Dixie Group Inc (DXYN) 2013 Q1 法說會逐字稿

Good day, and welcome to The Dixie Group, Inc. first-quarter 2013 conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to the Chairman and Chief Executive Officer, Dan Frierson. Please go ahead, Sir.

Thank you, Melissa, and welcome to our first-quarter conference call. With me is Jon Faulkner, our Chief Financial Officer. I'd like to include the Safe Harbor statement by reference to both our press release and our website.

The first-quarter trends tend to be most -- the first quarter tends to be our most difficult one. And last year, in 2012, it was stronger than usual. Despite these factors, we were able to show significant improvement this year. Our sales were up 20% compared with 2012, and we started the year on a profitable note. We had sales growth in all our residential brands, and the commercial business increased 13%.

We believe the investments we have made in the business over the last few years are positioning us to outperform the industry. Our residential business saw the continuation of significant growth in the wool business, solid growth in our polyester products, and strong performance in our Stainmaster nylon products. Gulistan Products, which we acquired late last year, along with our TruSoft and SolarMax products, helped boost our sales in the mass merchant and specialty retail market. Masland Commercial, under new leadership, is again outperforming the industry. And our new tile products are leading the way.

Jon Faulkner will review our first-quarter financials, after which I will comment on the industry in general and our current business. Jon?

Thank you, Dan. Our first-quarter sales were $75.4 million, up 20% versus the first quarter of last year. For the quarter, and as I said, our total sales were up 20%, while the industry, we believe, was up in the low-single digits. Our commercial products were up 13.1%, while the industry, we believe, was also up in the low-single digits. Our residential products were up 21.1%, and, we believe, the industry was up several points.

We outperformed the residential and commercial markets for the quarter. For the first quarter, the residential growth was a combination of sales momentum in our mass merchant area, increases from the successful integration of the Gulistan Products purchase late last year, growth of our Stainmaster, TruSoft and SolarMax products, and growth in our wool business. Our expectations at the mass merchant category will have lower growth in the second half of the year, but we should still continue the strong growth in our specialty retail markets. Commercial business is up with notable strength in the modular carpet tile product.

Our continued investment in new products, processes, and people, is allowing us to gain market share at the other upper end. For the quarter, gross profit margin dollars were up $2.7 million, or 17.2% as compared with a year ago. And as a percentage of sales, operating margin was 24.4% as compared to 25.0% in the prior year. As manufacturing costs impact on our gross profit for the integration of our Colormaster Dye House, our Crown Rug acquisition, and expansion of our Eton facility, was $794,000 during the quarter. These integration cost declines will go throughout the year.

SG&A for the quarter was 22.4% of sales or 1.6% below the same quarter the prior year. Interest expense was $995,000 as compared to $726,000 the prior year, and the difference is due to higher levels of debt. Our tax benefit rate was 3.4%, due to a federal rate of 28.1%, and the one-time inclusion of $157,000 of 2012 tax credits that Congress passed in the first quarter of 2013, as well as $202,000 nontaxed insurance proceeds during the period. Our income from continuing operations was $651,000, as compared to a loss of $104,000 the year prior. Diluted income from continuing operations for the first quarter was $0.05 per share compared to a loss of $0.01 per share in 2012.

Looking at our balance sheet, our receivables increased $7.7 million or 24% on a sales increase of 20%, compared to the prior year. Our inventories were flat. Our inventory turns improved 12% versus the same period in the prior year. Working capital increased $2.9 million, primarily due to higher receivables.

Capital leases and capital expenditures were $2.6 million for the period, while depreciation and amortization was $2.5 million. Anticipate capital expenditures for 2013 of approximately $10 million, and depreciation and amortization of $10.1 million. Our debts stood at $86.8 million at the end of the period, up $2.5 million for the quarter. We ended the quarter with availability under our loan agreements of $21.3 million. We've completed the modification of our loan agreement that adds $10 million in additional borrowing base as well as extend the term of our loan to March 2018 from September 2016, and lowering the borrowing rate by 25 basis points. Our updated investor presentation is on our website at www.thedixiegroup.com.

Dan?

