Dixie Group Inc (DXYN) 2015 Q3 法說會逐字稿

Good day everyone and welcome to The Dixie Group Incorporated third-quarter 2015 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.

Thank you, Kim, and welcome everyone to our third-quarter conference call. I have with me today Jon Faulkner, our Chief Financial Officer. Our safe harbor statement is included by reference both to our website and press release.

Sales for the third quarter were flat with the year ago period but up 6.6% year to date in comparison to last year. Third quarter just like the second quarter started off strong and moderated as the quarter progressed.

Residential product sales declined 1.5% versus the year ago period which was similar to the industry experience. Our commercial product sales were up 4.5% compared to the same period last year. We believe the industry was up low single digits.

Both Masland Contract and Atlas Commercial brands had sales increases and we continue to see a healthy commercial market and favorable responses to our new products.

The housing market appears to be improving. Housing formations in a tightening labor market should be positive for housing and flooring products.

At this time Jon Faulkner will review our financial results after which I will discuss our plans for the future. Jon?

Thank you, Dan. Looking at sales for the quarter, our sales were up $108.9 million, flat as compared to the third quarter of 2014. Total corporate sales are up 0.6% while the industry was down slightly we believe. Commercial products were up 4.5% while the industry was up in the very low single digits. Residential products were down 1.5% while the industry was down in the low single digits.

For the quarter, gross profit was 25% of net sales as compared to 24.4% for the third quarter of the prior year and 26.7% for the second quarter of 2015. Gross profit improved relative to a year ago as a result of improved operations and a reduction in acquisition-related expenses. Relative to the second quarter of 2015 however, margins were lower due to an unfavorable product mix primarily in our residential business, continued quality expenses from production made during the consolidation, and favorable adjustment in the prior quarter related to prior period acquisition expenses.

SG&A for the quarter was 23.2% of net sales as compared to 21.8% for the same quarter of 2014. Our selling expenses were higher relative to a year ago primarily due to higher sampling expenses in both our residential and commercial businesses. These higher sampling expenses should decrease in 2016.

We have begun operating our new Atmore Distribution Center and have moved the majority of the finished goods to this facility. We still have to consolidate our rented Saraland, Alabama rug operation into a company owned facility in the same location by the end of the first quarter of 2016.

Our corporate office consolidation plan is complete for our primary headquarters with smaller facilities being moved in the fourth quarter of 2015. The remaining corporate and facility consolidation expenses we estimate to be $1.2 million and are to be complete by the end of the first quarter of 2016. These plan charges are detailed in our press release.

Operating income was $1.3 million for the quarter as compared to $832,000 in the third quarter a year ago. Our interest expense for the quarter is $1.2 million and we had an income tax benefit of $38,000 due to truing up our effective income tax rate for the year. A normal rate going forward at reasonable levels of profitability should be in the 35% range.

Diluted income from continuing operations for the third quarter of 2015 is $0.01 per share as compared to zero per share in the third quarter of 2014. On a non-GAAP basis adjusted for facility consolidation expenses, the fully diluted earnings was $0.03 per share.

Looking at our balance sheet, our receivables declined by $303,000 during the quarter while inventories increased $451,000. Capital acquisitions including those funded by cash and financing were $1.8 million for the quarter. Depreciation and amortization for the period was $3.7 million. We anticipate capital expenditures for 2015 of approximately $13 million and depreciation and amortization of approximately $14.5 million. Our debt stood at $131.2 million at the end of the quarter. Our investor presentation including our non-GAAP information is on our website at www.TheDixieGroup.com. Dan?

Thank you, Jon. As we have reviewed previously since 2009 our sales are up over 100% and the industry has had very modest growth with sales up approximately 12%. To accommodate this growth, we had to make major changes in our facilities which impacted our operations last year and this year. Since the beginning of 2013, we have added over 50% to our employment base which has been more difficult and time-consuming than we anticipated and has had an adverse impact on operations. The good news is that these changes are basically behind us and we have seen and are seeing improvements. It is just not as fast as we had planned.

The more significant impacts of the restructuring relate to training, quality and waste. We anticipate these costs will drop as the training process comes to an end and our associates become more proficient in their duties.

