Dixie Group Inc (DXYN) 2013 Q3 法說會逐字稿

Good day and welcome to The Dixie Group, Inc. third-quarter 2013 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, Dan Frierson. Please go ahead, sir.

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

Third-quarter sales were up 37% over the prior year's level. The sales for the quarter exceeded our high-water mark before the 2008 recession. Our residential products grew 35% and commercial products nearly 40% compared to year-ago levels. We think the industry experienced a small single-digit improvement in commercial products and that residential business was up high single-digits.

For the year, our sales of carpet are up 27%, and we believe the industry is up in the mid-single digits. Performance relative to the industry is being driven by a strategy of reinvesting in the business during the downturn in order to take advantage of any changes or improvements in the marketplace. Fortunately, we feel the improvement began sooner and are more pronounced in the higher-end portion of the market.

Jon Faulkner will review our third-quarter financial results, with particular emphasis on the impact of our growth initiatives on our financial results. After his presentation, I will comment further on our strategy and current conditions in the industry. Jon?

Thank you, Dan. To reiterate, our third-quarter sales were $90.2 million, up 37.1% versus the same quarter last year. Our commercial products were up 39.8% versus the industry being up in the low single digits. Residential products were up 35% versus the industry being up, we believe, in the high single digits. Overall, we think the industry was up in the mid-single digits.

Our investment in the growth initiatives we began in 2012 are proving successful in supporting our growth. Total amount of these investments was approximately $2.3 million for the quarter and $5.3 million for the year to date. We anticipate that these initiatives will total $1.4 million in the fourth quarter and $2.4 million for 2014.

Detailing the initiatives, our Roanoke yarn expansion will be complete in the fourth quarter of 2013. Product conversion of our Colormaster dye line will be complete in the fourth quarter. However, we will install a new dryer on a continuous dye line to double capacity, as our growth has exceeded initial expectation. A new yarn space-dye line was installed during the third quarter. We are now qualifying new products, with production to begin in the last quarter of 2013.

We installed new higher-speed equipment to increase capacity of our machine-tufted wool line during the third quarter, with additional equipment to be brought online in the first quarter of 2014. Our Robertex wool acquisition was complete in July. We have been realigning operations to integrate it into our overall wool offering, with expectations that the manufacturing realignment should be complete in the first quarter of 2014.

These operational initiatives, we anticipate, increase our cost of sales by approximately $1 million in the fourth quarter and $1.5 million in 2014. We also began rebranding a process of our Robertex products with the launch of Carousel by Fabrica and added Robertex products to our Masland wool offerings, to be launched late in the fourth quarter and continuing into 2014. The launch of our Avant commercial brand is continuing with new products and sales coverage, expanding well into 2014. These sales and marketing efforts will increase our SG&A expense, we estimate, by approximately $400,000 in the fourth quarter and $900,000 in 2014.

Our tax rate was positively affected by $795,000 in prior year's tax credit. The majority of these tax credits were for qualified research and development expenses. Our tax rate without these credits was 31.6% for the period.

For the quarter as compared to the same quarter in the prior year, gross profit margin was 24.5% versus a prior-year of 25.2%. SG&A for the quarter was 22.4% of sales or 1.6% below the same quarter a year ago.

For the quarter, we had an operating income of $1.8 million compared to an income of $820,000 in the same period in 2012. On an adjusted basis, our operating income was $4.2 million or 4.6% of net sales. This compared to an adjusted operating income for the prior year of 1.7%.

Our interest expense was $896,000 compared to $781,000 in the prior year. The difference is due to higher levels of debt to support our increased working capital needs. Our tax shows a credit of $501,000. Again, the rate without the $795,000 prior-year tax credits was 31.6%.

Our income from continuing operations was $1.4 million; diluted earnings per share of $0.11. Our adjusted income from continuing operations was $2.2 million, with adjusted diluted earnings per share $0.15.

Looking at our balance sheet, our receivables increased $5.1 million during the quarter. Inventories were up $10.8 million for the period. Our inventory turns improved on a year-over-year basis by 14%. Working capital increased by $7.8 million during the quarter.

