Dixie Group Inc (DXYN) 2012 Q4 法說會逐字稿

Good day, and welcome to The Dixie Group, Inc. fourth-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 the Chairman and Chief Executive Officer, Mr. Dan Frierson. Please go ahead, Sir.

Thank you, Joyce. And welcome, everyone, to our fourth-quarter and year-end conference call. I have with me Jon Faulkner, our Chief Financial Officer.

Our Safe Harbor statement is included by reference to our website and press release. Dixie saw a year of changes in 2012, although our sales were up slightly in 2012 versus the prior year on a comparable 52-week basis. We've been building a foundation that will create optimal opportunity for significant sales growth in 2013 and beyond. 2012 was a year of swings in the marketplace. We had a strong first quarter due to consumer sentiment and external factors, followed by a disappointing summer; then returned to an above-industry-average growth in the last quarter of the year.

Though 2012 was not satisfactory from a profitability standpoint, we saw a shift in the overall market dynamics that leads us to be more confident for the future. In the residential market, we have seen rising existing home sales, driven by higher consumer confidence and low interest rates, pointing to a stronger 2013. From a commercial perspective, businesses have excess cash and appear willing to spend it on projects that will drive their sales growth.

Finally, now that the distraction of the election and the fiscal cliff are behind us, we see the consumer confident -- the consumer more confident as the stock market has returned to the highest levels since the financial crisis of 2008. Despite the industry uncertainties during the past year, we have developed several growth initiatives to take advantage of these improving market conditions.

Operationally, we expanded our yarn operation in 2012 and are in the process of expanding it again in 2013. We will have a combined increase of 43% in our yarn capacity within the two-year period. In addition, we reestablished our Eton tufting operations, as well as simplified our Atmore operations to increase throughput and to lower cost.

Late in 2012, we purchased the Colormaster continuous dying facility, allowing us to expand our product offering at improved margins once the conversion of our styles is complete, late in 2013. We will triple Colormaster's output in 2013, as we convert our existing products to utilize this technology. The cost of implementing this conversion will negatively impact earnings initially, but will become positive by the end of this year. Further, we purchased an existing rug supplier to increase the supply of our successful Infinity and Rugs 4.0 Wool program. In addition, we have modified our tufting equipment for modular carpet tiles, so that we can better respond to market demands by using a make-to-order model that improves throughput times and reduces inventory.

Finally, we've installed new raw material processing for our modular carpet tile business to lower costs and improve delivery. We installed new management in our commercial business, and are implementing several growth initiatives as a result. These include launching our Speak modular tile product line, which offers highly-styled products with a strong infusion of colorplay, allowing the design community to specify products on a budget without sacrificing the design aesthetic. In addition, we have realigned and expanded our sales force to service select commercial markets more efficiently.

Jon Faulkner will review our fourth-quarter and annual fiscal financial results, after which I will comment further on business conditions. Jon?

Thank you, Dan. Looking at sales for the year, our sales are $266.4 million, a decrease of 1.4%. However, on a comparable 52-week basis, they were up 4/10 of a percent. Fourth-quarter sales were $71.1 million, up 8.9% on a fiscal period basis, versus last year. Our commercial products for the year were down 11.1%, while the industry was up in the low-single digits. Our residential products were up 4.3% for the year, while the industry had slight growth. For the quarter, our total sales were up 8.9%, while the industry was up in the low-single digits.

Commercial products were up 2.9%, again, while the industry was up in the low-single digits. And our residential products were up 9.1%, while the industry was up several points. We outperformed the residential market for both the quarter and the year. For the fourth quarter, we saw strong sales growth in the mass merchant category, but are still pleased with the retail growth of both ends of the market spectrum. Our continued growth in residential is proof that our continued investment in new products is allowing us to gain market share at the upper end.

Our commercial business declined significantly in the first three quarters of the year, but is up in line with industry growth in the fourth quarter. We are confident that the management change we made in August to bring in a stronger management team for the commercial business is proving successful.

For the year, gross profit was 24.5% of net sales, as compared to 24.3% for the prior year. For the fourth quarter, gross profit dollars were up 5.8% compared with the year ago. And as a percentage of sales, gross profit was 24.5% versus the prior year of 25.2%. SG&A for the quarter and the year was 23.8% of sales or 4/10 below the fourth quarter of the prior year, but [1.25%] above for the full year versus a year ago. The higher selling for the year was primarily due to added selling expenses for product development and samples. We also had higher G&A by $409,000, due to acquisition-related expense.