We are seeing a decline in quality-related costs for production subsequent to our restructuring. We will continue to improve costs through emphasis on training and process improvements and will return to the operating levels we had before restructuring.

As I mentioned last quarter, our medical costs and product sampling costs are higher than we would expect on an ongoing basis. We raised medical premiums again in the third quarter on our self-insured medical plan and we will introduce new medical plans for 2016.

Our sample costs have been extremely high this year. The residential business has introduced a record number of new products and has had several national product launches with key customers which we do not expect to repeat next year. Obviously we anticipate the new products and samples should generate additional business in the future.

In our commercial brands, we have also invested heavily in new product. Atlas is introducing a robust offering of new products which is already having an impact on sales. We have seen some cost reductions as a result of lower price of oil and natural gas. These reductions have largely been offset by higher employment costs and other factors. Although our capital expenditures this year will be less than our depreciation and amortization, we continue to invest in new technology to maintain our position as the industry leader in style and design.

We believe the introduction of new beautiful products will continue to position us as the leader in the upper end of both the residential and commercial markets.

We are optimistic for the future. The housing and commercial markets are still growing. Our upper-end residential market continues to have favorable conditions with an improved economy and increased consumer confidence.

Our wool products particularly at Masland are showing great growth. New STAINMASTER products of PetProtect, TruSoft and Luxerell, these new introductions are being well received. Also our STAINMASTER partnership to expand retail coverage is working well.

The commercial market is growing especially in the hospitality segment. Masland Hospitality is growing with new tufted and custom-computerized yarn placement offerings from our Burtco acquisition. Atlas is growing with new products using the new vision weave technology and new modular tile offerings. And Masland Contract has expanded its modular tile collections as well.

Over the last several years, we have added extensively to our sales forces and we are leveraging our expanded sales forces going forward. And our internal operations are showing the benefits of our restructuring.

Our sales in the first four weeks of the fourth quarter are very similar to the third quarter with residential sales down slightly and commercial sales up mid-single digits. However, our order entry is outpacing our sales so far in the fourth quarter. As we move forward, our operational improvement should continue to improve our profit margins.

At this time we would be happy to open up the conference call to questions.

(Operator Instructions). Josh Wilson, Raymond James.

Good morning. Thank you for taking my questions. I wanted to get a little bit more color on that last comment about the last four weeks. You said shipments down slightly in residential and commercial up mid-single with orders outpacing. Does that orders comment apply to both residential and commercial?

More to commercial than residential I would say. Our commercial business dropped off in July, began increasing again in August and September and has continued to.

Okay. And then in terms of the puts and takes on gross margin, could you quantify the impact of the quality issues in the third quarter and maybe give us a sense of how much of it should be fixed in the fourth quarter?

Josh, the third quarter had impact we are estimating around 1% and that impact should diminish in the fourth quarter. We won't know until we see later on in the quarter how trends are coming in. It is almost all related to production during the periods when we are doing the restructuring and so therefore it is more effective the gross to net numbers in terms of our topline impact as higher claims have continued to come through.

This is isolated primarily virtually all to the residential business and our first impact was on deliveries which those deliveries have all been fixed residentially and so we are actually delivering very good rates, have been all summer and really this is just the lingering impact of claims and waste primarily.

Got it. Good luck with the next quarter.

Tom Lewis, High Road Value Research.

Good morning. First question kind of following up on -- in talking about how the sales -- residential sales in particular weakened as the quarter went on, do you view that as strictly a macro or seasonal issue or is it possible that the quality issues that you were just referencing may have been a factor in that as well?

Tom, let me start with that and Jon may want to add to it. First of all, we did perform a little better than the industry. We think the retail replacement business was weaker than the industry was overall because new housing and multifamily housing were relatively strong compared to the retail replacement business. So we believe we continued to outperform the industry.

As we went through our restructuring, the first impact we had was on service in terms of getting product to customers on time and quickly. We had some issues there, we have overcome those issues, overcame them earlier in the year and so that is no longer an issue with us. The quality has been an issue and I am certain that it did impact to some degree our residential business. But we think we can continue to outperform the industry going forward on the residential side as well as the commercial side.

Tom, to follow up, the sales impact on the gross line was better than on the net sales line primarily because of these higher-quality costs that we have had to pass through during the period. So we did perform on a gross sales basis a little better than that. As Dan said, we still outperformed the industry slightly but clearly if we haven't had those issues that was a headwind we wouldn't have dealt with we probably would have done better on our topline sales overall.

