Dixie Group Inc (DXYN) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Dixie Group, Inc., fourth-quarter 2013 conference call. Today's call is being recorded. At this time for opening remarks I would like to introduce Mr. Dan Frierson, Chairman and Chief Executive Officer. Please go ahead.

Thank you, Danielle. Welcome, everyone, to our fourth-quarter and year-end conference call. I have with me Jon Faulkner, our Vice President and CFO. Our safe harbor statement is included by reference both to our website and the press release today.

At $95.8 million and up 34.7% over the previous year, our quarterly sales were the largest and highest we have had for any quarter since the Company was reconfigured in 2003. Our residential products were up 30.5% versus the previous year, while the market experienced mid-single-digit growth. Our commercial products were up over 45% and the market, we believe, was up in the mid-single digits.

For the year, we continue to outpace the industry and gain market share. Our sales were up 29.5% for the year and we believe the industry was up in the mid-single-digit area.

Jon Falkner will review our fourth-quarter financial results with emphasis on our growth initiatives. After his presentation I will comment further on our strategy and plans for the future.

Thank you, Dan. Looking at sales, again for the year our sales were $345.1 million, an increase of 29.5%. Fourth-quarter sales were $95.8 million, up 34.7% on a fiscal period basis versus last year.

For the year, our commercial products were up 30.1% while the industry was up in the low single digits. Our residential products were up 28.5% in the mid -- while the industry was up in the mid to upper single digits.

For the quarter, our total sales were again up 34.7% while we believe the industry was up in the mid-single digits. Our commercial products were up 45.5%, while the industry, we believe again, was up in the mid-single digits. And our residential profits were up 30.5%, while we believe the industry was up in the mid-single digits also.

We far outperformed the industry, both in the commercial and residential products, for both the quarter and the year. In the fourth quarter we saw strong sales growth in our residential products throughout our retail channels. Continued investment in Stainmaster TruSoft and PetProtect products has paid off during 2013. We continued another year of double-digit growth in wool products.

Sales growth on our commercial products was led by our Speak modular carpet tile collection. For the year, our gross profit was 24.8% of net sales, as compared to 24.5% for the prior year. For the fourth quarter, gross profit dollars were up 31% compared with a year ago. As a percent of sales, gross profit was 23.8% versus a prior year of 24.5%.

We did have unusually high medical expenses late in the fourth quarter, which reduced gross profit by approximately 0.6%.

SG&A for the year was 22.2% of sales or 1.6% below the prior year. For the fourth quarter of 2013, SG&A was 21.5% as compared with 23.8% for the same quarter in 2012. The lower expense ratio was driven by higher sales volume.

Over the next few years we anticipate our SG&A expenses will drop by approximately 1 percentage point as we return to a more normal level of new product sampling expense.

Operating income was $8.6 million for the year, as compared to $1.8 million a year ago. For the year, we had additional expense in cost of goods sold and other expenses of $5.5 million for manufacturing expansion and business integration costs.

These expenses were primarily due to the expansion of our Colormaster continuous dye facility, the startup of our space dye yarn operation, expansion of our Roanoke yarn capacity, integration of our Crown Rug and Robertex wool acquisitions, and other related expenses during the year. We anticipate an added $270,000 of these final integration expenses early in 2014.

For the year, we had business integration expenses in SG&A related to launching the Avant brand and rebranding of our Robertex products of approximately $1.8 million. We anticipate these selling-related expenses to be approximately $1.1 million in 2014.

For the fourth quarter, we had an operating income of $1.8 million compared to an income of $415,000 in the same period of 2012. We had manufacturing expansion and business integration expenses of $1.3 million during the quarter. In addition, we had rebranding and launch expenses for our Robertex and Avant line of $597,000 in our SG&A expense for the quarter.

In 2014 we will begin the expansion project with the consolidation of our distribution network and streamlining of our manufacturing operations. This project will impact costs approximately $2.4 million over a two-year time frame with approximately $1.3 million of that in 2014 and the balance in first half of 2015.

Our interest expense for the year at $3.8 million was up 19% from the prior year due to higher levels of debt. For the fourth quarter, interest expense was $996,000 compared to $877,000 in the prior year due to higher debt levels.

