Dixie Group Inc (DXYN) 2014 Q4 法說會逐字稿

Good day and welcome to the Dixie Group Incorporated fourth-quarter 2014 year-end conference call. Today's call is being recorded.

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

Thank you, Melissa, and welcome, everyone, to our 2014 year-end 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 the press release.

Our sales of carpet in the fourth quarter were up 9.6% compared to a strong year-ago period. Without Atlas, sales were actually down slightly due to a reduction of commercial carpet sales during the period.

For the year, we continued our pattern of outperforming the industry sales growth, but operations were hampered by extensive changes to our facilities so that we can continue to grow our business. Our sales were up 18.1% for the year. Without the acquisition of Atlas, our sales growth was 7.1% compared to the prior year, while the industry experienced little or no growth.

Residential sales were much stronger than the industry, with sales up 8.2%. And our commercial sales, despite weak business in the fourth quarter, were up 5.5% for the year without Atlas. Including Atlas, our commercial sales were up 45%.

At this time, Jon Faulkner will review our financial results, after which I will discuss the plans and investments we've made to increase our capacity and improve our profitability. Jon?

Thank you, Dan. Again, looking at sales for the year, our sales were $406.6 million, an increase of 18.1%. Fourth-quarter sales were $104.6 million, up 9.6% on a fiscal-period basis versus last year.

As Dan had said, our total sales without Atlas were up 7.1% versus the industry being flat. Our commercial sales without Atlas were up 5.5%, while the industry was up in the low single-digits. Our residential products were up 8%, while the industry was down low single-digits.

We continued our growth in 2014, outperforming the industry by approximately 7%, excluding the Atlas acquisition. The year gross profit was 23.5% of net sales as compared to 24.8% for the prior year. For the year, we were impacted by the massive restructuring we have undergone to realign operations, expand capacity, and integrate the Atlas and Burtco acquisition.

Product mix was within expectation -- lower gross profit driven by cost variances in our operation as a result of the changes in the processes and the addition of new people.

Selling and administrative expenses for the year were 22.9% of sales, 0.8% above prior year, primarily due to the addition of Atlas as well as higher marketing expenses in our Masland Contract business.

Operating income was $673,000 for the year as compared to $5.6 million a year ago. We anticipate an added $1.4 million of integration expenses in 2015.

Our expansion is nearly complete. We have remaining completion of Susan Street dye house; expansion to accommodate Atlas; the move of our commercial finished goods facility from our Saraland, Alabama, to our Atmore, Alabama, carpet manufacturing facility; and the move of our Saraland rug operation out of a rented facility into a Company-owned facility.

Our interest expense for the year, at $4.3 million, was up 15% from the prior year due to higher levels of debt. Our effective income tax rate for the year was 61%. This was primarily due to the added state tax valuation allowance of over $500,000. Our nominal rate going forward at reasonable levels of profitability should be in the 35% range. Diluted income from continuing operations for 2014 was $0.03 per share as compared to $0.42 per share in 2013.

Looking at our balance sheet, our receivables increased by $0.8 million during the year, while inventories increased $11 million. Capital expenditures and leases for operating equipment was $23 million. Purchase of the Adairsville facility in the fourth quarter was $9.8 million.

Therefore, total capital expenditures and financings were $32.8 million as compared to depreciation and amortization of $12.9 million. We anticipate capital expenditures for 2015 of approximately $13.5 million and depreciation and amortization of approximately $14.2 million.

Our debt stood at $127.3 million at the end of the year, up $19 million for the year. We ended the year with availability under our loan agreements of $40.2 million. Our investor presentation, including our non-GAAP information, is on our website at the www.thedixiegroup.com. Dan?

Thank you, Jon. After the downturn of 2008 and 2009, we put together a growth plan to take advantage of the unique opportunities that emerged. And that plan has driven our sales success and investment over the last five years.

Since 2009, our carpet product sales have grown 96%, while the industry we estimate has grown only around 12%. While we had planned on 10% growth per year, we became capacity constrained in 2013, as our sales grew over 30%. As a result, we accelerated our plan to grow our capacity from the $350 million to a range of $550 million to $600 million, depending upon product mix.