2013, we are expanding both our residential and commercial sales forces to take advantage of market opportunities. As a result, we will continue to have high selling expenses in 2013, as we have added demand for samples in marketing materials. However, our G&A should drop as a percentage of sales, as we do not have the acquisition-related expenses. Therefore, we anticipate that our SG&A percentage will be in line with our 2011 results, at 22.5%.

Operating income was $1.8 million for the year as compared to $5.7 million a year ago. We had an additional expense of $1.4 million for manufacturing realignment and conversion costs of the Colormaster facility; $600,000 related to management changes; and $409,000 in acquisition-related expenses during the year. Also in 2011, we had a gain of $563,000 due to terminating a lease as part of our facility consolidation on the West Coast.

In 2013, we estimate we will have approximately $1.9 million in additional costs to convert our production to run the Colormaster continuous dye line. For the fourth quarter, we had an operating income of $415,000 compared to an income of $520,000 in the same period in 2011. We had manufacturing realignment and Colormaster conversion expenses of $530,000 during the quarter.

Our interest expense for the year at $3.1 million was down 9% from the prior year due to lower interest rates. For the fourth quarter, interest expense of $877,000 was above the prior year, due to higher debt levels. Our effective income tax benefit rate for the year is 38%. Our normal rate going forward at reasonable levels of profitability should be in the 34% range. Diluted loss from continuing operations for 2012 was $0.05 per share compared to $0.10 per share income in 2011. For the fourth quarter, we had a loss of $0.03 per share as compared to a loss of $0.02 per share in the fourth quarter of 2011.

Looking at our balance sheet, our receivables increased $3.3 million during the year, while inventories increased $8.3 million. Approximately 1/4 of the 13% increase in inventories was due to higher raw material costs and to balance higher unit volumes to support anticipated higher sales in 2013.

Capital expenditures and leases were $4.1 million, while the fair value of assets acquired between the Colormaster and rug acquisitions were $9.2 million as compared to depreciation and amortization of $9.4 million. Anticipate capital expenditures for 2013 of $8.2 million, and depreciation and amortization of $10.1 million. Our debt stood at $84.2 million at the end of the period, up $16.1 million for the year. The current portion of long-term debt is $4.1 million at this year-end. We ended the year with availability under our loan agreements of $20.5 million, and our updated investor presentation is on our website at The Dixie Group.com.

Dan?

Thank you, Jon. In the fourth quarter, we began to see improvement in our sales, which was a result of more favorable business conditions and our continued investment in the business. The favorable trends have continued into the new year. Investments we've made in people, productive capability, and products have enabled us to outperform the industry. Sales for the first seven weeks of this quarter are well ahead of year-ago levels.

Our residential brands are showing significant growth in our TruSoft and SolarMax Stainmaster products, as well as our wool introductions. We have added a number of new salespeople, as we assimilated some of the Gulistan products into our Dixie Home offering. Purchase of the Colormaster continuous dye facility during the fourth quarter will ultimately improve our cost position and level of service, which should enhance our inventory turn. Maslin Contract under new leadership has also added salespeople, and is introducing additional modular products, which have been well-received in the marketplace.

Investments we are making in people, new product, and machinery, are designed to take advantage of favorable industry conditions, better utilize our facilities, and improve our financial results. Our introduction of new products is still higher than historical levels because of the changes and improvement of fibers currently being offered. We believe, over time, sample and product costs should return to more normal levels.

Certain companies in the industry have recently announced price increases to offset higher raw materials and other operating costs. We will continue to monitor these activities and take appropriate action. We are optimistic that this year will see industry conditions improve, and we expect the upper end of the market will continue to grow faster than the overall market. As I mentioned, the first seven-plus weeks of the year have started strong, and our sales are up double-digits both for the residential and commercial businesses, compared with a strong first-quarter last year.

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

(Operator Instructions) Sam Darkatsh, Raymond James.

A couple questions here. What do you peg your capacity utilization at right now? I mean, let's assume that, over the next few years, each year, you're growing your topline high-single, low-double digit. How many years can you underspend D&A from a CapEx standpoint?

Sam, that's a difficult question to answer, in that every process through the manufacturing process is somewhat different. But I think probably the pinch point for us and the industry is going to be in cabling capacity of raw yarns. And as we noted there in the last -- really from the third quarter of last year, we have added 43% to our capacity. I think other than that, we obviously will be investing in new tufting equipment, where it helps us differentiate product, and/or produce more. But that would be the primary pinch point for us in terms of capacity.