Our effective income tax for the year was a benefit of $643,000. This was primarily due to prior-year tax credits and a reverse of our state tax valuation allowances. Without such items the tax rate for the year was 25.5%. Our normal rate going forward at reasonable levels of profitability should be in the 32% range.

Diluted income from continuing operations for 2013 was $0.40 per share as compared to a loss of $0.05 per share in 2012. For the fourth quarter we had an income of $0.12 per share as compared to a loss of $0.03 per share in the fourth quarter of 2013.

Looking at our balance sheet, our receivables increased $11.6 million during the year while inventories increased $21.4 million. Capital expenditures and leases were $13.3 million as compared to depreciation and amortization of $10.3 million for 2013. We anticipate capital expenditures for 2014 of approximately $16 million and depreciation and amortization of approximately $12 million.

Our debt stood at $108 million at the end of the period, up $23.8 million for the year. We ended the quarter with availability under our loan agreements of $32.6 million.

Our investor presentation, including all of our non-GAAP information, is on our website at www.theDixiegroup.com. Dan?

Thank you, Jon. We believe the dramatic downturn of our industry and the economy in 2008 and 2009, along with the changes in our industry, has provided an opportunity for growth and market share gains. Taking advantage of these opportunities has had an adverse impact on current period earnings, but we believe we will begin to see the benefits to our bottom line going forward.

Since the downturn in 2009, our carpet sales have grown 68% and we estimate the industry has only grown about 12%. During this period, our residential sales were up 88% and the industry less than 10%. Commercially we grew at 28% and the industry around 15%.

We have made major investments in our business to fuel this growth. With the fiber changes in the industry, the movement to soft fibers, and our move into wool products, we have continued to bring more new products to market than we would during more normal times.

We have also invested in yarn processing, new tufting and rug technology, and new dyeing technology. Specifically, we increased our Roanoke yarn capacity by over 40%. We purchased, upgraded, and increased the capacity of our Colormaster dyeing facility over the last 15 months. We purchased and started up our new space dye line, providing us with additional yarn capabilities.

We acquired the top-selling product lines from Gulistan and expanded our residential sales force. We invested in the Crown Rug operation, moving it into our California facility and expanding its production capacity. We bought and are currently integrating the Robertex wool business into our Fabrica and Masland product lines.

On the commercial side, we brought in a new management for our contract business and initiated a stream of new products to enhance our position in the specified commercial market. We also upgraded our modular tile processing equipment to lower cost and improve efficiency.

We launched the Avant brand in 2013 and recently announced both a joint venture and distribution agreement with Desso to expand our penetration in the high-end hospitality market and bring a new set of innovative Cradle to Cradle modular tile products to the North American marketplace.

We believe these actions -- we believe the actions we've taken to grow our business will continue to provide growth in 2014. The fourth quarter was strong and the year began with positive momentum. However, adverse weather conditions have tempered growth in January and early February and also impacted efficiencies in our manufacturing operations. January sales were up 2.3% and February so far is up about 16%.

We believe sales will regain momentum as weather conditions improve. Year-to-date sales are up a little over 6%. Our big-box business tends to be -- to come in large chunks, and the year-ago period was very strong for January and early February. Our sales year-to-date, exclusive of big boxes, is up 10%, with particular strength on the residential side and the higher end, as evidenced by growth of our Fabrica products and the wool business.

On the commercial side, our modular tile business is continuing to grow rapidly.

As indicated in our press release, streamlining our distribution network is the remaining major investment needed to sustain our continued growth in sales. This will be done over a 15-month time period during this year and next. We believe that housing industry trends should provide a favorable climate for the next few years, and although the first quarter has been challenging for the industry, we expect the year to be one of growth.

At this time we would be happy to answer any questions you may have.

(Operator Instructions) Sam Darktash, Raymond James.

This is Josh filling in for Sam. Thank you for taking my questions and congratulations on the quarter.

Thank you, Josh.

Quickly I want to make sure I caught the comments on the non-big-box businesses. Did I hear correctly that that's running plus 10% so far in the quarter?

Yes, that's both residential and commercial combined.

Got it. And as we look at March, was that a particularly strong month for you last year or do your comparisons get meaningfully more difficult?

It was a good month and our first quarter, as I recall, was up some 22% from the prior year, so first quarter was a very decent quarter last year.

But most of the big-box lump was in January and February?

