying is your competition has gotten more aggressive and lowered prices and you guys didn't react quick enough to the change in the competitive landscape, right? Or am I --

That's a good summary of what I said.

Okay, thank you. Secondly, could you give -- since the TruSoft goes across a number of distribution areas, could you give us a price point? So you mentioned it is in Fabrica, Masland, and Dixie. What would be the price points for TruSoft?

That's a little difficult to give you, but I'd say it's everything from the high teens to the mid-$30s. It depends on the product, the weight, the style. The first products we introduced were at Fabrica. They have done very well. We did get those in the market earlier, but the biggest portion of them will be introduced in late third quarter. And I think there will be -- that will -- unfortunately we had hoped to introduce it in the second quarter, but due to the development issues, it's taken us longer and it's taken our competition longer to get them to market. Therefore, normally in the second and third quarter, you would have sales from those products already being introduced. We have not had those, or had that. So, we do think it will have a significant impact on fourth quarter, and it's a number of products spread out over all of our brands.

Okay. But for the Dixie, it's in roughly the high teens, Masland is probably the mid-$20s, and Fabrica is over $30? That's ballpark.

Or higher, yes.

Who is the -- I should know this, but I don't remember. Who is the competitor in TruSoft?

Shaw is the other mill with the TruSoft product.

Okay. And finally, to what extent -- there's certainly been a number of cyclical problems in the very slow recovery in housing as opposed to the normal recovery. Housing normally leads everything out, and it certainly hasn't done it this time. But in addition to the housing problem in general, is there a secular trend away from carpet towards more of the wood floor and the rugs that cover the wood floor, which is reducing demand for Broadloom to some extent over and above the cyclical aspect? And if so, if you agree, what are you doing about it?

I think if you go back 10 or 20 years, there's definitely a cyclical trend to hard surface. Of course, laminate had its day, and now it's declining. There are a lot of trends going on within that. In the last couple of years, that cyclical trend has not been as great because hard surface was more -- utilized more heavily in new housing than it was in home resales or older housing. So that hasn't been as pronounced in the last couple of years.

I think you can make a case that upper-end higher-style carpet has really prospered next to hard surface. When somebody spends what they have to spend for hard surface, which is a lot more than they typically spend for carpet, higher-priced carpet doesn't look like it's priced so high. And I think, if you have beautiful hard surface, you want beautiful soft surface next to it. So, I believe you can make a case it actually has not been a deterrent to our business, and that's one reason I think we have, on the residential side, have continued to outperform the industry for a number of years.

You are not in the rug business, are you, if I remember?

Yes, we are in the rug business. That business -- obviously if somebody puts in hard surface, we want to cover up that hard surface with a soft surface.

But it's a very small percentage of your business, right?

That's a small percent, but it's very designer-oriented, designer-focused.

Thank you.

At this time, we have no further questions.

Thank you Alicia. Thank all of you for joining us for our second-quarter conference call. We will see you again next quarter. Thank you.

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