Dixie Group Inc (DXYN) 2014 Q2 法說會逐字稿

Well, good day, ladies and gentlemen and welcome to The Dixie Group, Incorporated second-quarter 2014 conference call. Today's conference is being recorded.

At this time for opening remarks and introductions I will turn the conference over to the Chairman and Chief Executive Officer, Mr. Dan Frierson. Please go ahead, sir.

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

Investments we have been making to grow our business had a very positive impact on our second-quarter sales as we continued our strong growth relative to the industry. Our sales for the quarter were up 29.4% in total and 14.8% not including the acquisition of Atlas Carpet Mills. Our residential products increased 13.7% from last year's second-quarter and we believe the industry was flat.

Sales of commercial products were up 24% compared with the year-ago period without Atlas or 83.5% including Atlas this year. We believe the industry was up low to mid single digits.

All of our brands, other than Atlas, were up in the second quarter on a year-over-year basis. We anticipate Atlas sales will begin improving with the introduction of new products later in the year.

Jon Faulkner will review our second-quarter financial results after which I will discuss our business going forward. Jon?

Thank you, Dan. Looking at sales, for the quarter our sales were $108.2 million, again up 29.4% on a fiscal period basis versus last year.

For the quarter gross profit as a percent of sales was weak at 24.6% as compared to 26.7% a year ago. On a non-GAAP basis including acquisition and manufacturing integration related costs, our gross profit percentage for the second quarter is 24.8%.

Other expenses that are not adjusted in the non-GAAP presentation are over $800,000 of expense relative to higher-than-normal Worker's Compensation expense related to an accident that occurred while installing equipment to accommodate the Atlas dye house consolidation and lower operating efficiencies early in the quarter. Had these operational expenses been included in the non-GAAP presentation, our gross profit would have been 25.5%.

Selling and administrative expenses for the second quarter of 2014 was 22.5% of net sales as compared with 22.5% for the same quarter in 2013. The high expense ratio was partially due to approximately $269,000 in costs relative to rebranding of our Robertex product line and the Avant brand launch and about $154,000 in Atlas acquisition related costs. Without these added expenses our selling and administrative expenses was 22.1%.

Operating income was $440,000 for the quarter as compared to income of $3.3 million a year ago. Adjusting for $2.2 million in facility consolidation, asset impairment and acquisition related expenses during the period as we implement our previously announced plan to expand capacity, integrate acquisitions and streamline operations, operating income was $2.7 million. Once again the non-GAAP operating income of $2.7 million does not include the unusual Worker's Compensation expense and lower efficiencies early in the quarter that would have increased non-GAAP operating income to $3.5 million.

We are most of the way through the merging of the Atlas dye house into our Susan Street facility. We've entered into an agreement to sell the Atlas dye house and have adjusted the Atlas purchase gain in the opening balance sheet, just showing it in the year-to-date results only.

In May we began the consolidation plan for our East Coast distribution network. We opened our Adairsville distribution center in mid-June and will continue to move finished goods into the facility throughout the summer. The next step in our plan is to convert our Eton finished goods facility into storage for work in process.

In addition, we announced in June the decision to shut down our Atmore carpet and yarn dye processes. The carpet dyeing operation was shut down in July and the yarn dye operation will be shut down in early August. We have scheduled the details of these restructuring plans in our press release.

Our interest expense for the quarter at $1.1 million included the higher cost due to the Tranche B Advance loan on our revolver as part of the Atlas acquisition. That loan was repaid in June and we anticipate lower interest rates going forward due to higher levels of availability under our bank revolver.

Our income taxes for the period was a benefit of $66,000. The tax in the period included a true-up to a higher rate from the first quarter and $117,000 charge due to the expiration of an unvested market-based stock grant. Our normal rate going forward at reasonable levels of profitability should be in the 38% range.

Dilutive loss from continuing operations for the second quarter of 2014 was $0.04 per share as compared to an income from continuing operations of $0.13 per share in the second quarter of 2013. Looking at our balance sheet our receivables increased $3.4 million during the quarter and inventories increased $1.7 million. Capital expenditures and leases were $2.2 million as compared to depreciation and amortization of $3.3 million.

We anticipate, including the new ColorPoint tufting equipment for Atlas, capital expenditures for 2014 of approximately $19 million and depreciation and amortization of approximately $12.7 million. We refinanced existing operating leases entered into during the downturn into capital leases to lower our financing cost during the period, as $2 million of capital expenditures is not included in the $19 million mentioned above.

