Dixie Group Inc (DXYN) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Dixie Group Incorporated second-quarter 2013 conference call. Just a reminder: today's call is being recorded. For opening remarks and introductions, it's my pleasure to turn the call over to the Chairman and Chief Executive Officer, Mr. Dan Frierson. Dan, please go ahead.

Thank you, Debbie, and welcome, everyone, to our call. I have with me today Jon Faulkner, our Vice President and Chief Financial Officer. Our Safe Harbor statement is included by reference to both our website and the press release.

The second quarter was one of strong performance, both residentially and commercially. Dixie had year-over-year sales improvement of 26%, with sales growth in all areas of the business.

Our sales growth in the residential business was 27% compared with the same period a year ago. We believe the residential market grew in the high single digits during the quarter, with the market strengthening as the quarter progressed.

It appears that the residential carpet market is now being positively impacted by the improvement in the housing sector. Sales for our commercial business increased 21% versus the second quarter of 2012. This increase was in comparison to the commercial market being up slightly. All of our brands had solid sales increases during the quarter, which indicates the higher-end business continues to improve.

Jon Faulkner will review our second-quarter financial results, after which I will comment further on current business conditions and the industry in general. Jon?

Thank you, Dan. Second-quarter sales were $83.6 million, up 25.6% versus the same quarter last year. As I said, total sales were up 25.6%, where we believe the industry was up in the mid-single digits.

Commercial products were up 20.6%, where the industry, we believe, was up only slightly. Our residential products were up 26.6%, while the industry was up in the high single digits.

We outperformed the residential and commercial markets for the quarter. Our residential growth was a combination of continued strength in our mass merchant area; positive impact of our successful integration of the Gulistan products purchased late last year; strong growth of our STAINMASTER, TruSoft, and SolarMax products; and continued growth in our wool business. We saw a strengthening in the residential marketplace as the quarter progressed.

Our commercial business had significant growth relative to the market only being up modestly. We continue to have double-digit growth in both our broadloom and modular carpet tile product categories. Our continued investment in new products, processes, and people is allowing us to continue to gain market share at the upper end of the market.

For the quarter, gross profit margin dollars were up $6.6 million or 42% as compared with a year ago and as a percent of sales. Gross profit margin was 26.7% versus a prior year of 23.6%.

Operating income of $3.3 million was 3.9% of sales. Due to the high rate of sales growth and the continuing cost of our Roanoke yarn plant expansion, integration of the Colormaster dye house and Crown Rug acquisitions, and the higher sampling expenses, it negatively impacted our operating income by over $1 million during the quarter. These costs should decline as we go throughout the year.

SG&A for the quarter was 22.5% of sales or 1.1 percentage points below the same quarter of the prior year. Our interest expense was $869,000 compared to $762,000 the prior year. The difference is due to higher levels of debt.

Our tax benefit rate was 27%. Our normal rate for the second half, barring any out-of-period credits or change in valuation allowances, should be 30%.

Our second-quarter income from continuing operations was $1.7 million as compared to a loss of $404,000 the prior year. Diluted income from continuing operations for the quarter was $0.13 per share compared to a loss of $0.03 per share in the second quarter of 2012.

Looking at our balance sheet, on a year-over-year basis our receivables increased $12.2 million and our sales increased to 25.6% compared to the prior year. Inventories were up $6.7 million or 9.2% versus the prior year.

Our inventory turns improved 11% on a year-over-year basis. Our working capital increased $12.6 million versus the prior year, primarily due to higher receivables.

Capital leases and expenditures were $3.4 million for the period, while depreciation and amortization was $2.6 million. We anticipate capital expenditures for 2013 of approximately $13.5 million and depreciation and amortization of $10.3 million. Our debt stood at $94.6 million at the end of the period, up $7.9 million for the quarter.

We ended the quarter with availability under our loan agreements of $25 million. We have completed the modification of our senior credit facility to increase our revolver from $110 million to $130 million to support our continued growth. Our updated investor presentation is on the web at www.theDixieGroup.com. Dan?

