The Dixie Group, Inc.
Q4 2014 Earnings Call Transcript

Published: 18 Feb 2015

[Operator:]

Good day, and welcome to The Dixie Group Incorporated Fourth Quarter 2014 Year End Conference Call. Today's conference 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, sir.

[Dan Frierson:]

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, our 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 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’ll discuss the plans and investments we’ve made to increase our capacity and improve our profitability. Jon?

[Jon Faulkner:]

Thank you, Dan. Again, looking at sales for the year, our sales were $406.6 million, an increase of 18.1%. Fourth quarter sales are $104.6 million up 9.6% on a fiscal period basis versus last year. As Dan had said, out total sales without Atlas were 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 in the low single digit. To continue our growth in 2014, up from 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’ve undergone to realign operations, bank capacity and integrate the Atlas and Burtco acquisition. Product mix was within expectation, lower gross profit driven by cost variances in our operations is result of the changes in the properties position. Selling and administrative expenses for the year were 22.9% of sales, 0.8% above the 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 compared to $5.6 million a year ago. We anticipate and added $1.4 million of integration expenses in 2015. Our expansion is nearly complete, the remaining completion of Susan Street dye house, expansion to accommodate Atlas, move of our commercial [indiscernible] facility, Saraland and Alabama to our Atmore, Alabama carpet manufacturing facility and the move of our sale and rug operation out of a rented facility into a company owned facility. Our interest expense for the year $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% primarily due to the added state tax evaluation allowance of over $500,000. For 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 $5.8 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, amortization of $12.5 million. We anticipate capital expenditures for 2014 of approximately $13.5 million and depreciation and amortization of approximately $14.3 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 $40.3 million. Our investor presentation including our non-GAAP information is on our website at www.thedixiegroup.com. Dan?

[Dan Frierson:]

Thank you, Jon. After the downturn of 2008 and 2009, we put together a growth plan to take advantage of the unique opportunities that emerge. And that plan has driven our sales success and investment over the last five years. Since 2009, our corporate 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 Robotech’s 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 cost as well. The investments we have 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 dyeline. 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 dye operations, converting that mill to a dry mill dedicated to serving our Masland Contract brand. As part of this process, we de-commissioned our Atmorewastewater treatment plant. Further, on the west coast, we merged our newly acquired Atlas dye house into 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 are focused on improving waste, yields and efficiencies in our operations. We are seeing the positive impact of our expanded sales force, the result of our efforts in 2013 and 2014 to increase our field coverage significantly. During 2015 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 the commercial market will grow more rapidly than the residential. Our experience to-date seems to bear this out. 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 Carousel increases from higher wages and higher health care cost. These costs are being partially offset by current lower energy and raw material cost. It is difficult to predict where our raw material cost 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 innovated 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 or we take advantage of investments and new products in manufacturing and distribution capability. At this time we would like to open up the call to your questions.

[Operator:]

Thank you. [Operator Instructions] Now we will take the question from Joey Matthews from Wells Fargo Securities.

[Joey Matthews:]

Hi, can you first talk about your outlook for the hospitality segment, remind us first what kind of percentage of your commercial sales are hospitality related and then your outlook in terms of opportunities and challenges both to split with Desso and Tarkett in 2015 that will be helpful? Thanks.

[Dan Frierson:]

Joey that's several questions in one, but basically as you will recall early in 2014 we had 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 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 you have any other comments on it?

[Jon Faulkner:]

It's a small percentage of our sales today, I don’t know that percentage off hand that we are pretty large prior to the -

[Joey Matthews:]

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 the big assumption it sounded like in your earlier mark set, 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?

[Dan Frierson:]

Joey that's little difficult to know at this time, my point was we have had wage increases. We also have had higher labor - health care costs that are flowing through our operations. We have begun to have lower energy cost and low energy input cost in our manufacturing and so forth. And some reduction in raw material cost, 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 product. So I don't think we could give you and 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.

[Joey Matthews:]

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 cost from oil, has that impacted your kind of niche higher end market any color there will be great?

[Dan Frierson:]

Joey, I would say typically when there is volatility in the raw material area it tends to be to show up in special, it tends to show up in lower price products first and higher end products later. At this point, there has not been a lot of activity and this is all very recent and it takes a while for all of us to work through the system. So, there hadn't been a big change there, I think maybe later in the year it all stays at these levels we will see something but that's still unknown.

[Joey Matthews:]

Great. Thank you for taking my questions.

[Dan Frierson:]

Thank you Joey.

[Operator:]

[Operator Instructions] Our next question will come from Sam Darkatsh with Raymond James.

[Josh Halpern:]

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?

