Dixie Group Inc (DXYN) 2015 Q2 法說會逐字稿

Good day, everyone and welcome to The Dixie Group, Inc. second-quarter 2015 conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Chairman and Chief Executive Officer, Dan Frierson. Please go ahead, sir.

Thank you, Dana and welcome, everybody, to our second-quarter conference call. I have with me Jon Faulkner, our Chief Financial Officer. I would also include our Safe Harbor statement included by reference to our website and press release.

Our sales for the second quarter were about 2% ahead of the same quarter last year (technical difficulty) overall was slightly down. Excluding Atlas, which we acquired last year, our sales were up 4.6% for the quarter and we believe Atlas will begin to show improvement in the third quarter. Our sales of residential products declined slightly, which was reflective of the weak quarter for the industry. Unlike residential, we believe the commercial market grew in the low single digits. Our commercial product sales increased 6.7% compared with the same period last year led by Masland Commercial products, which increased 17.7%.

Atlas underperformed the market as we were unable to get new products to market last year. We have introduced several new products this year and are beginning to see order entry outperform last year. As we look at our markets going forward, we are encouraged by the momentum in the commercial market. Also the housing market appears to be gaining traction with housing starts and building permits at an eight-year high. Home resales have increased to an annual rate of nearly 5.5 million. Household formations and a tightening labor market are helping boost demand for housing, which should help increase demand for floor covering products going forward.

Jon Faulkner will review our financial results, after which I will speak to our operations and expectations. Jon.

Thanks, Dan. Looking at sales for the quarter, our sales were $110 million, an increase of 1.9% over the second quarter of 2014. Again, our sales without Atlas were up 4.6%. Our carpet sales were up 2% while the industry was down slightly. Our commercial products were up 6.7% while the industry was up the low single digits. Masland Commercial, excluding Atlas and Avant, was up 17.7%. Our residential products were down 4/10 of 1% while the industry was down in the low to mid-single digits.

For the quarter, gross profit was 26.7% of net sales as compared to 24.7% for the second quarter of the prior year, 24.3% for the first quarter of 2015. Gross profit improved as a result of improved operations as our restructuring comes to a close, income of $459,000 from an adjustment to estimated acquisition-related contingent payment offset by continued higher than normal quality, training and waste costs. We anticipate we will have continued improvements in waste training and quality costs in the third and fourth quarters.

SG&A for the quarter was 23.8% of net sales as compared to 22.5% for the same quarter of 2014. We have higher sampling costs in both our residential and commercial businesses this year, items which should decrease in 2016. Operating income was $2.2 million for the quarter as compared to $588,000 in the second quarter a year ago. We have completed the facility consolidation plan on the West Coast. The only remaining significant East Coast manufacturing consolidation activities are in our Atmore and Saraland facilities.

We are announcing the consolidation of three of our existing divisional corporate offices to a single facility located in Dalton, Georgia. The corporate office consolidation plan is estimated to cost $716,000. The majority of these costs relate to lease cancellation charges for the facilities we are vacating. Those plan charges, as well as the remaining cost of our manufacturing consolidation plans, are detailed in our press release.

Our interest expense for the quarter was $1.2 million. Our effective income tax rate for the period was 44%. Our normal rate going forward at reasonable levels of profitability should be in the 35% range. Diluted income from continuing operations for the second quarter of 2015 is $0.03 per share as compared to a loss of $0.04 per share in the second quarter of 2014. Analysts had us at a diluted income from continuing operations of $0.04 per share. This estimate was based on an operating income of $2.2 million net of facility consolidation charges, which we've beat with the non-GAAP operating income of $3.1 million as shown in our press release.

Looking at our balance sheet, our receivables increased $2.4 million during the quarter while inventories increased $4.2 million. Capital equipment acquisitions, including those funded by cash and financings, was $2.6 million for the quarter. Depreciation and amortization for the period was $3.7 million. We anticipate capital expenditures for 2015 of approximately $13.5 million and depreciation and amortization of approximately $14.5 million. Our debt stood at $133.8 million at the end of the quarter. At quarter's end, the availability under our loan agreements was $35.3 million. Our investor presentation, including our non-GAAP information, is on our website at www.TheDixieGroup.com. Dan.