Thank you, Jon. I think the best way to describe the late second quarter and early third quarter is: a rising tide lifts all boats. I believe the improvement we've experienced in the housing sector is beginning to have an impact on the carpet industry. The residential carpet business usually lags housing improvement by about a year, and we are now feeling this impact in the carpet business.

We are also feeling the momentum increase in the commercial market, as the replacement business improves and modular continues to gain market share. Operationally, we have spent the last few years preparing to this growth. We have expanded our yarn capacity significantly to be able to service the improved demand with quality, differentiated yarns. We've also expanded our North Georgia tufting operation and added equipment that enables us to maintain our position as a style and design leader in the marketplace. The purchase of the Colormaster continuous dyeing operation ensures that we can service the increase in business at a competitive cost and continue to be a leader in color for our discerning customers.

All of these moves are intended to position our Company for growth from an operational perspective for both the residential and commercial markets. With this growth in mind, we're increasing our capital expenditures this year to $13.5 million to better service our customers.

From a product standpoint, we have continued to increase the introduction and sampling of new products to enhance our market position. Our investment in STAINMASTER, TruSoft, and SolarMax products has positioned as well for the movement to soft products.

Commercially, we have focused on several new modular product offerings which have been unusually successful in the marketplace. We have also added sales representatives in both the residential and commercial brands to improve our market presence and penetration.

Our recent acquisition of Robertex is intended to add to our wool offering, enhance our wool processing capabilities, and expand our ability to innovate in this category. Our wool business continues to grow and has helped to position us with the design community.

On the commercial side, this quarter we are in the process of launching a new brand. Avant is primarily focused on the modular office market. Avant utilizes edgier use of patterns, textures, and colors, combined with a marketing campaign promoting local and regional artisans.

We anticipate Avant will have a positive impact on our sales next year. Obviously, all of these initiatives which I mentioned have had a negative impact on operating margins. However, the improved volume we are now experiencing is beginning to have a positive impact on the bottom line. And as these initiatives gain momentum, the costs will decline. The improved margins we are experiencing are an indication that this trend is working.

In the first quarter, business began to improve, and sales were up 20% over the previous year. During the second quarter we began to feel the momentum of the industry improve, and our sales were up 26% over the previous year.

Sales and orders continued to reflect a strengthening market in the third quarter. Sales to date in the third quarter are somewhat above the second quarter year-over-year improvement percentages. At this time, we would like to open up the call for questions.

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

Good morning, Dan, John. How are you?

Fine, Sam. How are you?

I'm doing well, and terrific quarter. You are to be commended. This is really good stuff.

With the really high growth rates come, sometimes, some growing pains and some high-class problems. I did notice the capacity -- I'm sorry, the capital expenditures are going higher. You have got to be pretty much just about at capacity, at least from a labor standpoint. And, certainly, I'm guessing your yarn is also filled up, too.

How would you ascertain or categorize your utilization rate right now, Dan? And what is the prospect of continuing to leverage gross margins going forward, understanding that the integration costs also roll off?

Let me reply to your capacity question, and I'll ask John to reply to the margin question. From a capacity standpoint, we still are adding capacity in our yarn facility. We will not be up to full capacity there with trained operators and running all of the new equipment that we have bought there until sometime in the fourth quarter.

So we do have additional capacity coming onstream there, and are able to supplement that with other sources, and have capability of adding additional capacity there fairly easily. So we don't see that as a problem -- or, at this point, a capacity issue.

In tufting, we have added additional tufting equipment, and we have ample capacity there in most of the categories. We are adding some machines and will continue to add machines that help us differentiate our product in the marketplace.

In terms of dyeing, we obviously still have capacity there at our dye facility in Atmore, Alabama. We also will be adding or upgrading the drying -- putting in a new dryer in our dyeing facility in December, which will almost double our capacity there.