So that having been established and added, we can expect your CapEx to be below D&A for the foreseeable future for the next three to five years or so?

I won't say for three to five years. I don't have my -- I wish our crystal ball were that clear, but it's not. We are spending money additionally on the Colormaster acquisition to upgrade and improve that facility. We are adding some high-speed tufting equipment, which will lower our costs and improve our productivity. And we will be looking at some other tufting equipment that would add product capability to what we -- to our current abilities. So -- but it shouldn't be significantly more, but that depends on what opportunities might arise.

All right. My next question -- I guess this is a $64,000 question here. At what point do you begin to leverage all of these incremental selling costs that you've incurred, largely in order to pick up market share? And what keeps your market share strong, once you end up making the decision to reduce the relative selling costs, like sampling and the like?

Let me start the answer to that and then turn it over to Jon. I want to speak to what we are doing to increase sales. We have added a number of salespeople on the commercial side, along with new management of our commercial business. When we acquired certain Gulistan products, we also were able to bring onboard a number of the Gulistan salespeople, which gives us greater coverage in the country for our Dixie Home line.

So, we have significantly more salespeople going forward. We have more product being introduced this year than we've ever introduced before. And a lot of that is due to the fact that Stainmaster has introduced the new TruSoft and the SolarMax products. And we see a real opportunity to gain real estate at retail by doing this, and to improve our coverage and increase our sales.

And I'll ask Jon to talk to the leverage of that.

Sam, basically, if you look at our sampling expenses, they have, as you noted, we projected they will be higher in 2013 due to the things that Dan just described. But that, historically, our sample expenses have been about a point lower than where they are today. And so we would anticipate, as we get into 2014 and beyond, we would see that return to that more normal level.

And that's one point as a percent of sales?

Correct.

Okay. Now would you be taking your absolute sampling costs down? Or would you just expect sales growth which naturally would take the percentage of your sampling expenses as a percent of sales down? Or I guess what I'm getting at, it's a step function lower in 2014?

I would view it as a combination of both those effects -- of higher sales and lower absolute dollars.

So then -- I'll return to my last question then. So what gives you confidence then, Dan, that once the sampling costs return back to normal levels, that you'll be able to maintain these obviously-above-industry-average growth rates?

Sam, I think it's a question of sales coverage and displays at retail throughout the country. And we've been growing faster than the industry for some time. If we go back to the peak period, which, in sales, was the third quarter of 2006, and we look at the industry declined about 40% by the end of 2009, we also declined about 40% from our peak, which was somewhat later than the industry's peak. Now the industry has come back about 5% and we've come back about 35%. So I feel very confident that the upper end of the market will outperform the market generally, and that we've been able to outperform due to continuing our product introductions and gaining market share at retail.

The other thing, Sam, is it's somewhat self-limiting in that the number of retailers' storefronts are not increasing; they've actually decreased over this time period. And there's a point at which you have a saturation. And second of all, you have the number of coverage in terms of the sales force penetration. Again, once you cover the markets you need, you're not at the same level of growth in terms of people. So those two things somewhat become a little bit self-limiting.

Last question. I'm not looking for numbers, just looking for metrics here. Can you remind us, with management's variable compensation, what metrics are used to determine that on a year-to-year basis? What financial metrics do you use to determine the variable comp?

It's largely based on our operating profit, but also on individual goals for each of our associates.

And in a broader sense, that operating profit is looked at in line of asset utilization at the Board level, and initiatives which we have undertaken, and whether we have accomplished those initiatives.

Okay. So what I'm getting at is, management's compensation is tied to profitability as opposed to revenue growth or something along those lines?

That is correct, Sam.

Okay. Very good. Just wanted to make sure. Thank you both very much. Good luck.

Thank you.

Arnold Brief, Goldsmith & Harris.

I've got a couple of questions. You mentioned a couple of times the increase in the sales force, both residential and commercial. Could you give us some color on that? Are we talking 5%? Or 10 people? 100 people? What's --?

Let me start with that, and then, Jon, you add if you have additional information. On the residential side, we hired about 8 or 10 of the Gulistan folks. We were adding some people anyway. I would say to the Dixie Home line, it's a significant increase, but if you look at the residential business overall, it's probably 8%.

