The Dixie Group, Inc.

Thank you Alisa[ph] and welcome everyone to our second quarter 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 press release.

For the industry in Dixie, this year appears to be a replay of the past in many ways. Business started off stronger than the previous year, but was -- has retreated as the spring progressed.

The second quarter was not as strong as the first on a relative basis and we appear to be in a wait and see period.

Dixie had a strong residential growth in the quarter however, a 5.6% improvement in sales compared to a decline for the industry. Excluding mass merchants, our residential brands grew over an 11% during the quarter.

Our commercial business began slowing in the last half of last year and during the second quarter, this trend continued. We have been disappointed in our commercial sales and are in the process of changing leadership to enhance our results.

Our the last several years we have experienced continued raw material increases and have passed those on in the way of carpet price increase. It appears that this trend has ended or at least we are hopeful it has, however our industry continues to experience a difficult period but we believe conditions are beginning to change.

At this time I would like to ask Jon Faulkner to review our financial report.

Thank you Dan. Looking at our sales, second quarter sales were 66.6 million down 3.8% versus last year.

For the quarter end dollars, a total of carpet sales were down 3.7% while the industry was up marginally. Our commercial products were down 25% while the industry was up in the mid-single digits and our residential products were up 5.6% while the industry was down in the low single digits.

For the quarter, Fabrica, Masland Residential and Dixie Home retail segments were up over 11%, while the mass merchant segment was down 28%. Further, during the third quarter of last year, we had a onetime roll buy special order for over $4 million that will not repeat during the current quarter.

At this point we anticipate we will get some increase in the mass merchant segment in the fourth quarter once the new TruSoft products have released.

Our commercial sector was down against the strong quarter in 2011. Sales had noticeable slowed since the second half of 2011.

In an effort to strengthen our performance in the commercial sector we will be bringing in new leadership for our commercial business. For the quarter, gross profit margin at 23.6% was 6/10th of a percent decline from the same quarter a year ago.

Operating margin was impacted by approximately 540,000 in manufacturing realignment expense relative to moving top-ten equipment to Eton share heads down to Atmore. We have spent approximately 750,000 year-to-date and anticipate spending another 325,000 in the third quarter.

That effort has proven successful, improving output and lowering cost.

They also incurred approximately 40,000 to 50,000, primarily in the second quarter, developing new fiber systems. Introduction of these technically challenging fibers has caused additional expense now largely behind us that impacted the first half of the year.

SG&A at 23.6% of sales, was above last year’s 21.6% for the same period. We were impacted by higher sample expense of 900,000 above last year.

We are investing heavily in Stainmaster TruSoft one of two suppliers to the industry to have this fiber and Permaset, the only supplier in the industry with a bleach dyeable wool.

Our operating income in the quarter of a $40,000 loss compared to a gain of $2.3 million last year, the combination of the manufacturing realignment expense, higher product development cost and increased sampling expenses during the quarter had a negative impact of 1.9 million. The prior year’s quarter had an operating income of $1.8 million when excluding the $536,000 gain to the settlement of our Pullman facility lease termination.

Our interest expense at $762,000 for the quarter reflected lower interest rates as compared to $900,000 in the prior year quarter. Our effective income tax benefit rate for the quarter was 43%.

This was due to the domestic manufacturing credit change in our state evaluation allowances, interest expenses associated with our 2009 and prior tax audit and our year-to-date true-up. Our normal rate going forward at reasonable levels of profitability should be in the 35% range.

Earnings from continuing operations in the quarter was a loss of $404,000 or $0.03 per diluted share. Looking at our balance sheet, receivables increased $441,000 during the quarter, inventories increased $5.5 million during the second quarter on normal seasonal high.

Capital leases and expenditures were $1.7 million for the year-to-date, while depreciation and amortization was $4.8 million. We anticipate capital expenditures for 2012 between $4 million and $5 million and depreciation, amortization of $9.5 million.

Our debt has increased $2.2 million for the quarter and we ended the quarter with availability under our loan agreements of $19.3 million. Our updated investor presentation is on our website at www.thedixiegroup.com.

Dan?

Thank you Jon. As Jon has pointed out, the results of the second quarter were less than satisfactory but influenced by several unusual items.

The movement of tufting machines to North Georgia from our Atmore plant negatively impacted results was already showing both cost and quality improvements at our Eton and Atmore facilities.

The opportunity be the only one of two manufacturers bringing TruSoft Stainmaster to market was an unusual opportunity but increased our cost of development and sampling for the quarter and the year, both of these investments will impact current earnings but should facilitate significant growth starting in the fourth quarter of this year. As we look to the future of our contract carpet business we felt we needed new leadership to help take advantage of the growth in the modular part of the business.

Hopefully these changes will be completed soon and we will return to a pattern of growing faster than the market.

As we look back at the last several years, the industry and we experienced a significant decline but now have begun to grow again as a company and as an industry. Our growth is outpaced the industry and we believe we will continue to do so.

We are currently bringing TruSoft product to the marketplace and believe this new soft fiber will be the new standard in the industry. In the world arena, we are introducing our Permaset products which offer our customers a wide range of choice of color in wool, which is new for the industry.

The commercial market, we are experiencing great reception to our new Chrome Collection and with the introduction of new -- other new value products, this should enhance our market position. The housing industry finally appears to have bottomed and beginning to show the signs of improvement that will lead to sustained market growth.

Units of new homes and home resale’s are well above year ago levels and the median price for both are above year ago levels. These conditions are leading to higher forecasted sales for homes in the future which we believe leads to better conditions in the carpet industry at some point next year.