So we have -- fortunately, we've invested a lot in the last several years in capacity in various parts of our business, and that -- it's not a major issue. Also, I should add, on the West Coast with our Fabrica operation, there is ample capacity there -- tufting, dyeing, and finishing.

So we don't see that as something that will slow down our growth at this point. And certainly -- we hope to challenge the capacity we have. And I think that, obviously, the more we can do that, the better our results should look. And let me ask John to reply to your margin question.

Sam, relative to the integration costs and manufacturing, those should continue to decline somewhat below where they are in this quarter. But I would expect still to have those costs in the third quarter.

Our sampling expense year over year will probably be similar to what it was in this quarter. So we'll see a decline from that number we had, but it will be a gradual decline throughout the end of the year. And then looking into next quarter, our next year, I would expect as we have leverage or volume, we'll continue to see margin improvement going into 2014.

So, all in, what would you peg your incremental margin on the operating line on volumes right now? Just ballpark it.

Incremental -- taking out those integration expenses and the sampling expenses, but just a pure incremental -- I would say we are between 20% and 25%.

Okay. Second question would be this: it's very encouraging that you're mentioning that July is up even stronger than the average growth rate of Q2. Can you remind us what the year-on-year comparisons are in August and September versus July? Do the comparisons get more difficult for you? Do they get easier? Roughly the same?

I'd say they're roughly the same, Sam.

Okay. And last question would be: you're saying that you're seeing evidence of industry accelerating, not only through the quarter, but through July as well? Or is it your suggestion that it's just what you're seeing, and it may be more difficult for you to determine what the industry shipment data looks like?

We have data going through the second quarter, and it substantiates what we are experiencing or feeling. So that -- through the end of the second quarter, we feel, is very understandable; and, we think, accurate. Anything beyond that is anecdotal, but I would say we are seeing continued improvement from what we can tell in the business. A number of our people that are meeting right now, and what we pick up is that business continues to improve, particularly in the residential area.

You asked about capacity, and I responded. I did not respond on polyester, because that's a smaller percentage of our business -- a relatively small percent. But I think in the industry we are seeing a tightness of availability of polyester fiber or extruded product, and that is certainly indicative of the business and the industry improvement.

Very helpful. Thank you, and again, terrific quarter.

Thank you, Sam.

Arnold Brief, Goldsmith & Harris.

Just looking ahead a little bit, but could you give us your best guess on the tax rate and capital expenditures for 2014?

Arnie, in 2014 the normal tax rate would be in the 32% range. Capital expenditures could be similar to what we have this year, maybe slightly lower. I will say that we are at some state valuation allowances, Arnie, that will turn sometime either this year or next year. So we may have an unusual rate occur at some point during that time period because of the state valuation allowances. But barring that or any unusual credits, the normal rate would be 32%.

Okay. Just seasonally -- I'm going back from memory, but seasonally isn't the second half of the year normally stronger than the first half, particularly since the March quarter is usually your lowest quarter?

Arnie, no. Usually our second quarter and fourth quarter are the two best quarters.

And your third quarter is usually better than March, so that would indicate that second-half sales are normally higher than the first half.

Yes. But this year, the second quarter was obviously relatively strong; third-quarter looks like it will be. Too early to tell about fourth quarter. But our business continues to be best in the fourth quarter. The higher-end business. (multiple speakers)

So normally -- without making a forecast -- but normally your second-half sales are better than your first half.

Yes.

Okay. You mentioned the unusual expenses a couple of times, and they're declining, but you've given us numbers for the first and second quarter. Could you give us -- how about all those unusual expenses, if you total them up without trying to itemize them -- how they look for the third and fourth quarter?

You know, we had over $1 million in the third quarter between --

Second quarter.

Second quarter, excuse me, between sampling and manufacturing changes. Third quarter I would expect that the decline and be a little less than that. And by the fourth quarter, that ought to be well down from there. I Would say more like half that number or less.

Okay. All right, that's good enough for me. Thanks very much. That's all I've got.