It grew throughout the year, but we were strong in the early part of the year, yes.

Okay. Then with regard to input cost trends, we've been hearing a little bit about possible risk of inflation in nylon. Are you seeing anything to that effect? And what are your thoughts on input costs and industry pricing for 2014?

Josh, we seem to have a habit of trying to raise prices early in the year. They don't always stick.

We have not been informed of any major price increases. A few raw materials have gone up slightly, but at this point, unless there continues to be major movement in the oil price, we may not see it. But at this time we have not.

Thank you for the color. Again, best of luck on the next quarter.

Les Sulewski, Sidoti & Company.

Good morning, gentlemen. Thank you for taking my questions.

Looking at last year, you roughly achieved 30% growth to new additions in favorable market conditions. Can you help us understand what kind of growth you are aiming for for this year?

We do not give forward projections, Les, but I will say we see positive momentum coming into this year, though the first quarter has been challenging because of weather-related issues. As Dan indicated, what we do see is the overall industry will continue to rebound and typically we perform better than the industry being at the upper end part of the market.

We think the upper end of the market and the very lower end of the market are outperforming the market generally. So we would expect, being primarily committed to the upper end of the market, that that business will grow faster for us than the market generally.

Also, as we indicated, we have continued to introduce product at a very rapid rate, both on the residential side and on the commercial side. We think that does have a dramatic impact on our business and, therefore, would expect to outperform the industry for the year.

Okay, thank you. You mentioned on one of your previous calls that you were targeting 7% to 9% operating margins. I understand integration can sometimes take a little bit longer and things come up that weren't expected, but can you provide us any updates on where you see the margins headed? Has the target changed or timeline been kind of pushed to the right?

First of all, that is correct, that is our longer-term belief that that's what the industry or what the Company should be able to perform at those levels. However, I will say that as we have grown really beyond what had been our probably previous capacity levels, really in that $330 million range, as we got up in the $345 million range and continue to grow we had run into a series of bottlenecks.

If you look at that, we expanded our yarn capacity 40%. We had reopened our Eton facility to give us plenty of space to add tufting. We doubled the capacity of our dyeing and we have always had plenty of capacity in finishing. And the real last bottleneck has been our distribution network.

So as we expand the distribution network over the next 15 months what we will be doing is increasing capacity, which should take away the things that have been affecting us in terms of returns. So I think as we get over that period of time that will put us back in line with trying to get back into those ranges. But, historically, if you look at the competition as well, you will see that that 7% to 9% range is a reasonable industry expectation.

And to kind of buildup on the distribution network, with Desso in the picture now can you comment a little bit more on that?

In terms of the distribution, we will be combining our distribution into one facility and that's really -- we have leased a facility in Adairsville, Georgia, very close to Calhoun, and we will be combining all of our distribution from several different locations into one, which will allow us to serve our customer better.

In terms of Desso, we have had a relationship with them for some time. We have reached agreement with them on a joint venture and a distribution agreement. What we are -- particularly in the hospitality area we will be combining efforts with our salespeople and their salespeople.

We will have a much broader offering by combining their products with our products. They have woven wool products; we primarily have tufted products and rugs. And we feel like that will allow us to be a more complete supplier in the hospitality trade. We are very excited about the possibilities there going forward.

We will be distributing many of their very innovative modular tile products such as their AirMaster products, SoundMaster, LightMaster. Each of these have innovative characteristics that are engineered into the products that make it perform differently than most other products in the marketplace. We will be training our sales associates next month and then after that launching this out into the industry.

So we really think it's a great opportunity to bring additional product, innovative product, and different product than other people are selling in the marketplace.

I will mention that the sales cycle in the commercial marketplace is significantly longer than residential, so really we anticipate impact more in 2015 and beyond than in 2014 as we are starting the sales process together with Desso.

Great, thank you for taking my questions.

Arnold Brief, Goldsmith & Harris.

I've got a couple, although a lot of them have been answered already. Just as a point of information, if I'm not mistaken in the first quarter March is by far the biggest month of the quarter normally.

It is certainly usually the strongest month of the first quarter.

Secondly, on the fiscal agreement; are they distributing some of your products or is it you are distributing their product exclusively? Is there --? (multiple speakers)

You are already in the hospitality market. Is there any conflict with what you are already distributing? How many -- could you give me some idea of how many SKUs are involved or the volume potential?