Thank you, Jon. The housing industry tends to be a good indicator of our future business. During the first quarter, the housing market continued to move in the right direction as evidenced by some of the following trends -- housing starts and permits continue increasing, and were over the 1 million rate for the first time since 2008. Inventory of both new and existing homes is below demand. Affordability is high, even with prices increasing. Employment and household formation are both moving in a positive direction. Big builders are reporting large year-over-year gains, and foreclosures are decreasing.

With these trends in motion, it is only a matter of time until the carpet industry experiences upward momentum. One would expect to see this happen sometime in the last half of this year.

Let's take a look at what has happened to our industry since the downturn of 2008 and 2009. 2009, our industry declined in sales by about 40% from its peak, which actually was in 2006. Dixie also experienced a sales decline of about 40% from its peak. Obviously, survival was the first instinct for most industry players. Because the downturn was so prolonged, it was very difficult to know when the bottom was reached. Every company had to go through its version of rightsizing in order to get costs in line with sales and future prospects.

In addition to the difficult economic period, our industry was also going through some other major changes. Polyester filament has come from nowhere and now is about 50% of the residential business. At the same time, soft products have grown significantly, and now represent a large portion of the residential products being offered at retail. These and other changes have meant that investment in new products and the business was required to maintain one's position.

Difficult periods are tough for all players, but do offer opportunity to improve one's position relative to the industry. Our plan has been to continue investing in product, people and, where needed, productive capability. These investments have better positioned us to become more important to our customers and suppliers.

In the last year, we have concentrated investments in the following areas -- with people, we have hired a number of individuals with both technical and/or creative capability to enhance our operations and our product capability. We also have hired a significant number of new salespeople to improve our market coverage and penetration. We've added more salespeople than ever before. In terms of assets, we've added over 40% to our yarn capability, bought additional tufting machines, and purchased Colormaster, which gives us continuous dying capability.

These investments have enabled us to be more competitive and enhanced our product offering. In terms of products, we've introduced a record number of products to enhance our position as a style, design, and color leader in the industry.

Investments we have made obviously have had a negative impact on our earnings, but have allowed us to improve our position and grow faster than the industry. The growth in the industry since 2009 is about 7%, while we at Dixie have experienced growth of 39%. In the first quarter of this year, as Jon pointed out, our sales grew 20%, and we believe the industry was up mid to low-single digits.

As Jon has pointed out, the cost and disruptions in the investments is declining. And we should be in a better position to take advantage of our sales increases by bringing a larger portion of the increases to the bottom line. Unlike last year, the sales and orders in the first 4.5 weeks of the second quarter have continued to show the same percentage growth that we experienced in the first quarter.

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

Thank you. (Operator Instructions) Sam Darkatsch, Raymond James.

Dan, you just mentioned that your April residential and commercial orders are up double digits. I think that's terrific, and it suggests that, at least for your business, things continue to be going quite well. How would you characterize the industry retail traffic in April versus Q1 versus March? There's been some anecdotes that it might not have been as strong as what you're seeing.

Sam, yes, I think any comments we would have would be anecdotal, certainly not factual, in terms of the industry. We think there's been a little slowdown in traffic, but that's -- I don't think there's anything there that we can really hang our hat on. We have certainly seen, in our sales and order entry, as I mentioned, we have continued at the rate of increase that we had in the first quarter. And quite honestly, that's really the best barometer we have or the only numbers that we have that we can go by.

Second question, and then I'll defer to others. You talked about pricing, Dan. Obviously, there's been a fair amount of price increases in the industry. Talk about your pricing strategy, why it may differ? And do you believe it's going to affect your market share positively going forward? Because, obviously, your consumer is a little less price-sensitive than the normal carpet participant.

Sam, obviously, the industry went through raw material increases, and therefore, price increases on carpet in the first quarter. And on those product categories where we had price increases, we did increase our price. If we didn't have price increases, we did not. But I think from all we can tell, the price increases seemed to have been passed through and in effect and behind us.

Is there a way you can quantify or estimate what the benefit of price was for you in the quarter, year-on-year, and in sales and/or margins?