In addition, we made the decision to merge our two West Coast dye houses as a result of the purchase of Atlas Carpet Mills in the first quarter. Further, in the fourth quarter, we decided to discontinue the Carousel brand, a small non-core line of products that was part of the 2013 Robertex acquisition.

Therefore, 2014 was a year of expansion and facility realignment, which impacted virtually all of our facilities. We had $3.2 million in facility consolidation and asset impairment expense in the fourth quarter, the peak in terms of investment in realigning and expanding our capacity, and thus had the most impact to our bottom line and adding operating costs as well.

The investments we've made have included both capital expenditures and temporary increases in operating costs due to the implementation of the capacity expansion plan. We began the year by expanding capacity at Colormaster, our continuous dye line. We completed the training and fully commissioning of our expanded Roanoke yarn facility.

We acquired and began the integration process of Atlas Carpet Mills. We expanded our Eton residential tufting operations, doubling the number of machines in service. We realigned our Calhoun wool operations, a change designed to increase capacity and lower cost. Further, we moved the finished goods for our residential East Coast business to our newly opened Adairsville facility, consolidating four warehousing operations into one facility.

We added continuous yarn dyeing capability to our Colormaster facility and expanded our yarn skein dye operations in Calhoun. Similarly, we shut down our Atmore carpet and yarn dyeing operations, converting that mill to a dry mill, dedicated to serving our Masland Contract brand.

As part of this process, we decommissioned our Atmore wastewater treatment plant. Further on the West Coast, we merged our newly acquired Atlas dye house our Susan Street dye facility. We upgraded our machine tufted rug capability during the year, with added capacity, as well as installing skein dye capability to support our custom rug wool programs.

We purchased Burtco and its excellence in computerized yarn placement tufting technology, using this as the foundation for our newly formed Masland Hospitality sales force.

Having completed most of these initiatives, our prime focus in 2015 is training our workforce, which has increased 45% since the beginning of 2013. Further in 2015, we're focused on improving waste, yields, and efficiencies in our operation. We are seeing the positive impact of our expanded sales force, the results of our efforts in 2013 and 2014 to increase our field coverage significantly.

During 2014, our gross margins were impacted adversely by the massive restructuring we have undergone to realign operations, expand capacity, and integrate the Atlas and Burtco acquisitions. SG&A has been impacted similarly by investment in people and product to expand our sales.

As we look to 2015, we believe we will see improved results from these investments. In 2015, we anticipate that the commercial market will grow more rapidly than the residential. Our experience to date seems to bear this out.

In the first six weeks, our carpet sales are up 20% over the same time in 2014. Excluding Atlas, carpet sales are up 6.9%. Unlike last year, our commercial carpet sales are up more than our residential sales, but both are experiencing positive momentum.

We have experienced cost increases from higher wages and higher healthcare costs. These costs are being partially offset by current lower energy and raw material costs. It is difficult to predict where raw material costs will be in this volatile environment.

Having invested heavily in capital expenditures to service our growth, we anticipate this year a more normal year, with capital expenditures in the $13.5 million range. We believe the consumer preference for innovative fashion and better quality products will continue to provide us with the opportunity to grow our business and outperform the industry.

Our focus for 2015 will be on improving operations and minimizing disruptions, thereby improving our profitability while we take advantage of our investments in new products and manufacturing and distribution capability.

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

(Operator Instructions) Joey Matthews, Wells Fargo Securities.

Can you first talk about your outlook for the hospitality segment? And remind us first what kind of percentage of your commercial sales are hospitality related? And then your outlook in terms of opportunities and challenges post the split with DESSO Tarkett in 2015, that would be helpful. Thanks.

Joey, that's several questions in one. But basically, as you will recall, early in 2014, we had a joint -- we began a joint venture with DESSO in the hospitality area. Later in the year, they were purchased by Tarkett, which obviously was not good news for us. They owned Tandus in this country.

And we could have continued that hospitality joint venture, but we elected to discontinue it in late 2014. So we did actually have the cost of implementing the joint venture and then dissolving the joint venture last year.

The Burtco acquisition gave us an excellent opportunity to develop a Masland Hospitality business, which we also did late in 2014. That business is doing well. We think that that market is growing better than the market is generally, and we are seeing good activity there and increased sales.

Jon, do you have any other comments on that?