(Operator Instructions) Matthew Dodson, JWest, LLC.

Yes, could you just help us understand on the gross margin side -- so in the first quarter you had integration costs of about $800,000, which affected your gross margin. Your gross margin grew sequentially phenomenally: 230 basis points. Can you talk about how much you had in integration costs in Q2?

Of that $1 million, about half of it was integration costs.

Okay. So when you talk about the $1 million in expenses, are you saying that they're both in SG&A and in COGS?

Yes. In COGS is about half of it, and the other half is in SG&A.

So you had about $500,000, basically, in COGS for the integration. And that integration expense will continue into Q3 and then dissipate in Q4?

Yes.

Okay. And then can you help us understand the -- on the SG&A side, and I guess -- you said earlier this year that you were going to level load your sampling costs throughout the year. They were going to be equal in each quarter. So is it because you saw demand accelerate, or did a customer come to you, that you had to accelerate sampling costs in Q2?

Well, we've done a couple of things. We've also hired additional salespeople both on the commercial side and the residential side. That's been part of our cost increase. The sample cost is a little ahead of where we thought we were going to be because business has been better generally. It's not a particular customer; it's just business has been more robust than we thought it was going to be. Therefore we put more into sample expense. And we think that's paying dividends.

Got it. And so how do we think about sampling costs in the back half? Do they go down from Q2 in an absolute-dollar basis? Or do they stay at these elevated Q2 levels?

They may elevate a little bit because of the Robertex acquisition. But other than that, they would be pretty level.

On an absolute dollar basis, yes.

On an absolute dollar basis, okay. And then the other question that I have for you, just relative to SG&A, because it was a lot higher than we thought it would be -- because your performance had been so strong, did you book any reserves for bonus accruals, etc., in Q2?

Yes, we did, and they are up significantly from prior year.

So can you give us how much you booked for bonus accrual in Q2?

No, we don't really go into that information. There's also some accrual for 401(k) for everyone in the Company that was impacted -- they're going to be at a higher level than we had originally thought.

Got it. Okay, great. Thank you.

Ethan Steinberg, SG Capital.

Hi, guys. Nice job. Thanks for taking my question. And I think just about everything got answered.

I'm a little confused on how to allocate that $1 million. So roughly $500,000 was in COGS and had to do with what you've laid out before with the equipment?

Correct. That's correct.

Okay. And then how do you expect that to trend over the next couple quarters?

Again, it'll be down slightly in the third quarter and then to trail off pretty significantly in the fourth quarter.

Okay. And then was there anything else unusual in the gross margin that sort of helped or hurt it? Or is what we saw in the quarter pretty indicative of how it should behave on this kind of revenue trajectory?

We think the mix in the second quarter was pretty indicative of where we are today and where we see things going forward. Obviously, the ultimate consumer decides what our mix is. But it really had more to do with improved operations than it did in product, if you follow what I'm saying. Running it at higher volumes has -- and we have been able to improve our operations significantly.

Okay. And then the $500,000 extra or greater amount SG&A, that's sampling and hiring?

Yes.

Correct.

Okay. And so the SG&A did go up a lot more than that sequentially, I think. What else -- was that the bonus accrual? Or what else drove that up so much sequentially?

I mentioned the 401(k), and bonus accrual, and things of that sort.

Okay. And then, are those accruals just to essentially catch you up to the end of June? Or did you accrue enough to cover you for some of the second half as well?

We accrue as we go throughout the year, but they are accrued at a rate which is indicative of what we believe will be the total year results. So it caught us up through the second quarter. But we'll continue at a similar rate in the second half.

Okay. So that's what I just want to make sure I understand, is that - so if you added another quarter of similar results, it will be just as high? There wasn't a decent amount of catch-up from Q1 that you had to accrue in the June quarter?

We don't give those numbers, but there was some catch-up from first quarter, yes.

Okay. And was there anything else in SG&A that was higher or lower than you guys really would have expected it to be?