Capital leases and expenditures were $4.5 million for the period, while depreciation and amortization was $2.7 million. We anticipate capital expenditures for 2013 of approximately $13.5 million and depreciation of amortization of $10.5 million.

Our debt stood at $107 million at the end of the period, up $12.4 million for the quarter. And we ended the quarter with availability under our loan agreement to $26.4 million. Our investor presentation, including our non-GAAP information, is on our website at www.TheDixieGroup.com. Dan?

Thank you, Jon. During the 2008 and 2009 recession, we, like the industry, lost about 40% of our volume and consequently cut costs dramatically in order to survive. Once the industry appeared to stabilize, we decided to invest in the future through new products, readily available people talent, and equipment that could help us produce differentiated product. As Jon reviewed, we have had a number of initiatives which have been costly in the short term but have enabled us to grow much faster than the market.

The movement to soft fibers, such as STAINMASTER TruSoft and the introduction of SolarMax, has helped separate us from much of the competition. Also, the strong movement to wool products through product introductions and acquisition has enabled us to grow the wool business at a rate much faster than the market.

On the commercial side, in the last year we have launched several collections of more competitive but well-styled modular carpet, as well as developed and launched the new Avant brand. During the last year, we have introduced more new residential and commercial products than ever before. Consequently, the new products are a higher percent of our sales than ever before.

We have also added more new salespeople, enabling us to expand our coverage and strengthen our customer relationships. As we look to the future, we are optimistic about our prospects.

Because the housing and commercial markets are gaining momentum, the market reception to our residential and commercial products has been exceptional. Our upper-end customer is more confident and willing to spend. We have invested heavily in new products, talented people, and equipment to make differentiated product and add capacity to accommodate the growth. We believe both the residential and commercial markets will grow in 2014, and we believe our strategy is working in both markets.

As Jon explained in his comments, the one-time costs of these initiatives have been significant; but as we move forward, the costs should decline, and our profitability consequently should improve. Also, we have aggressively taken advantage of market opportunities as they developed, which has meant our expenditure for introducing and sampling new product has been at an all-time high as a percent of sales. We would expect these expenditures to decline as a percent of sales as sales increase and product introductions return to a more normal level.

As we look at this year, in the first quarter business began to improve and our sales were up 20% over the previous year. During the second quarter, we begin to feel the momentum of the industry improvement, and our sales were up 26%. During the third quarter we were able to get more of our new products to market, and our sales were up 37%.

Obviously, at some point the comparison to the year-ago quarter will become more difficult. The fourth quarter of last year, our sales were up 9% over the 2011 fourth quarter. In the fourth quarter to date, this year, we continue to experience strong momentum, with orders and sales up in excess of 30%.

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

(Operator Instructions) John Baugh, Stifel Nicolaus.

Congratulations on the terrific sales results.

Thank you, John.

Could you comment -- I believe there was a reference to home center channel, as well, in there. And couldn't help but notice some Home Depot ads that had been running about Soft.

Could you comment on whether you're participating in that program in general, and then what you're seeing out of the home centers in terms of marketing? I know they had pulled back on carpet. It seems to me they're back at it. Any color there would be great, thank you.

John, we are not participating in the Home Depot ads or business. We do participate with Lowe's, and that business has been -- has improved significantly this year. And I think the soft fibers have been at the center of that.

Good. And is this soft revolution that some of the trade call it -- is that something that you have experienced yourself, and is driving your business? And I'm curious how that trend is impacted at all by the proliferation of very low-priced polyester products in the marketplace.

Well, first of all, we can't really speak knowledgeably to the lower end of the market. We don't participate there.

But in terms of the soft fiber, it certainly has gained significant market share, both in nylon and polyester, and I think will continue to do so. It's a very attractive product, and we think will gain market share; and that's one of the reasons our sample costs have been as high as they have been, is replacing a lot of the older products that are not soft.