Thank you, John. The good news is that we are well along the way with our restructuring plans to increase our capacity and better service our customers. Implementation has had an adverse impact on our financial results as we realigned our plans. There were short-term impacts on our productivity, quality and waste, as well as unusual training costs as we brought additional associates on board.

Although the restructuring is not totally complete, we are beginning to see the operational improvements, which help improve our gross margin to 26.7% for the second quarter compared with 24.7% in the same quarter a year ago and 24.3% in the first quarter of 2015. Our plan is to continue to improve cost through emphasis on training and process improvement; thus returning to the quality and waste levels we had prior to restructuring.

Two other areas of significant impact during the quarter were high medical costs and high sampling costs. We continue to experience higher medical costs associated with our self-insured group medical plan. We have made changes in plan design, implemented incentives to better utilize disease management services and are implementing additional rate increases. All of which we believe will help mitigate future costs. We will also introduce a new self-insured plan in 2016.

Sample costs have been larger than we would normally expect. The planned launch of new Atlas products in 2014 was delayed by the acquisition and the delivery of new technology. Therefore, we have a robust offering of new products this year. Residentially, we have an unusually high sample expense due to a record number of new products and several national product launches with key customers.

On the positive side, we have experienced some cost reductions as a result of the price of oil and natural gas. The oil prices have helped reduce some of our raw material prices and the natural gas prices have had a positive impact on some of our processing costs. So far in the third quarter, we've experienced year-over-year improvement in order entry for both residential and commercial products. Both show improvement in the mid to high single digits.

Sales of carpet to date this quarter are up 6% compared with last year. We see specific opportunities in the growth of our wool, broad loom and rug businesses and our Stainmaster PetProtect products and the continued development of beautiful patterns to service the upper end residential market using our new ColorPoint and iTuft technologies. The commercial market, and especially the hospitality sector, continues to gain momentum. We also show solid growth in our modular tile offerings in both the Masland contract and Atlas brand.

We are also pleased with the activity we are experiencing in Masland Hospitality as we leverage our investment in custom computerized yarn placement tufting technology. The new products at Atlas are being well-received and our July sales have improved from last year in Atlas and improved from the first quarter. Our efforts in the third quarter will be focused on continuing to improve our gross margins by improving operations with specific emphasis on quality, waste and cost. At this time, we would like to open up the call to any questions.

(Operator Instructions). Sam Darkatsh, Raymond James.

Good morning, Dan and Jon. This is Josh Wilson filling in for Sam. Thanks for taking my questions. Starting with the scrap, training and waste in the second quarter, could you quantify the impact and describe maybe how it compared with the first quarter?

I would say the -- I don't have a specific quantification, but the impact was in line with the impacts we had in the first quarter in terms of they were improved, but instead of it being more of operational quality cost, it was more in the area of returns and allowances as we were getting additional pushing that through the pipeline. And so the improvements we expect in the third and fourth quarter are going to be affecting top line as well as bottom line as we expected our returns and allowances rate to come down, as well as our additional quality costs to come down.

Can you give us a sense of the pacing or how much improvement we might see in the third quarter versus the fourth quarter?

We don't break out forward projections on that, so we don't have that -- don't release that information. But I would say it would still be -- we still have improvement in gross profit to (inaudible) achieve from where we are today.

All the measurements we have of product quality-related items have continued to improve throughout the second quarter and will be significantly better in the third quarter than they were in the first half.

Okay. I know you talked a little bit in the press release about demand trends during the quarter and then what we've seen in July. Could you dive in just a little deeper into what you saw month-to-month?