Our debt stood at $114.7 million at the end of the period down $17.9 million for the quarter. We paid off the Tranche B loan over advance on June 30, the Monday after the quarter ended. We ended the quarter with availability under our loan agreements of $46.5 million.

Currently our availability under our loan agreement after reaping the Tranche B loan is $37.8 million. Our investor presentation, including our non-GAAP information, is on our website at www.thedixiegroup.com. Dan?

Thank you, Jon. Over the last few years we have embarked on an ambitious plan to grow our business and improve our profitability. There has been no area of our Company that has not been impacted.

At the same time we have made strategic acquisitions to improve our operations and enhance our market position. In 2012 we began the expansion with our yarn operation, which has been increased by over 40%. We also reopened our Eton tufting facility with the focus of growing our residential business.

In 2012 we also brought new management into our Masland contract business with a special focus on growing our modular tile business. Later in 2012 we purchased a continuous dyeing operation from Milliken to lower our costs and support growth of the residential business. We also purchased Crown Rug to enhance our offering of wool rugs.

In 2013 we purchased Robertex, a leading wool carpet supplier, to continue our growth in the wool market. We also launched a new commercial carpet brand, Avant, to help grow our commercial business. Later in 2013 we expanded our continuous dye operation to give us ample comp capacity for growth.

In addition, we purchased and started up a space dye operation to give us greater product capability. In early 2014 we entered into a joint venture with Desso Carpet to sell into the hospitality market in this country, which gives us access to woven Axminster wool carpet. We also began selling some of Desso's unique and innovative products into the modular tile market.

In March we purchased Atlas Carpet to increase our presence in the upper end of the commercial market. In the second quarter we merged their dyeing into our existing operation in California. During the second quarter we also began opening a new distribution center in North Georgia, which increases our space for product without increasing our cost.

And lastly, we are closing our yarn and carpet dyeing in Atmore and are moving the dyeing to lower-cost facilities. Obviously, all of these moves have been done to help support our aggressive growth over the last few years. As we complete these restructuring plans our profitability should improve significantly.

Our organization has responded to these changes very well but there have been significant upfront costs in making these things happen. Current business conditions are showing some improvement in the residential and commercial marketplace. The remodeling sector seems to be driving this improvement and we believe that is generally positive for the upper-end business.

During the second quarter most industry players announced and implemented a carpet price increase to reflect the cost increases which we have experienced. The results of the increase should begin to be seen in the third quarter.

Last year the second half of the year was particularly strong for us. Last year's third quarter, which is usually about the same as the second quarter, was up 8% over the second quarter and was up 37% over the previous year's third quarter. Despite this, we are experiencing growth so far in July and anticipate we will have growth in the third and fourth quarters and continue to gain market share.

Through the first four weeks of July, our sales are up 19% and excluding Atlas, sales are up 6%. We believe as the distractions from our many initiatives pass, our costs will come down and our margins will improve.

The numerous operating initiatives and acquisitions impacted our balance sheet and we felt a secondary stock offering would be the prudent thing to do. The successful completion of the offering leaves us in a strong position to grow organically or by acquisition. At this time we would be glad to answer questions.

Thank you. (Operator Instructions). Adam Rudiger, Wells Fargo Securities.

Good morning, thanks for taking my question. In your press release you mentioned you still have some work to do in order to get to what you called acceptable margins later in the year. I was wondering if you could be a little more specific and talk about what acceptable means to you both in terms of gross margins and SG&A to sales and then comment on what you think really you need to do to accomplish those goals.

Adam, we have consistently targeted that we think 7% operating income is a reasonable expectation for the Company. And if you look at that, that would be involve improving both our gross margins and lowering our SG&A.

I think if you look at the operating initiatives, it's very hard to capture all the things that are going on relative to the changes that we have internal in the Company. But as those restructuring plans come down you should see margins tick up and then we ought to see a drop in SG&A as we fully absorb the higher cost structure we have in place for higher-level sales.

Particular, I think our residential business is a little ahead. We really started that growth plan in 2010. We really were late 2012, 2013 starting the growth plan on the commercial side and that growth plan really will come to fruition, I expect, in the next year or so.

In addition, Adam, we did have a price increase, which we implemented late second quarter and early third quarter which should impact the latter part of the year.