And then, lastly, any color on the commercial side of the world in terms of what you're seeing and how it's playing out, whether the order trends there -- you made the comment about the residential -- well, I guess you were commenting on overall orders being strong through October. I'm curious as to whether there is any bifurcation between residential or commercial.

We are not seeing any bifurcation. Both our commercial and residential orders and sales are in excess of 30%. And interestingly enough, they are both up for the year very close to the same number -- in the 27%-plus range.

So we are not seeing any change there. I will say, and you may recall, we changed our management team there about a year and a half ago. We've seen a lot of improvement, particularly in our modular tile business. So for us, the business has been strong; but as best we can tell for the industry, the commercial business is up just slightly.

Great. Thanks for taking my questions.

Thank you, John. Good to talk to you.

Matthew Dodson, JWest, LLC.

Can you talk a little bit about -- so originally in the year, you were going to level load your sampling costs, and they were going to be equal for four quarters. And now, in this quarter, and you put an additional $700,000 in.

Can you just help us understand at all, or can you give us a sense of what you think you'll do in sampling costs next year? And would you be willing to share at all what you're going to do totally in sampling costs this year?

Let me comment generally, and then I'll turn it over to Jon. But obviously we don't break out some specific costs, particularly by period, or whatever. But I will say our sampling cost depends on the opportunities we see ahead of us. And the acquisition of Robertex midyear certainly has influenced what we've done with samples. But, Jon, I'll turn the question over to you.

Matthew, actually, the sample costs -- anything related to the acquisitions that have closed in the third quarter, those numbers were affected because of that. But in addition, as we've gone throughout the year, we have made some adjustments for our overall expenditures.

So our initial estimate beginning the year turned out to be a little lower than what we're actually going to expend, so we raised that for the second half of the year. Anticipating 2014, I believe that our sample costs will come down next year as a percentage of our sales relative to this year.

Do you think they'll come down in absolute dollars?

I think they will be flat to down.

Flat to down. And then can I just ask you follow up? On the $5.3 million -- you say in the press release that approximately $5.3 million year to date. That includes extra sampling cost, and it also includes some of the initiatives you took in the gross margin to improve gross margins. Is that correct?

Yes, let me review that to make sure it's clear. If you look at the quarter to date, of the $2.3 million, $1.6 million of that was in the selling expense -- was in the cost of goods sold, and the balance was in SG&A.

In the fourth quarter, we anticipate $1 million in additional cost of goods sold and $400,000 in additional selling expense, for a total of $1.4 million. For the year, we anticipate $5 million in additional cost of goods sold expenditures and $1.6 million additional SG&A expense, for a total of $6.6 million or almost $6.7 million.

Got it. And the $6.6 million additional in SG&A was on top of --

That's combined cost of goods sold and SG&A. It's only $1.6 million in SG&A.

Yes. The $1.6 million, though, is a combined or an additional amount of what you had planned at the beginning of the year for sampling costs. Is that correct?

That is not just sampling, no.

It's more than sampling. It includes --.

The launch of those --. (multiple speakers)

Salespeople, etc.?

Yes. And the introduction of our new products under the Robertex acquisition. So it's (multiple speakers).

The last question: if you back out the $1.6 million that you had in the COGS, gross margins would have been 170 basis points, or almost 180 basis points better. If we think about next year -- and obviously, sales are very robust -- but if you think about gross margins next year, can that put you kind of in the 28%, 29% gross margin? Can we think about that kind of for next year, or is that too aggressive?

I think if you look at the adjusted gross margin that we have for the year, that's a good indicator of gross margins going into next year, recognizing we still anticipate $1.5 million of additional COGS expense next year and $900,000 in selling, which would reduce that.

But that as a run rate, as a percentage of sales, is a reasonable expectation for gross profit margin. Additional leverage will boost that some, but I don't know that it would go to the numbers you're describing.

Okay. Then can you talk a little bit, just what you think -- over time what you think you can drive op margin to?

Operating income -- we have always said that we would like to be in that 7% to 9% range long term, but we are really not there at this point in time.

Great. Thanks for your time.

Tom Lewis, High Road Value Research.