Sure, Josh. On the commercial side, really it was strong throughout the quarter. On the residential side, April started out relatively strong, but it seemed to sputter a bit in May and June. I would say we have seen some improvement in July. Obviously, our order entry and sales have improved some. So whether this was a temporary pause or a trend, we are not sure.

Thanks again. Congratulations on the quarter and the improved margins and good luck with the third quarter.

Thank you, Josh.

Keith Hughes, SunTrust.

Thank you. A couple questions. You had some nice gross margin improvement in the quarter, specifically narrowing in on raw materials. Is that something that will add more to gross margin to where you are standing in the third or have you seen the full impact?

Keith, that's a hard thing to answer. Obviously, pricing is very volatile. We don't know what forward pricing is going to be, but we would anticipate that it would be in the same level as second quarter, if not a little further, but that could change pretty rapidly.

And then second question on specifically commercial. You had a really nice quarter in commercial. You did better than the industry. I guess one industry question. I was a little surprised the industry wasn't up more than that. Number two, specific to you, where do you think you are taking share, what kind of end-user markets?

That's a difficult question to answer. Obviously, we are in the corporate market and that's an area of concentration. Hospitality has been particularly good for us. As you will recall, we had a false start with our Desso arrangement last year, but I think it has helped us focus more on hospitality and we've seen real improvement there this year. So I would say -- and primarily in those areas.

And was the commercial demand consistent through the second quarter?

I would say fairly consistent. As you know, commercial tends to come in lumps, so it's a little difficult to be smooth like the residential order entry, but I would say it was pretty -- stayed pretty much the same throughout the quarter.

Okay, thank you.

But let me add there, of course, Atlas was weak in the second quarter, in the beginning of the second quarter, but did improve toward the end of the quarter. And as I stated earlier, we are seeing much stronger order entry and sales there than we saw previously.

Okay, thank you.

(Operator Instructions). Alex Silverman, Special Situations Funds.

Good morning. Wondering if you could help us with the East Coast consolidation and what the timeline looks like.

Alex, in terms of the remaining work that we have to do, the consolidation of the distribution center is actually primarily complete and it up and running. In August, we will continue to move products. We will have some expenses continue in the fourth quarter as we are moving product. At the same time, starting in the fourth quarter and into the first quarter, we will be consolidating our rug operation in our Saraland facility near Mobile, Alabama. That's the reason why we expect that all these charges will be concluded by the end of the first quarter of 2016 when we completely vacate that facility. So the distribution center should be up and running by the fourth quarter and those costs over and then the rug consolidation between the fourth and the first.

Okay. Just to skip around, can you quantify at all what the high sampling costs might have cost you in the quarter year-over-year?

I would say looking forward, a better way of looking at it is our sampling costs going forward we would anticipate on an annual basis a drop between $1 million and $2 million in actual absolute sampling costs going forward.

For -- starting in the third quarter or over -- starting when?

In 2016.

Okay.

We level our sampling costs throughout the year because they occur in a very lumpy fashion, but the level of sample dollars in 2016 we expect to be down again between $1 million and $2 million.

That's helpful.

Because of the unusual expenditures this year, which hopefully will add to the top line.

Sure, of course. And then in terms of your medical costs, can you quantify that at all for us?

I would say our medical costs in the year-to-date we have run in excess of $1 million of what we would have planned in the first half.

For the first half?

The first half of the year. And obviously, when you are self-insured, there's less certainty because you actually experience whatever the costs are and the reason we've implemented these changes are in response to a spike in cost of which we believe are due to a variety of factors between Obamacare and other factors.

Got it, all right. Very helpful. Thank you.

(Operator Instructions). [Robin Matchison], [Statuette Funds].

Thanks for taking my question. Notwithstanding the commercial -- the good results on the commercial side of the business, did you see any evidence of project delays impacting your business?

Robin, there are always some delays. Let me say that, but not in a major way, no.

Thank you.

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

Thank you, Dana and thank all of you all for being with us on the second-quarter conference call and look forward to talking to you at the end of the third quarter.

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