It's a small percentage of our sales today. I don't know that percentage off hand.

Okay.

But it's not -- that we were very large prior to this time period.

And then -- my next question is on the impact of lower oil prices on your cost structure and what you can -- what you think you can gain from a margin perspective this year from -- assuming oil prices stay where they are, which is a big assumption.

It sounded like in your earlier remarks that those benefits would simply be offset by higher wage and other input costs. Am I reading that right? Is that kind of a neutral impact then, overall, for 2015?

Joey, that's a little difficult to know at this time. My point was we have had wage increases. We also have had higher labor -- excuse me, healthcare costs that are flowing through our operations.

We have begun to have lower energy costs and energy input costs in our manufacturing and so forth and some reduction in raw material costs. But I think it's very difficult to know what's going to happen there, and if so, when. It's a volatile market and we also have competitive costs in selling products.

I don't think we could give you in that we don't give projections. I could give you a good description of exactly the impact that we see at this time. We think it will be, if there is an impact, later in the year.

And then just my last question, can you kind of talk broadly about the competitive landscape right now? How are your competitors reacting to the lower input costs from oil? Has that impacted your kind of niche higher end market? Any color there would be great.

Joey, I would say typically, when there is volatility in the raw material area, it tends to be -- to show up in specials. It tends to show up in lower-priced products first and higher-end products later.

At this point, there has not a lot of activity in that this is all very recent and it takes a while for all of this to work through the system. So there hadn't been a big change there. I think maybe later in the year, if oil stays at these levels, we will see something. But that's still an unknown.

Great. I thank you for taking my questions.

(Operator Instructions) Sam Darkatsh, Raymond James.

Hi. This is Josh filling in for Sam. Thanks for taking my questions. Could you rank the impacts on gross margin in the fourth quarter?

I'd say that the most significant impacts that we had were labor-related and -- in terms of operator efficiencies and training. And then the second area would be waste and yield. Again, those are really related to that as well.

The other aspect of waste is from all the movement of goods. When you move goods, you find out after you move them if there was damage during the process. And we just completed the Adairsville move in late December. I think we'll continue to see impact from any damage that may have occurred during those moves as we turn that inventory over. But that we'll be rolling out over the next several quarters.

Also in terms of new employees or employees who've changed positions because of the restructuring, that would tend to be impacted over the next several quarters. As an example, we were hiring people in Adairsville all through the last six months and so some people have been there six months, some people have been there one month. And as a result, those impacts, as they roll forward, we should feel improvements in the first half of 2015.

Okay, thank you. As it relates to the raw material benefits, I know you said maybe second half before we have more visibility into what the impacts might be. Would that be sort of the normal timing you'd expect it to roll through or are there any other puts and takes that we should be bearing in mind in this cycle?

Well, I indicated, Josh, we have seen some changes there, but not of major magnitude. I think it will be later in the year before you do, if there are any. But it's really too early to know exactly what will transpire there.

I might add on your first question that that really [speaks] the labor issues and training issues that we've had. That's why we really want to spend 2015 settling out all the things we undertook in 2014 and not embarking on major initiatives during this year so we can thereby improve our operations and our profitability.

Can you quantify any expected benefit to gross margin in 2015 as you work through these different bugs?

As you know, we don't give projections. But I think if you look at our historical margins back several years ago, that would be a good indicator of where we should be getting (technical difficulty).

Thanks. Good luck with 2015.

Arnold Brief, private investor.

Just two questions. One with the industry consolidation that's been going on for many, many, many years and so much of the industry in the hands of few competitors at this point.

How do you think with the decline in oil prices, lower raw material prices, that there is a possibility that your end prices, finished goods prices, may hold up better than they have in much earlier years.

The second question is (technical difficulty).

Arnie, you broke up there on the second question, I'll try to answer your first and then you can re-ask the second. Obviously, the consolidation, I think, over the years has made for a more stable marketplace, but any time there are major swings, I think you're still going to see things in the marketplace.

However, on raw material pricing, we still have not seen that work itself through the system. Plus, again, it tends to happen more in the lower-priced products than it does in the higher-priced products in terms of production.

And the other question was how long do you think it will take to normalize your operating margin?