First question: with respect to capital spending, I would guess that the elevated level we're at now to bring on all these new capabilities carries on over some into next year. But might you give us a sense of once we get past that, what the new normal level of capital spending might be for you, say, relative to what you're looking to this year or where it was more recently?

Well, you know our expected capital expenditures this year were in the $13.5 million range. And in the short term and looking into 2014, I would expect them to be in that range -- maybe even a little higher, but in that range.

Over the long term, I expect that our depreciation, amortization, and our capital expenditure to come in line with one another. We underspent during the downturn pretty significantly, so we're a little bit overspending now. But over the long term, we would expect those two to balance out.

All right. And then, I was wondering if -- other than what we can read about in terms of some of the larger players taking out capacity, can you talk to how five, six, seven really tough years have evolved the competitive landscape for you there?

Tom, I'm not exactly sure what you're looking for there, but I think, clearly, we really began investing back in the business before a number of our competitors did. And quite honestly, it did have a negative impact on our profitability there in the last couple of years, but we think it was well worthwhile doing, looking at the business strategically and long term. And we're getting to the point where it's beginning to show up on the bottom line, as well.

If you look at -- the industry from peak to trough was off about 40%. We were off about 40%. Our trailing 12 months are up about 58%, and the industry is somewhere in the 10% range. So I think clearly the strategy is working, and our emphasis this next year is really in bringing that to the bottom line.

Okay. Well, I kind of -- what I was wondering is: would it be fair to assume that over a difficult stretch of time like that, that competitors -- smaller competitors, the ones that if you're not up close and personal everyday -- you know, we're not aware of, just aren't around anymore, or are really not as competitive as they used to be?

I think the industry is as competitive in the lower and mid price range as it's ever been. I think we've seen the entrance of a couple of new mills. We have seen a couple of mills go by the wayside.

But I wouldn't say people are weakened. The big companies in the business -- the two biggest, Shaw and Mohawk, I think are as competitive as they've ever been.

Okay. Well that's -- I would think so. Finally, it's been a long and winding road, and I would really like to say thank you very much to you and your whole team for all your hard work in sticking with it.

Well, thank you for sticking with us.

Ethan Steinberg, SG Capital.

Congratulations on the results and execution. Thanks for taking my call.

So I'm a little confused on a couple of things. I haven't had time to completely go through it, so sorry to do this on the conference call, but I want to make sure I'm thinking about it correctly. The adjusted operating income of $4.1 million -- or almost $4.2 million and 4.6%, that's backing out the $1.6 million in integration costs?

Yes. Well, we're backing our both in the COGS and in the SG&A expenses, as well as the tax effect and -- I'm sorry, you're talking about operating income. Yes, those two items were backed out. And during the period we had $2.4 million of those numbers: $1.6 million in COGS and, right, $800,000 in selling.

Got it. Okay. And then you're saying it's going to be $1.4 million in the December-ended quarter and then drops a lot next year, to $1 million and $400,000 for the whole year?

$1.5 million and -- no. $1 million and $400,000 for the fourth quarter, or $1.4 million total; and $1.5 million and $900,000, or $2.4 million, for next year.

For the entire year.

For the entire year.

Got you, okay. And then, I guess I want to just make sure I'm thinking about it correctly. So we grew the revenue about $25 million on a year-over-year basis, and that adjusted operating income grew about $3 million. Was there anything else in the expense structure that won't necessarily repeat?

Ethan, I think we indicated earlier that we did see opportunities in the marketplace. And therefore, we have spent a lot more aggressively in terms of hiring salespeople and developing and introducing product at a level that is higher than we would think we would have going forward in more normal times.

And yes, and clearly is paying off; so it's a good investment. But I guess I'm just trying to get a sense of -- as that goes to a more normalized environment, how much do you think would drop through if you grew the revenue? Is it $25 million or $10 million? I'm just wondering what that drop-through should look like when you're not in such a high investment phase.

