Dixie Group Inc (DXYN) 2015 Q4 法說會逐字稿

Good day and welcome to The Dixie Group, Inc. 2015 Year-End Earnings 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.

Thank you, Katherine, and welcome, everyone, to our fourth quarter and year-end conference call. Jon Faulkner, our Chief Financial Officer, is here with me. Our safe harbor statement is included by reference to our website and press release.

Our carpet sales for 2015 were up 4.5% over 2014, while the industry, we believe, was down slightly. Without Atlas, our sales increase was 2.5% for the year-over-year period. In the fourth quarter, our total carpet sales were up 2.5%, while the industry was down low single digits. Sales of our residential products both for the year and the fourth quarter as compared to the same periods in 2014 were flat, while we estimate the industry was down in the low to mid-single-digit range for both periods.

For 2015, our increase in commercial product sales was 14.4% compared to the same period last year. And as compared to the industry growth, we estimate, in the low single digits. Without Atlas, our commercial products sales were up 10.5% for 2015. For the fourth quarter of 2015, our commercial product sales were up 8.2%, while the industry was down low single digits.

Although the facility consolidations have impacted our results more than anticipated, we continue to experience improvement in our operations as the year progressed. Operating income for the year of 2015 improved by 7.2% over 2014. This improvement for the year was made up of an equal combination of lower facility consolidation and asset impairment charges and improved operating results. Over 3/4 of this improvement occurred in the fourth quarter.

Jon Faulkner will review our financial results. After which, I will comment on current activities at Dixie and in the industry. Jon?

Thank you, Dan. Looking at sales for the year, our sales were $422.5 million, an increase of 3.9% as compared to 2014. In the fourth quarter, our sales were $107.8 million, up 3% compared to the fourth quarter of 2014.

As Dan described, our total carpet sales were up 4.5%, while the industry was down slightly, and they were up 2.5% without Atlas. Our commercial products were up 14.4%, while the industry was up in the low single digits; again, 10.5% without Atlas. Residential products were flat, while the industry was down low single digits.

In terms of the quarter, our total carpet sales were up 2.5%, while the industry was down in the low single digits. Our commercial products were up 8.2%, while the industry again was down in the low single digits. And our residential products were off slightly, again, while the industry was down in the low single digits.

For the year, gross profit was 25.1% of net sales, an improvement over 2014's 23.5% gross profit percentage. For the fourth quarter, gross profit was 24.4% as compared to the prior year 23.1%. This improvement was driven by improved operating efficiencies and reduction in our expenditures for materials. There were significant quality-related expenses throughout the year. However, we anticipate these to significantly improve in the first half of 2016.

SG&A for the year was 23.8% of net sales as compared to 22.9% for the prior year. Higher expenses in 2015 relative to 2014 were primarily due to having Atlas with its higher selling expenses in only part of the year of 2014 as well as higher sampling expenses in both our residential and commercial business. The higher sampling cost should decrease in 2016.

For the fourth quarter, SG&A expenses were 22.5% compared to 23.9% for the same quarter of 2014. Fourth quarter expenses were lower, primarily due to sampling expenses lower than budget in our commercial business.

In the fourth quarter, we had a restructuring charge of $682,000, majority of which was due to completing the movement of three offices into our new Dalton headquarters facility. The only remaining facility consolidation after this is consolidation in our Saraland, Alabama rug operation out of a rented facility into the company-owned facility. That move is on schedule to be completed at the end of March.

Operating income for the year was $2 million, an improvement of $7.3 million over 2014's results. This improvement was made up of $3.7 million lower facility and asset impairment charges and $3.5 million improved operating results. For the fourth quarter, our operating income was $1.2 million, an improvement of over $5.6 million compared to fourth quarter of 2014. This $5.6 million improvement was made up of $2.5 million lower facility consolidation asset impairment charges, $3.1 million from improved operations.

Interest expense for the year is $4.9 million as compared to $4.3 million in 2014. Higher interest expense is largely due to a higher rates we've previously locked in future interest rate swaps in 2015 until 2021, to fix a portion of our floating asset-backed revolver. We had an income tax benefit rate of 23.9% for the year. Our normal range going forward at reasonable levels of profitability should be in the 33% range.

Diluted loss from continuing operations was $0.15 for the year and $0.03 for the fourth quarter. On a non-GAAP basis, adjusting for the facility consolidation expenses, fully diluted loss of $0.03 per share for the year and $0.00 per share for the fourth quarter.

Looking at our balance sheet. On an annual basis, our receivables increased slightly. Our inventories were up $10.9 million, of which $2.9 million was due to holding higher inventories from the supplier, who was going through a year-end software conversion. The balance of the increase was to improve service for our customers.

Capital equipment acquisitions, including those funded by cash and financing, was $12.2 million for the year. Depreciation and amortization for the year was $14.1 million. Anticipated capital expenditures for 2016 of approximately $10 million, and depreciation and amortization were approximately $13.5 million. Our debt stood at $126 million at the end of the year, virtually the same as the end of 2014.

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

Thank you, Jon. The consolidation was more difficult than originally planned due to two primary factors. First, we experienced a dramatically changed labor market in 2014 and 2015, as we no longer could easily recruit individuals with previous industry experience. As a result, our new associates required extensive training, and we experienced significantly higher labor turnover than we had in the period immediately prior to our expansion.

Second, we had counted on a stronger market than we experienced in 2015. While our carpet sales were up 4.5%, we believe the industry was down for the year. We responded to this market shift by adjusting our plans for a period of lower sales growth going forward.

Further, though we have nearly completed the physical moves, it will be well into 2016 until we have overcome all of the obstacles of higher claims, expenses, and lower product yield that came from product made during this time frame. We have installed improved quality systems, thus ensuring only first-quality product will be shipped to our customers. But we still have a higher waste percentage than we have had historically.