Sam, at this point in time, I don't really think there's a good way for us to break that out. Because our mix has shifted -- the whole introduction of the soft products that are basically all new products. And those new products, obviously, you start with a price, having already put into them the raw material costs you anticipate having.

So, your ASP -- is it up or down, then, on a year-on-year basis, including the mix? Your overall ASAPs are --?

You'd look at it and say that in the commercial business, they're up, and in the residential business, they're flat.

And you're suggesting that a lot of that is mix as opposed to price itself?

I would expect that to be more mixed. Because we've seen -- for instance, we've seen some of our strongest growth at wool. We've also seen strong growth at some more moderate price points. And so it didn't really mix within categories. We've not seen any degradation of price in any one particular category. It's been more mix changes with us.

And there's not a way to break out what like-for-like SKUs -- what pricing was on like-for-like SKUs on a companywide or a vertical basis?

I guess we could do that. We've not done that at this moment in time, no. I don't have that information with me at this moment in time.

Oh, okay. Thank you, gentlemen. I appreciate it.

Arnold Brief, Goldsmith & Harris.

Yes. You had a great quarter with sales. I was a little surprised that, with that kind of sales increase, your gross margins weren't better, even adjusting for the cost of the plant integration. Was there a price/cost lag there in terms of your raw material and your price increases? Is there anything affecting the gross margin in the first quarter that won't be there the rest of the year? I'm excluding the integration costs.

Arnie, excluding the integration costs, there was some, obviously, lag and always is. We're on LIFO, and when we have a price increase in raw material, it takes us a while to get that all the way through. And yet, in our costs, it goes through immediately. So, there was some lag there, but that wasn't tremendous.

Well, could you discuss your gross margins in general then a little bit? (multiple speakers)

Arnie, it --

Is there a change in mix that would preclude you from showing a gross margin that's more commensurate with the sales that you're getting now? I mean, there is -- I know you've got some changes, but you've got wool and commercial should be helping you, I would think?

Yes. Arnie, I will say this, that as we go throughout the year, the growth we had in the first quarter was higher in the mass merchant category. As other categories take a larger percentage of the share, we should see some improvement from mix throughout the year. But again, it's pretty volatile, because we have a very broad range of product categories. But I would say that we would tend to see an improvement in margins as we go throughout the year.

Could you -- I know you discussed this on your last conference call; I just don't have it in front of me. The sampling expenses are -- I think they were going to decline later in the year and be flat in next year. Could you refresh my memory there?

Sample expenses are up year-over-year. (multiple speakers)

Transition expenses.

Oh, the transition expenses. I'm sorry. (multiple speakers)

No, no, the sampling expenses.

Oh. Sampling expenses are up year-over-year. We level our sampling expenses throughout the year. So what you saw in the first quarter, SG&A included, a one-fourth of the sampling expenses for the year. They're not adjusted by quarter. As we get into future years, I would anticipate our sample expense as a percentage of our sales not to drop as we continue both growth and in absolute dollars, as we make adjustments.

But we've been through a very heavy period of sampling expenses this year, as well as we have for the last couple of years. This is our highest year by far.

Okay. And the integration experiences, you indicated they would decline as you went through the year. (multiple speakers) Could you be a little bit more specific there?

(multiple speakers) Yes. If you remember, we told you about -- well, we told you about $1.9 million, we thought, for the year. We've had about $800,000. I think the $1.9 million is still a reasonable number. And that will be primarily in the second and third quarters, and then should be pretty much over by the fourth quarter.

Okay. So that's pretty much the same as you had indicated.

Right.

All right. I guess the bottom line is there's been sufficient change in the industry that -- would it be fair to say that even if you got back to your peak sales levels, your gross margins would not be capable of getting back to your peak gross margins? (multiple speakers)

I think it's unlikely (multiple speakers) --

Was it mix or raw material costs or whatever, right?

We were at 30 points in our peak margins, and I would expect us to be higher than we are today, clearly. But I think 30 points would be very difficult as a company coming back (multiple speakers) --.