I would expect that our operating margins should start looking normal in the second half of 2015 and early 2016.

Thank you.

Howard Rosencrans, Value Advisory.

I'm trying to get a sense of -- I'm not sure if I missed it or whether it wasn't fully addressed in terms of the hospitality business, how big a portion of your business is it now and how big a portion do you envision it? It seems -- that's one question.

The second regards the commercial business and the retraining -- not the retraining -- or the training of salespeople that you discussed. Do you feel like it's impacting the commercial business more? Because I would think that the commercial business at this juncture should really be starting to get better. You seem to have the -- there should be a pretty good tailwind business-wise in that respect. Thank you.

Howard, to be a little more specific, we think -- and it depends on how you define some of these markets, but we think hospitality for us is something over 20% of our commercial business and growing. And obviously with the Burtco acquisition and the CYP technology, we think this will grow faster than our commercial business generally.

And to answer your question or respond to your comment, we are seeing the commercial business pick up steam. And I think this year will be a good year for the commercial markets, probably better than the residential markets.

We see a lot of activity, we see really throughout the country, and therefore we would anticipate our commercial business growing faster this year than our residential business. And we would expect hospitality to be really at the lead of that -- the head of that.

Okay. So the major internal issues or -- that -- you know, it seems like 2014 was somewhat of a perfect storm, in no small part taken on by yourself. Not so much a function of the marketplace, but just all the restructuring activities and positioning you did.

Is the training of the salespeople, is that really the big gating factor in ramping up your Atlas business? The plant stuff is largely behind, as I understand, or will be largely behind in the next few months. Is the gating factor really getting the salespeople going on the commercial side?

And based on your -- just the comment you just made regarding your commercial vis-a-vis residential, I have a little concern that your residential won't be as strong. I mean, we are seeing housing numbers pick up, furniture numbers pick up.

I'm just wondering -- you did comment that there was a single-digit decline in the industry on the carpet side. Is it possible that carpet continues to lose -- I guess carpet did continue to lose share to hard floors. Is that a factor? So I know it's a lot of questions.

Yes. Howard, first of all, we think residential will grow for the year. I guess what I'm trying to convey is that when we really started our growth initiatives, we started it on the residential side.

And when we grew 30% in 2013, that was primarily residential. We haven't had that experience on the commercial side to the same degree we have on the residential side. So I think we have more opportunity.

Specifically Atlas you referred to, we see the growth there coming primarily from new product. We have a lot of new modular product as well as broadloom that will be -- started hitting the market in late fourth quarter and will be rolled out in the first half of this year.

Similarly with Masland Contract, if you'll recall, we changed management there in late 2012. And we are beginning to see the results of those changes and product introductions there. So taken together, we think that we will have more growth on the commercial side simply because we have more opportunity.

We do think our residential business will grow nicely as well and we -- all three brands: Masland Residential, Fabrica, and Dixie Home are all doing very well and we have a lot of new products from each. But we -- so far this year, all brands are in positive territory.

Are you seeing the data points or can you give us some more color on the data points that we can focus on that would be leading indicators of your -- of either side of your business -- your residential or commercial. I guess let's leave it there for the moment. Thank you.

Well, we tend to look at two things. And it's not housing starts, like you might think. It tends to be consumer confidence and the stock market. And when those are aligned and doing well, we tend to, in the upper end of the business, do very well, both commercially and residential.

I think when companies are doing well, they -- the corporate sector tends -- commercial carpet tends to do much better. So those, to me, are the leading indicators I would look at. Now obviously, housing starts is important -- construction on the commercial side is important, but replacement carpet is where we really excel in both commercially and residential.

Howard--

It would seem --

I was just going to mention briefly that the other thing which is a little more kind of the macro data is if you look at fixed investment as a percent of GDP, either residentially or commercial structures, both of those have been improving in the last year and we continue to see those improve.

I will say the housing numbers have been a little noisy. And so sometimes, I think, people overreact to the changes in housing numbers. I always have to look at them over a bigger trend period. But the fixed investment is the one area that we continue to see a returning to more normal levels of the last 30 years, 40 years.

Great. Thank you so much.

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

Thank you, Melissa. And thank all of you for being with us for our 2014 year-end conference call. And look forward to an active and growing 2015. Thank you.

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