With the uncertainty in the world markets reflected in a depressed stock market and turmoil in our energy markets compounded by the volatility of an election year, we see 2016 as a year of very modest growth. As we enter 2016, our plans focus on fine-tuning the organization.

We've also made significant progress in bringing in newer yarn-winding technologies to improve yarn yields and reduce waste. We have been refining our production processes to increase quality levels, and we'll be continuing these efforts to improve our quality.

We have taken actions to focus on lowering costs in multiple areas, including logistics, materials purchasing, and general and administrative operations. We expect to continue experiencing lower raw material costs in 2016. In addition, we have lowered our sampling expenses as compared to 2015, a period with particularly high new product introduction costs.

We have also addressed our higher medical costs, with major plan design changes and significant premium increases. Finally, we've continued to strengthen our sales presence in key markets around the country. As we look forward to completing our facility consolidation plans, our emphasis will be on improving profitability, reducing debt and improving our balance sheet with lower capital expenditures.

We have taken the long view, building a foundation for the future with a platform that can support future growth. We remember that our company has been built by men and women with a vision of serving their customers. We're celebrating the 150th year of Masland carpets. Masland has been through many changes in the past century and a half, from converting the facility during World War II to making supplies for the military from wool to nylon products in the 1950s. Similarly, Dixie, celebrating its own 95th birthday this year, has a legacy of adapting to a changing marketplace.

As we look at the carpet industry today, we expect business to be much like last year, with growth in the commercial market and a relatively flat residential marketplace. The first quarter tends to be the most difficult for the upper end of the market where we participate. So far in the first quarter, our carpet sales are down mid-single digits, with residential down low single digits, and commercial, which typically is more volatile, down high single digits. However, order entry has continued to outpace shipments during the quarter for commercial and residential products. As our new products make their way into the marketplace and we move into second quarter, we anticipate stronger performance relative to last year.

As we have seen our market share increase despite the slow growth environment in 2015, we feel that this has validated our view that as the consumer focuses on better interior finishes, our products are well suited with innovative styling, and our sales organization is designed to serve the discerning taste of the upper-end buyer. Residentially, we continue to emphasize new product introductions, especially increasing our presence in pattern goods and Stainmaster's PetProtect products.

Commercially, we're seeing the marketplace respond well to our vision weave products from Atlas. Our Masland hospitality brand has successfully launched a new category of computerized yarn placement products as well as expanded our Andara hospitality offerings. Masland Contract is experiencing strong receptions to its Invista, Lumena modular tile products.

We look forward to 2016 with a continued emphasis on improving our results and providing beautiful products to our customers.

At this time, we'd be happy to open up the call to any questions. Thank you.

(Operator Instructions) And our first question comes from Sam Darkatsh from Raymond James.

Just a couple of just broad questions, if I could. Dan, the industry statistics in the fourth quarter were, I guess, a bit screwy because of potential for day count accounting that may or may not have been done correctly. But either way, it was still pretty soft. And I just wanted to get a sense of what you think is happening in the industry, especially on the residential side based on the fact that this year was the first year in a while that there's really been a breakdown in the relationship between residential carpet demand and existing home sales. Just get a sense of what you think is happening in the industry broadly.

Sam, I think we have obviously noticed the same thing and don't have complete answers, obviously. During the period, this January, in particular, we see a lot of our customers, January and early February, either through events they have or Surfaces or other venues where we see an awful lot of them. What we continue to hear is that pattern carpets are selling very well. We continue to hear that the upper end is outpacing carpet sales overall. I think there is somewhat of a movement back to nylon products by a number of suppliers from polyester, although polyester continues to be a big part of the market. And I'm talking about here, the retail replacement market, not so much the multifamily and other categories.

But I don't know whether it's the uncertainty of the election or the uncertainty of energy prices and the volatility of energy prices and the uncertainty that comes from that or just what, but our customers are not that negative. At Surfaces, for instance, I think all of them were interested in new products, all of them that we spoke with, they tend to be in the higher end and be leaders in their geographical areas, are going to be spending money on promotions. We are going to be -- with Masland's 150th anniversary, we're going to do some special promotions this year for our Masland line.

Interestingly enough, our business at Fabrica in the first quarter is up more than any of the rest of the business, and that's the very highest end. So I think that's, to some degree, validates the fact that the upper end is doing better than the market overall. But I think, only time will tell, and we're certainly interested in finding out why it hasn't been stronger than it has in the fourth quarter. I certainly hope that first quarter and this year will improve. And as I pointed out, our order entry is doing better than our sales in both commercial and residential products.

And then my follow-up question -- and by the way, thank you for the complete answer on that. That was helpful. My follow-up question is also probably pretty obvious, which is in the -- with the backdrop of a fairly soft industry demand period, why is the skilled labor market so tight? You would expect that to be the opposite. And are you seeing it begin to loosen up? Or what are the reasons or the genesis for that labor market being so tight?

Well, that was particularly true during '14 and '15. Candidly, we are not adding to our headcount at this time. We have actually cut back some, and we'll continue in that mode until we see stronger activity. But I think it's true, almost regardless of what business you're in. The unemployment rate is under 5%, and we see this in many geographical areas. And talking to others in other industries, they see the same thing. It's just that the labor that is available is certainly not trained and experienced and oftentimes is not committed to working in a manufacturing environment.

Helpful. Thank you.

Okay. Thank you.

(Operator Instructions) One moment for questions to queue up.

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

Katherine, thank you very much. And we appreciate you being with us on the fourth quarter and year-end conference call. Obviously, in 2016, we're looking for a much better year than we had in 2015, and we look forward to talking with you, visiting with you at the end of next quarter. Thank you.

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