[Jon Faulkner:]

I would say the most significant impact 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 that was really related to that as well. The other aspect of waste it’s from all of the movement of goods when you move goods you find out after you move them it appears damage during the process and we just completed the Adairsville move in late December I think we will continue to see impact from any damage they have occurred during those moves as we turn that inventory over. But that we will be rolling out over the next several quarters. Also in terms of new employees or employees who have changed positions because of the restructuring would tend to be impacted over the next several quarters. As an example, we were hiring people in Adairsville all for the last six months and some people have been there six months, some people have been there one month. And as a result those impacts the roll forward we should feel improvement in the first half of 2015.

[Josh Halpern:]

Okay. Thank you and as it relates to the raw material of the assets 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 would expect to roll through or are there any other puts and takes that we should be bearing in mind in this cycle?

[Dan Frierson:]

Well, I indicated Josh we have seen some changes there, but not major magnitude and 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 the labor issues and training issues that we have 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.

[Josh Halpern:]

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

[Jon Faulkner:]

As you know we don't give projections, but I think if you look at our historical margin back several years ago that would be a good indicator for which we are getting.

[Josh Halpern:]

Thanks. Good luck for 2015.

[Dan Frierson:]

Thank you.

[Operator:]

Our next question will come from Arnold Brief, Private Investor.

[Arnold Brief:]

There is two questions, one would be industry consolidation has been going on for many, many, many years and so much of the industry in the hands of two competitive at this point. How do you think the decline in oil prices lower raw material prices that is a possibility that your end prices finished goods may hold up better than they have in much earlier years, the second question is its [Audio Gap]

[Dan Frierson:]

Arnold, you broke up there on the second question. I will try to answer your first and then you can re-ask the second. Obviously the consolidations, I think over the years has made for more stable marketplace but any time there are major swings I think you are still going to see three 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 price products than it does in the higher price products in terms of production.

[Arnold Brief:]

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

[Jon Faulkner:]

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

[Arnold Brief:]

Thank you.

[Dan Frierson:]

Thank you, Arnie.

[Operator:]

And our next question will come from Howard Rosencrans from Value Advisory.

[Howard Rosencrans:]

Yes hi guys. Thank you. I am trying to get a sense of, I am not sure if I missed it or whether it wasn't fully addressed in terms of the hospitality business bigger portion of your business is it now and how bigger 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 the sales people that you discussed do you feel like its impacting the commercial business more because I would think that the commercial business at this juncture should really be starting to get better, I mean, you seem to have a, there should be a pretty good tailwind business wise in that respect? Thank you.

[Dan Frierson:]

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 pickups team and I think this year will be a good year for the commercial markets probably better than the residential markets. We will 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 cost value to be really at lead of that, ahead of that.

[Howard Rosencrans:]

Okay. So, the major internal issues or that it seems like ’14 was somewhat of a perfect storm in those small part taken on by yourself not so much of function of the marketplace but just all the restructuring activities and positioning you did. Is the training of the sales people is that really the big gaining factor in wrapping up your Atlas business, the planned stuff is largely behind as I understand or will be largely behind in the next few months, is the gaining factor really getting the sales people going on the commercial side and based on just the comment you just made regarding your commercial vis-à-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 am just wondering you did comment that there was a single-digit decline in the industry on the corporate side, is it possible that corporate continues to lose and I guess corporate did continue to lose share to hard flush is that a factor. So I know it’s a lot questions so?

[Dan Frierson:]

Yes, Howard, first of all, we think residential will grow for the year. I guess what I am 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 opportunities specifically Atlas you referred to we see the growth there coming primarily from new product. We have a lot of new marginal product as well as broad lane that will start 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 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 with all three brands Masland, residential Fabrica and Dixie Home are all doing very well and we have a lot of new products from each. So far this year all brands are in positive territory.

[Howard Rosencrans:]

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 other side of your business, the residential or commercial and I guess let’s leave it there for the moment? Thank you.

[Dan Frierson:]

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 the corporate sector tends of commercial carpet tends to do much better and so those to me the leading indicators I would look at. Obviously, housing starts is important, construction on the commercial side is important, but replacement carpet is where we really excel both commercially and residential.

[Jon Faulkner:]

Howard, got to mention briefly the other thing which is little kind of the macro data is we look at fixed investment as a percentage 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 over react to the changes in housing numbers, you always have to look at the bigger trend period, but the fixed investment is one area that we continue to see returning to more normal levels over the last 30, 40 years.

[Howard Rosencrans:]

Great. Thank you so much.

[Dan Frierson:]

Thank you, Howard.

[Operator:]

[Operator Instructions] And with no further questions in the queue, I will turn the call back over to Dan Frierson for any additional or closing remarks.

[Dan Frierson:]

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.

[Operator:]

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