On the commercial side, it's probably greater than that as a percentage. But a lot of that is salespeople who are associates of the Company, and some of that is through agents, as well, on the commercial side. A significant increase -- more significant increase there than on the residential side. Probably in the 15% range.

Okay. Secondly, I got a little confused because you were talking about higher sample costs in 2013. And then there was -- I think Jon said something about SG&A going down to 22.5% in 2013. Am I confused over something?

Yes, our -- we have run high sample expenses in 2012, which are really continuing in 2013. However, our G&A also had higher expenses due to acquisitions that will not repeat in 2013. Therefore, the combined SG&A has dropped, but it's due to the G&A component, not to the selling component. (multiple speakers)

(multiple speakers) Okay. The selling component drops in 2014?

Correct. That would be the goal.

In theory, if nothing else changes, your selling -- your SG&A would be down another point in 2014?

Correct.

Okay. Finally, your gross margins, even adjusting for the unusual expenses of last year -- even if I add that back, you're somewhere in the area of 25%. By the way, before I forget, your sampling expenses -- I should know this, but I just don't recall off the top of my head -- are they in the cost of goods sold or SG&A?

SG&A.

They're all in SG&A. The -- even when I adjust for your unusual costs of last year, your gross margin is about 25%, well down from the historical peaks. Could you give us some color -- I know you don't want to talk specific numbers to any great extent -- but could you give me some color on how you look at that in terms of -- that decline in terms of capacities or utilization, product mix, and pricing?

I'm not trying to -- what will it take to get back -- without making a forecast for this year and next year, but what will it take for you to get back to more reasonable gross margin levels?

Arnie, that's a difficult question to answer. I'll start and see if Jon has any additional comments. But if you recall, when we were at higher levels, we were up in the $320 million in sales and numbers of that sort. And that was some time ago. But, obviously, we continued to work to improve our gross margin. There are parts of the business that are very difficult to improve, and there are others where you have better gross margins. And we continue to try and find those areas and grow in those areas that allow us to have a higher gross margin. And we'll continue to do that.

Certainly, we're not content with a 25% gross margin relative to where we used to be. So, I think it's important to understand that. And we -- without trying to predict anything in the future, that's certainly one of our objectives.

Well, let me try to rephrase the question. Assuming your sales got back to -- I think the peak was $330 million, but maybe $320 million, $330 million -- just assuming that without trying to make a forecast for what year -- if your sales did get back to that, would that capacity utilization be enough to get you back to your peak gross margins? Or has the industry fundamentals changed in terms of raw material and pricing and product mix and what have you?

Arnie, I would say that the select segments of the business would achieve the gross margins that they probably would have achieved at the peak. However, our mix probably would work against us. So I would say it would be difficult to break through that 30% range, but I would certainly expect it to improve beyond where we are today as we fill capacity.

Okay.

I think what Jon says there is accurate. Interestingly enough, in those days, our average selling price per square yard as a company was about $20, and today, it's about $20.

And don't you have higher raw material costs today than back at that point?

I think we probably do, yes. (multiple speakers) I know we had higher medical costs. (laughter)

So there has been some change there, unless pricing recovers a little bit more, would prevent you from getting back to the old gross margin level? (multiple speakers) If pricing is the same and raw material costs are up, then the old gross margin level would not be sustainable unless pricing improved. (multiple speakers)

Well, but you're looking at it in totality. And as Jon just pointed out, there are certain segments of the business where we had -- if we the same capacity utilization, we'd have the same margins we had in those days.

We have actually held our prices well as an industry. We have passed pricing increases along; I think the industry is fairly disciplined. I think what has happened is our mix between our different segments has tended towards more volume orientation, and therefore, lower margins as a percentage of our total mix.

We have Dixie Home in there, which has, I would assume, a lower margin?

And it is a larger percentage of the business. At the same time, we have done things such as grow the wool business, which has much better margins, but it hasn't grown as fast as, say, the Dixie Home segment has. So we've tried to grow all segments, but they've not all grown uniformly.

Okay. I think I got the picture. Thank you very much.

Thank you, Arnie. Good to hear from you.

There are no further questions at this time. Mr. Frierson, I'll turn the call back over to you for any additional or closing remarks.

Thank you, Joyce. And thank you all for being with us today. We are certainly looking at 2013 as a year of opportunity and significant topline growth, and begin to improve, obviously, from an operating profit and total profit standpoint. Thank you, and see you next quarter.

And that concludes today's conference. We thank you for your participation.