(multiple speakers) Arnie, that's very mixed-related. For instance, the two areas that have grown the fastest in the first quarter were wool, at the very high end, and polyester at the lowest end. So it's somewhat difficult to answer your question. We tend to focus on the differential between gross margin and selling costs. And I think you also are seeing selling costs come down as our sales increase. So I think the delta there is really where we focus our energy and effort. And we're certainly hopeful that those can get -- that delta can get back to more normal levels.

Well, let me ask -- let me be more specific. If I recall -- I'm going from memory now, so you can either correct my memory or provide a different answer. But if I remember right, many years ago, your goal taking that gross margin, and the SG&A and the delta and all that, was a 10% operating margin, which is not unusual for a well-run business. Is that a goal that's still attainable? Am I remembering the goal properly? And is it still attainable?

I think the goal is in that 8% to 10% range. And we certainly hope and think that, over time, that is attainable.

Okay. That will do it. Thank you very much.

Thank you, Arnie.

Keith Hughes, SunTrust.

I want to go back to some of your statements in the prepared text, and about the Soft product. It's gained -- how much of your business would you consider in the Soft genre, if we can call it that? And what do you think it is in the industry right now?

Well, again, there's no good data on the industry. And even in our situation, a lot of it is new products that are just getting off the ground. If you're talking about dollar sales, you're talking about percent of our displays -- I think you're going to be looking at different numbers. But Soft has become a real standard. You've had, obviously, the two major mills in the industry certainly pushing Soft, both their own fibers, and in one case, Stainmaster TruSoft.

So, it's become a big percentage of the new products. And I think that's probably a better way to look at it. And I can't give you a good percentage number. But it's certainly significant and it's certainly growing. And there also are various stages of Soft or Soft products that are a little different from each other. So it depends on what all you put in those categories. But Soft has certainly gained retail space, and we have tried to take advantage of that through TruSoft and some other products, and gained floorspace at retail.

And price point-wise, most of this comes in mid to high-type price points, which are the samples you're seeing.

The softer fiber tends not to be quite as bulky, and therefore, less apparent value, so it tends to be used in higher-end goods. (technical difficulty)

(technical difficulty) Such as higher-end wool --?

Correct.

All right, thank you.

Matthew Dodson, JWest, LLC.

Can you -- and maybe you don't break this out, but you talked about your sampling costs; you evenly weight them for each quarter. Can you tell us, by any chance, what your sampling costs were of SG&A this quarter? And if you could, could you tell me what your sampling costs were of SG&A in your fourth quarter, in December?

We do not break that out. But I will add one bit of color. We did have some additional sampling costs in the last half of last year, but because of the Soft products that were not projected when we started the year. So, in the fourth quarter, we had higher costs than we did in the first quarter on sampling costs last year.

Okay. Well, how about if I go about it a little differently this way? So, obviously, if we go into the June quarter, seasonally, it's a stronger period of time and your sales should be up sequentially from the March quarter. And I guess the question I would have is, sampling costs will be even with Q1, so as a percentage of sales, they will be down. What is the variable cost nature of SG&A then that we can think about?

Because, you know, I mean, at some point, you're going to start to get a lot of leverage in your SG&A. I mean, if you look at it just from fourth quarter to the first quarter, your SG&A in dollars was basically down $100,000 and your sales were up $5.4 million -- or $5.3 million -- or $4.3 million, excuse me.

I'm going to ask Jon to address that, but I will say, over the last year or two, our sample costs has been what I would call higher than a normal rate, due to the many different new fibers being introduced, due to the changes that were taking place in the industry, and due to the opportunity we sought to grow the business. So, I would tend to agree that as a percent of sales -- and we do not give that percent -- we would see it going down in the future.

Our selling expenses -- first of all, our G&A tends to be heavily driven just by normal inflation, poor salaries and that kind of thing. Because that's -- the bulk of it is salary. The selling expenses -- remember, all of our salespeople are on commission, so that tends to be driven primarily by sales volume; whereas the rest of our selling expenses are primarily driven by our sample expenses (multiple speakers) --.

Right. So, I mean, exactly. And so if I would think about it, you have FICA, you have all those kind of expenses in Q1. It seems like SG&A would have been higher in absolute dollars than Q4, because you had sales that were higher. So you would have paid higher commissions, you would have had FICA expenses, but yet it was slightly down. So is that because, from a run rate, that sampling, I guess -- can you give us any sense of what sampling is? Is it 20% of SG&A? Is it 15% or not?