Finally, I'm sure it should have a positive impact on revenues. Given the distribution agreement, it's usually a much lower margin. Could you flesh this out a little bit?

Let me give you conceptually -- Arnie, first of all, thank you for the question. We offer tufted product and rugs into the hospitality trade. They primarily offer woven products, so there is not a lot of overlap, and we are talking about an agreement here in North America.

Now on the tile distribution agreement, that is a little different animal. It really gives our salespeople more product to sell to the same or similar customers that are much more environmentally sensitive and designed for specific applications.

Now, you asked about elsewhere, Desso will be selling some of our tufted products in Europe as well. But we are excited about the possibilities here; we are just getting started with this. And, as Jon said, it will not have a dramatic impact this year, but we think potentially could in 2015 and forward.

In the joint venture, they will be selling your tufted product and you will be selling their woven product or --?

Well, the joint venture will actually combine our hospitality salesforce and their -- which is a small subset of our overall Masland Contract salesforce -- and their North American hospitality salesforce. Those two will be combined and then they will jointly, as a combined salesforce, cover the United States focusing on --

Selling your combined products.

-- combined product, focusing on (multiple speakers) Yes, combined product line. Focusing on the four- and five-star hotels chains primarily (multiple speakers).

So your existing salesforce will not be selling those clients anymore; that's how you are --?

We are actually taking the people who would've been selling those and we are merging them in with their salesforce to create this joint venture salesforce combined under the Desso (multiple speakers).

Under this agreement are your margins -- theoretically as the business gets going is your margins comparable or somewhat less to the existing mix?

Once we get going the margins should not be any different, because it is a joint venture, so we will have comparable margins. We will split them. Obviously there will be a little bit of start-up expenses, but that's just marketing materials. Nothing major.

Is it 50/50 on the joint venture?

Yes.

Do you have any indication of what their market share now is in that high-end hospitality area?

We are not in a position to give out their information, Arnie. I'm sorry.

I tried.

They are a significant player and we certainly think having their salespeople selling our products should be additive for us going forward in this joint venture.

Maybe you could approach it another way. Could you give us some idea how big, how large this segment of the hospitality market is? The size of the market.

I don't have that information at hand, Arnie, but it is a tip of the iceberg in that sense. It's not a major chunk of the market where you would have the lower-priced hotels. This is people who want woven products and they are public spaces, so they are all upper end facilities. I don't have those numbers at this point in time.

In terms of mix, could you -- I know you don't break out the actual numbers, but could you give us some idea of how much -- what percentage increase in revenues Dixie, Masland, and Fabrica had for the year? Just in percentage terms without giving the dollar numbers.

Are you talking about all three residential businesses?

No. Well, Masland, Dixie, and Fabrica just percentage increases in sales. I am trying to get some idea of the mix. (multiple speakers) residential increase in commercial, but you didn't breakout the --.

Within residential all three brands were up. The highest growth, however, was in the Dixie Home area. And --.

Okay, that's what I wanted to know. If you look at your operating margin for the year and throw back all the non-GAAP expenses, your operating margin actually comes in around $7.2 million or $7.3 million, something like that on an adjusted basis, which is already the bottom end of the range that you've indicated.

Given all the expense cuts that you've gone through, plant consolidations, what have you, and then the leverage you are getting from revenues on your fixed expenses, I recognize mix has had some impact on the margin but it seems to me that, again, on an adjusted basis you are already over 7%. Isn't the potential somewhat higher as your sales get well over $400 million?

Yes, our potential is higher than that and that's why we really said 7% to 9% range and what we do see.

I meant isn't the range a little bit low is what I'm saying, not the 7%?

Arnie, I would like to say that we could aim for a higher number and internally I know that we are trying to maximize our profitability. But I will say that I am not generally one that wants to go that far out on a limb.

Looking at those margins, apart from mix and all the expenses that you've indicated and some of the costs that you are still working through, has price been any factor in terms of impacting the margins? Or is pricing versus margins sort of normalized at this point without -- not being a negative effect? Have you used price to get revenues?

I would say basically, no. There may be a few cases where we have, but not generally.

Got you. Okay, thanks.

(Operator Instructions) Matthew Dodson, JWest, LLC.