Not really.

Okay. Great. Great job, you guys. Thanks for taking the call.

Thank you.

Arnold Brief, Goldsmith & Harris.

I've just got a couple of quick ones. Do you anticipate any unusual expenses in integrating the July acquisition?

Arnie, we will have slightly higher sampling expense in the second half of the year. That will be offset by, of course, earnings that we will from that acquisition. But that will be slightly higher in the second half.

No write-offs, or anything unusual?

No, Arnie. We're very excited about the acquisition of Robertex. It really enhances our position in the wool business, makes us a major player there, along with the business we've been developing at Masland and Fabrica.

What we will do there is move the Robertex products into the Masland line, and the Carousel products will become part of the Fabrica line. So it really will enhance our wool offering, and I think the design -- help our position -- enhance our position in the design community.

To go back a little bit, I hate to keep rehashing this, but you threw me a little bit of a curve here. We were talking about sampling expenses expiring -- declining in the second half of the year, and I guess into 2014.

But then you indicated -- you also included in those unusual expenses for the increment of the salespeople, which I didn't quite realize; because those expenses, I would assume, will continue at a high level, on the one hand. On the other hand, I would assume they would become more productive on the sales line. Could you elaborate a little bit on that?

We have added salespeople and will continue to add salespeople. But after the -- when we -- if you'll recall, in the late last year we took on some Gulistan products when they went out of business and hired a number of their salespeople. I think they are very seasoned people and have hit the ground running, and I think that will cease to be as big an issue or big a factor.

Last question. Just to refresh my memory, could you review a little bit what happened with price and raw material costs in the second quarter and how that looks going into the second half of the year?

There hasn't been a lot of change in the raw material cost. There's They've been a little up, a little down. But no dramatic movements there, and we don't anticipate any now. But oil where it is, you never really know for sure, barring some unforeseen thing. But we're not -- don't anticipate any major changes there.

Okay. What I'm trying to recall -- there were some raw material costs, if I remember, late in the first period, and you were still playing a little catch-up on price in the second period. It took you a while to --.

Not major, Arnie. Polyester was early in the year. And polyester is a smaller percentage of our total business. So the impact for us was not that great.

Okay. So the second quarter price/raw material relationships were fairly normal through the whole quarter.

Yes.

Okay, thank you.

Thank you.

(Operator Instructions) Matthew Dodson, JWest, LLC.

So if you back out the $500,000 that you had in the integration costs in the gross margin, your gross margin would have been, like, $27.2 million. And I guess the question that I have for you is: is that kind of a good run rate at this kind of volume level? And the other question I would have for you -- or do you get more productivity once the integration costs are gone? And then the last question is: do you think you get an improvement in gross margins if volumes continue to build?

First of all, I think the integration costs that we gave you -- when you back goes out, that accurately reflects a normal rate for this sales level. I would say as we grow our sales beyond that, there is going to be additional leverage.

But again, that would be assuming mix is basically the same as it is today. One thing we do have is a pretty wide range on both the commercial and residential side in terms of sales mix from the high to the low end. But assuming that stays the same, we would continue to get additional leverage as we grow beyond that point.

So as you go through the cycle and the changes that you have made, and I understand mixes, the issues, etc. But do you think that you guys could get to the high 20s in gross margin? Is there any reason why, if you're doing $90 million, $100 million in sales in a quarter, that you can't be knocking on 30's door for a gross margin? Or is that just too ambitious?

That is somewhat, obviously, product dependent, as John pointed out. But that would be our objective.

Okay. Thank you.

Thank you.

Gentlemen, with that, there are no other questions in queue at this time. I'll turn it back to you for closing remarks.

Thank you, Debbie, and thank all of you for being on the call. We look forward to sharing with you again at the end of the third quarter where we are. It does appear the industry is beginning to show improvement, and we certainly want to be sure that we continue to outperform the industry and gain market share. Thank you very much. Bye.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.