Okay. And I guess my other question would be you don't seem to be the only company out there that is finding it harder than maybe any of us would have expected looking back two or three years ago to find, train and hang on to the sort of people that you need running your equipment. Do you feel like you are making any real progress on this? And if so, how do you do that? It just seems like wherever the unemployment stats are nationally speaking, I think you know what I mean, it is harder to attract and retain the people that you need.

You know, Tom, several large corporations have announced increases which is pretty interesting unilaterally in order to maintain their workforce. And to put it in perspective in 2010 and 2011, we could go out and hire and had usually trained associates that could come in and be productive almost immediately. As we got into 2013 and 2014 particularly that really became difficult to do whether it was in Georgia or Alabama or California, wherever.

So it has been more difficult. It does take more time to train people but we have been at the same employment level now for some time so we have pretty well hired the number of folks we want and have been in the process of training them and I would say are in a much better position today than we were a year ago. But clearly it takes time for these people to work as efficiently and proficiently as somebody who has been doing the same job for an extended period of time.

Okay, I know it is a tough issue that would have been hard to see coming a few years ago but it sounds like you are making some genuine headway on rising to this yet another challenge. Thanks a lot.

(Operator Instructions). Mark Montagna, Empirical Capital.

A question about your residential. It sounds like you have got some quality issues that you are correcting and you have had delivery delays. If I was a salesperson in a local department store, it seems like that lack of say reliability on the delivery would cause me to want to sell some other products from some other brands. But that actually seems like a good problem that can be pretty easily corrected once you get your deliveries consistent, on time, no delays. Would that then perhaps cause salespeople to say okay, we can count on these guys. Could that be part of what might be holding you back in residential?

Mark, I think you are correct. Part of that has been a result of that. I want to reiterate though from a service standpoint we are delivering on time and doing well since the second quarter of this year. We have continued to have some quality issues which really were created during the restructuring period. We have done a lot of things to mitigate that and make sure it doesn't get to the customer but you can't be successful doing that 100%.

So yes, I think it has impacted us. Remembering that what we sell is style and design and beautiful color and therefore I think many of the people that sell our product really want us to be successful and I am convinced that if we can convince them that we are making a quality product and delivering on time that our sales will reflect that.

So do you think you are on track by the end of the fourth quarter to have productivity and quality issues up to the normalized levels or is that being pushed back out to maybe the first quarter or the second quarter of next year?

I think it will probably be in the first quarter. We will be close in the fourth quarter but it doesn't happen overnight and there is a lot of work going on to improve it. It has already improved dramatically but to get back to levels that we think are where we ought to be it would be sometime early next year.

Okay. What was unfavorable about the product mix in the third quarter that hurt gross margin?

That was just -- and if you look at the summer, the product mix was just slightly weaker on the residential side. Anticipate that coming back in the fourth quarter to being more normal than what we had like in the second quarter of this year. And it was just between the high end and the low end in terms of some product categories we just had a little bit more in some of the lower margin products.

We have such a diversity of products in terms of price point and in product categories that we have these shifts that occur time to time and we had one during the summer, expect that to come back more normally in the fourth quarter.

Okay. And then looking at the product rollout at Lowe's, do you know by what date that finally got completed and then where do you stand with the CCA product, new products going to that buying group?

The Lowe's rollout as I understand was really fully completed in August. And the CCA, I don't know the exact date of when it was --

It depends on which product category you are talking about CCA, There are different product categories but the Lowe's was during the third quarter and completed in the third quarter and then I think CCA, we have a number of products there that are getting out as we speak.

And that is a complete overhaul at CCA, correct?

Yes, there was a complete overhaul of their offering, their vehicle and that was something we participated in and it has been many years since they have done that.

Are you getting feedback from them that this is causing perhaps a disruption in sales and then once that gets fully implemented perhaps things get back to more normal from those thousands of retailers?

No, Mark, I don't think so. I think our sales with them have done well.

Okay. And then -- all right, that was all I had. Thanks.

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

Kim, thank you and thank all of you for being with us in our third-quarter conference call and look forward to speaking with you next quarter.

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