Congratulations on a great quarter. Just a couple questions. Can you help us understand gross margin going forward? You give your target for 7% to 9% operating income, but where can we expect gross margin to go when you increase your volumes, kind of leverage your fixed cost?

If you look at gross margins, we would expect them to be in the high 20%s over time. We don't see gross margins going up in the 30% range, but in the high 20%s.

Can you help me understand sequentially -- volumes and sales went up sequentially, but gross margins went down, even if you back out all your whole integration expense. Was it just that 60 basis points of medical or was there something else in there as well?

Jon Faulkner There was a fair amount of noise relative to mix during the time period and probably the largest single effect was we did have a couple of large jobs that were on the commercial side that occurred early in the quarter. But other than the normal range of mix -- and we have a pretty broad range in our mix that can occur -- I would say the major effect really was the medical.

And then, like I said, we had one particularly large job early in the quarter on the commercial side. Those were really more just mix noise in the system between -- in the different brands that we were selling at the time.

Then kind of going forward then, I understand you not going to get to the high 20%s in gross margins, but should we see an uptick sequentially in gross margins because mix is getting back to normal? Are we still going to have these medical and inefficiencies that you talked about because of the weather kind of holding gross margins back?

I think we will definitely have inefficiencies due to weather. We had several plants affected by the weather. Almost all of our East Coast facilities were in one way or another affected by the weather, either from customer shipments or being shut down. People not being able to get to work, which interrupted several times so far this quarter.

But beyond that I think we would expect to see, again, sequential improvements in margin as we continue to grow. But the largest impact right now in the short term will be weather related.

Then you gave your kind of SG&A outlook going down 1% year over year because of sampling costs. Is that evenly -- is your sampling cost evenly distributed throughout the year or is it front-end loaded?

We level our sampling costs throughout the year. We review that, obviously, every quarter, but the attempt is to try and level our sampling costs throughout the year. We do have, of course, a continuation of those SG&A expenses relative to the Avant and the Robertex rebranding occurring in 2014. And that will be complete in 2014, those two projects.

So then what are you guys basing that 100 basis points decline in SG&A off, just more volume? Because it sounds like you (multiple speakers).

We had increased -- if you really looked back in 2010, after the downturn we increased our sampling expenses more normal to a much higher sales level. And so as we increased our sampling expenses we have been growing into that sales volume and as we achieved higher sales volumes, our dollars of sampling will not be increasing proportionately. That's the reason we will be getting it back to normal.

So it looks like you guys did close to $77 million in SG&A for the year. Does the absolute dollars have to increase besides the increase -- the expense you just talked about, the $1.3 million going forward?

Yes, our selling has got a variable component because our salespeople are on a commission basis. And so, if you look at our SG&A, we do have a variable portion as well as a fixed portion and that variable portion is driven by sales level, whereas the fixed portion is both either G&A.

Or, as I said, our sampling expenses will not grow as fast as our overall sales as we have really been preloading or upfront investing in new products at a much heavier rate relative to our sales volumes. And we will going to future years.

Out of your SG&A, how much is variable?

A little less than half.

Perfect, thank you. Congratulations on the great year.

With no further questions in queue -- I do apologize. We do have a follow-up question from Arnold Brief.

Just in theory, is there anything in the -- assuming the economy stays as you've indicated or as you expect with housing growing, etc., is there any reason that your margins shouldn't normalize, whatever you want to consider normal? Is there any reason your margins shouldn't normalize in 2015?

As we sit here today, most of the one-time expenses will be over in 2014.

We will have the restructuring charge occurring relative to the streamlining of our distribution network through the first quarter, but that will be on a separate line item on the P&L so you can isolate that simply.

That was pretty small also.

But that will be the only item really that should not be complete by that point in time (multiple speakers).

So the answer to my question is yes?

Yes, Arnie.

Thank you.

With no further questions in queue, I will turn the call back to Dan Frierson for any additional or closing remarks.

Thank you, Danielle. We appreciate everybody being with us today. Obviously, we have been very successful in growing our top line and we are intent on growing the bottom line to match that as we go forward.

Appreciate you being with us and look forward to talking to you next quarter.

Ladies and gentlemen, that will conclude today's conference. Thank you again for your participation. You may now disconnect.