Is your expectation that you think you can get to that 7% anytime during 2015?

I think in the first half of 2015 we will still have a fair amount of restructuring. We will be shutting down our rug operation and moving it into a building we already own, which is the last piece of that integration. And so I expect when we achieve that it will be in the latter half of 2015.

Okay. And then just asking about the general environment. It was helpful to hear you talk about the normal seasonal impacts second quarter to third quarter and the changes last year. If you excess, I'm just looking at the 6% year-over-year change and so far this quarter it would suggest a decent slowdown, but if you would ignore last year's comparisons and you just kind of look at your business and how it has been trending in June and July, do you think -- do you discern any difference in July versus the second quarter?

Adam, not really. We had a very strong, in particular, commercial quarter in the third quarter last year with some very large orders. And our residential business is up much better than the 6% and we anticipate commercial to be up better than it is once we pass this period when we had some large orders.

Okay. Thanks for taking my questions.

(Operator Instructions). Sam Darkatsh, Raymond James.

Good morning, Dan, Jon, how are you? Just two clarification questions. The Worker's Comp item, Jon, I know you said in combination with some of the inefficiencies, the combination of the $200,000 of items, but just the Worker's Comp item alone, could you help quantify that a little bit?

We don't break that number out obviously because there's other considerations involved but between those two it was $800,000.

Okay. And on slide 28 of your presentation that I'm looking at here, you have a year-to-date 2014 seasonally adjusted to represent an annual rate of $407 million for year-to-date 2014. My guess since you are talking about expectations for growth in the back half, is that does not necessarily represent your expectations for sales for the year, that's correct?

That's a safe assumption.

That's correct. That mathematically it was Dixie without Atlas using our historical seasonality percentages plus the Atlas add on. And so you are right, that is a safe assumption.

Okay, thank you. That makes it much more clear. Thank you.

(Operator Instructions). Les Sulewski, Sidoti & Company.

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

First, I wanted to start out with looking at your press release comment on the sale of the Atlas dye house, and that's expected to fall into the third quarter. So have you found a buyer for that and kind of how does that work out into the balance sheet?

Okay, Les, what we had to do is because we do have a contract for sale it still has a contingency period that will run through early August and we anticipate the sale will occur late August or early September. But since we do have a contract for sale we went back to the opening balance sheet and if you will notice the gain on Atlas on a year-to-date basis now says $10.5 million.

It was originally $8.7 million. The difference on that gain is primarily due to the balance sheet adjustment that we made relative to the Atlas purchase. Because it was in the opening balance sheet we reflected it in the year-to-date results, not in the second quarter --

Or third quarter.

Or third quarter. So we have already taken into account the anticipated purchase price and profit we would make on that transaction in the opening balance sheet in Q1.

As we get later in the year we will continue to probably have some small adjustments to the opening balance sheet, which we'll continue to come back and adjust the gain relative to Q1 until the end of the year. And at the end of the year we expect to have completed all of the analysis to finalize that gain on the sale.

Okay. So is this how it impacted the first quarter? If you look at page 37 of your investor presentation and I see your top line there is $4.4 million, income from continuing operations as reported, is that -- was this number changed, or adjusted?

Yes. That number was changed when we (multiple speakers) first quarter.

I see. Okay.

We had to restate first quarter as a result of that and that's that restatement. That's why if you take the year-to-date results and pull out the second quarter you will see that effect of that restatement but basically that boiled down to two items. It was the change in the taxes and the changes in the gain on purchase of Atlas.

Okay. I follow. Thank you. And then one other thing, you mentioned about the industry price increases.

Can you comment a little bit more on that? What kind of percentage rates of increases are we expecting and just a little bit more color on that if you could?

The price increase will be effective throughout third quarter. It will be fully effective in the second quarter and we expect the magnitude of that to be in the low single digits. And it's a little different by market segment, etc., but overall I think you are in that 1% to 2% range.

Most industry players have announced and implemented price increases, as have we. And as Jon said, we would expect that to be in the low to mid single-digits impact over time.

Okay. Thank you, gentlemen. That's very helpful.

Mr. Frierson, we have no further questions. I will turn the conference back to you for closing or additional remarks.

Thank you very much, Kelsey, and let me just say we are glad to have you with this. We appreciate your support and look forward to talking with you next quarter.

Again ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.