We are not in such a high investment phase. Our goal is to be in the 20% to 25% range. I think in the near term, it may be more in the 15% leverage ratio, just because we do have -- we captured what we thought were the one-time expenses, but we didn't capture all the expenses of the growth during this period. So as we go forward, our leverage ratio -- again, we think we're going to be in the short term in the 15% range, but longer term our goal is in that 20% to 25% range.

Okay. So that -- it's still -- it grows sequentially from here. Even going to 15% is a nice step up.

Yes.

Okay. And then, I'm also just curious: you said that the comparison was against 9% last year in Q4, and it's up 30% quarter to date, which is a big number. Is the comparison of that 9% pretty even for October? Or was it harder or easier than the 9% for the quarter?

Ethan, if you go back two years ago, our sales were strongest in October and the first part of November; and then they trailed off in the second half between the holiday season -- between Thanksgiving and Christmas. Last year our sales were pretty much strong throughout the entire quarter. And so I don't know what the seasonality would be this year, but we did have a little unusual seasonality last year in that it was -- really, it was a good October. But what happened was November and December came in much stronger than we historically would have expected.

Okay. Great. And there's nothing with the mix or margin of what you're seeing in October that is different than what we saw in the third quarter?

No, it's a continuation. Candidly, some of the new products, as we indicated earlier, began to impact sales in the third quarter -- really late second quarter and third quarter. And we're seeing the continuation of that. So the mix is not materially different in the fourth quarter than the third quarter.

Okay. Well, great. Nice job, guys. Thanks for taking the questions.

(Operator Instructions) Josh Goldberg, G2 Investment Partners.

Thanks for the strong results. Just so I understand: through the third quarter, I guess the first 45 days, you were tracking roughly around 30%, you said in one of your presentations. And you ended the --

That's the fourth quarter, Josh.

No, no, the third quarter.

Yes. In the middle of August, you had a presentation on your website that said you were tracking around 30%, and you ended up doing closer to 37% -- or over 37% for the quarter. Does that imply that the last 45 days, business actually got stronger? And I have a follow-up.

Josh, our business -- particularly the commercial business -- sometimes comes in lumps. And we try to level those out a little bit.

I don't recall. I don't think it was particularly stronger, but somewhat. But we did have good order entry from the start. And as we have indicated this quarter, both the order entry and sales are up in excess of 30%. But as John pointed out, last year we had a strong November/December. So we don't know where we will end up for the quarter.

Okay. And then in terms of acquisitions, the Robertex acquisition -- how much did that add in terms of revenue for the quarter?

We have not released those numbers. And that acquisition was a combination of additional wool sales; but also, it allowed us to bring inside operations which we currently had to outsource. So it was a combination of things. But we have not released those sales and do not break out our wool sales separately.

Okay. Was there anything that sort of affected mix this quarter that got you down on the gross margin side, besides, obviously, some of these one-time items? Or is the commercial business a little bit lower in terms of gross margin mix versus your residential side?

Actually, our mix really had no major changes. And the average between the two businesses are very similar. They're both -- the upper and lower end of each business are very comparable, and the average of those businesses are comparable.

Remembering our lower end is still very much upper end in the marketplace.

Right. And just so I'm clear, so if you have a lower cost of goods sold addition in the fourth quarter -- this sort of one-time cost that you're incurring -- all things being equal, and keeping the mix as it is, and to translate AR, you would expect your gross margin percentage to be higher than the 26.1% in the third quarter, to something closer to maybe what you did in the June quarter -- 26.7% or 27%? Is that fair to say?

It could be, yes. Again, the adjusted gross profit margin was really to let people see what we think a more normal profit margin is. But, again, I don't know what the sales volume will be for the quarter and whether there'll be additional leverage on that.

Okay. Got you. Great. Thank you so much.

Thank you, Josh.

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

Thank you, Melissa, and thank all of you for being on the call. Obviously, we're very pleased with the sales increase, and we continued to see strength in the fourth quarter as we did in the third quarter. Our objective in the fourth quarter and going forward is to bring more of that increase in sales to the bottom line. Look forward to talking with you next quarter.

That does conclude our conference for today. Thank you for your participation.