Let me kind of hit it another way that might give you some insight. If you look basically at our SG&A as a percentage of the total, basically three-fourths of it is related to selling, and about half that -- about half of the selling is variable to some degree.

Okay. Got it. And then the rest is potentially what these costs that are going to go down over time with the sampling expenses, right?

It will be sampling. And then just within selling, where you have what I would call more fixed, selling expenses, which are sales management, that type, which are more driven by normal salary increases, and to some degree, compensation, other compensation expenses related to sales. But strictly purely variable portion, which you know is getting moved directly with sales. And it's going to be, I'd say, about half that.

Got it. And then so may I ask another follow-up to one of the other person's questions, relative to gross margins? So if you wouldn't have had those integration expenses, basically your gross margins would have been about 100 basis points higher? Is that roughly right?

Yes, that -- yes, that's right.

Okay. And then so the question I would have for you is, are the integration expenses the same in dollars in Q2? And when do the integration expenses abate?

Basically, there's about $1.9 million for the year. We had $800,000 in the first quarter. The balance of that -- the $1.1 million should be split roughly equal between the second (technical difficulty) and be largely (technical difficulty).

Okay. Great. And then the last question I have for you -- and this is just a little bit of just try to get the insight interest expense. Interest expense went up sequentially a little more than $100,000?

Yes, due to debt levels is the main change. (multiple speakers)

And was that your working capital, I assume? Because orders were so strong?

That's correct.

Well, the acquisition of Colormaster, as well.

Well -- excuse me. We had the acquisition late in the quarter of Colormaster.

Late in the year.

But ultimately late in the fourth quarter. It was really the -- that debt went about the middle of November, we had a little more due to increase because of the acquisition of our Crown Rug, which was in December. And then the main driver was the increase in receivables in the first quarter.

Got it. And so is this $1 million run rate, do you think, a decent run rate going forward? Or not?

I think that's a fair run rate.

Okay. And I promise this is my last question. I know you have a bunch of NOLs. I assume that income tax was primarily state. Is that true? And then should the tax rate be about somewhere in the 3% to 5% then for the full fiscal year, if you do make money each quarter?

I've not run forward, but if you look going forward on a normal rate, we're going to be in that low 30% rate in terms of book tax. In terms of cash, obviously, well, we've come pretty much from 2012, we've utilized most all of our NOLs up. The only thing we have really left is that we do have 100% reserve against several of our state taxes, and we'll be turning those reserves around as we are profitable. And that has to do with state tax credits in particular parts of the country.

Got it. And then -- I do promise, this is my last question. The other gentleman asked about gross margins, and he said before he thought you had said you could get to 30%. And, obviously, you're at 25% right now. And I think you guys stated that maybe that's 28% to 30%. But the question I have for you is (multiple speakers) --

Excuse me. That was not the question or the answer. What we said was the delta between gross margin and selling was in the 8% to 10% range.

Okay.

What we're saying is operating margin of 8% to 10% (multiple speakers) --.

Okay, 8% to -- okay. So, what is the key, though, for gross margins to go up? Because I assume you're at low utilization still relative in your factories. And I assume once you get to higher utilizations, you get good incremental cost absorption on the fixed cost. Is that true or not? Or can you help us understand that at all?

That is true, but remember, a large percentage of our costs is in raw material. And that is a strictly variable cost. And -- but we will get some additional leverage there, and we'll get some additional leverage on our SG&A costs. Between the two of those is where we would shoot for that 8% to 10% range -- operating margin.

Okay. Great. Thank you so much.

Thank you for all your questions.

And at this time, we have no further questions in the queue. And I'll turn it back over to our presenters for any additional or closing remarks.

Melissa, thank you. And I want to thank all those that listened in and asked questions. Obviously, we're happier with the first quarter than we've been in a while, but we still have a long way to go, too, as was pointed out, to get to the profitability levels that we feel are reflective of where we ought to be. Thank you for listening and see you next quarter.

That does conclude our conference for today. Thank you for your participation. You may now disconnect.