Until then the focus on operational improvement and better utilization of assets will continue.

With our investment and people, equipment and product we will be well-positioned to take advantage of any improvement in the marketplace. At this time, we would like to open up the call to questions.

First a housekeeping question and then I will ask some strategic ones, John do you have a sense of what the LIFO reserve was at the end of the second quarter on the balance sheet? Dan, how big do you think TruSoft can be for you, I know you had some initial cost, just trying to get a sense of what the potential returns might be?

Sam as you know it is a new fiber, and it is very different from any fiber we have processed before and therefore there were significant development and technical cost and development cost involved. However, the products are beautiful and they are soft and we think it can have a major impact on the business going forward but it is higher priced, that’s obviously where we tend to play and therefore I don’t think you will have maybe the volume of some other lower priced products but we think it will be a significant player for Invista and Stainmaster going forward.

And that’s going to be offered throughout your residential end markets and end customers or just mass merchant, how wide spread will that be?

We will have product in the market later this year at Fabrica, Masland and Dixie Home. So it does cover the water front in terms of higher brands.

Second question, what are you seeing in terms of your own pricing as well as industry pricing knowing that some of the input costs at least for Shaw and Mohawk who have likely already receded and I guess the follow-up question to that would be at what point do you believe that your yarn would start to see some relief from a pricing standpoint due to raw materials and what are you seeing in selling prices as a result?

Sam as you know we tend to play in the higher end and there is less volatility there, I think what you are speaking of would first surface in the very low end of the market where we are not a day-to-day player so we are probably not the best ones to ask that question but we have not seen any major decreases in place fiber prices, any decreases in fiber prices of significance. We have seen some declines and other materials we buy, but a year ago we were faced with increases in all these areas.

We did have an increase in our residential pricing earlier in the year and we had an increase in our commercial pricing just about a month or so ago.

And I think Jon is ready to give you the LIFO information.

LIFO is at 15.3 million at the end of June and it was at 14.99 million at the end of December.

Okay and then you are saying that the June and July softened up and are you seeing the promotional environment begin to stiffen a little bit, with the softer demand trends of late.

Sam that’s usually what happens, I would say our business has really been pretty steady March through July on the residential side but we haven’t seen the uptick in the spring that sometimes we see but we do continue to outperform the industry there. But I do think we will be in a period like this, a wait and see period as I called it earlier and really until probably fourth quarter sometime.

And the last question and then I defer to others. So after the equipment resets, what do you peg your capacity utilization right now?

And if it is real low, do you want to keep it with your dry powder in case the demand comes back over the next few years or are there opportunities to take some capacity out?

Sam, they are not major opportunities to take capacity out. We simply don’t run tufting machines as much or don’t run as many of them when that happens.

The pinch point on capacity for us and for the industry really is in yarn and yarn processing and we have added capacity there as we have announced previously and we have added about 20 some odd percent 25% capacity this year so we have plenty capacity for growth but during the slower periods we simply will not run that capacity.

First question I had was on the commercial side, I guess what, in your opinion -- I guess why in your opinion have you guys underperformed the industry so much, I mean is that just a product of the higher price points that you guys sell your products at? And if so, have you thought it all about rolling out some possibly some less expensive products to the commercial side?

Nick, to answer your question, the real divergence from the industry has been in the modular side of the business. We have only been in the modular 4 or 5 years and we have not had the growth in the modular that many of our competitors have experienced.

Actually, our broadloom business is held up pretty well in Masland, but we are very much in the upper end of the business and I think your point is appropriate. We will be introducing a product that is well-styled and a quality product but at more competitive prices going forward.

And I know you mentioned a little bit on the mass merchant side, I mean obviously 2011 was a great year, we are seeing a little bit of pull back. But, is there any way that you guys can really build that business back up?

I mean. is it purely just I guess new product introductions, I mean are you guys, are you pretty much dependent on retailers offering promotions and advertising and things like that, is that basically what’s going to drive any growth in the mass merchant side?

I am not quite sure how to answer that. We think we will see growth as Lowe's introduces the new TruSoft fiber in the fall that will certainly give us a boost there but that business what we call is lumpy.

It comes in lumps and it goes in lumps and we would anticipate that with TruSoft our business there would improve significantly.

Okay and then just lastly I know you guys don’t give guidance but just given the weakness that you are seeing in commercial on the commercial side and the margin pressures and the investments that you guys are making in new products, do you guys anticipate I guess been profitable in 2012? I mean, do you think that’s a possibility?

Your first assumption was correct. We do not give guidance and that would be giving guidance.

We certainly think in the fourth quarter, the introduction of TruSoft, the introduction of our Permaset wool products will have a positive impact and we will not have the cost of the developing the products. We will have a sample cost but we will not have cost of moving equipment and the manufacturing realignment that we went through so we certainly think that starting in the fourth quarter it should be significantly better.

Could you comment, I am not sure I heard all the commentary around, the home centered channel in Q2. I have heard that their business in carpet is off materially in year-over-year and I was wondering if that what you have seen, and whether or not that is a product of their own, of lack of promoting or advertising that particular product or broader read on the consumer.

Well first of all, we are minor player. As you know, most of our products are higher priced and the retail -- other retail is where we concentrate our effort and energy and that’s what I have said in the second quarter, we were up 11%.

Fabrica, Masland and Dixie Home through traditional retailers were up 11%. The mass merchants, we are not big enough with them to really know across their whole product line if, for instance, one they introduce the new category, does it take business from the others or is their business off totally?

We just don’t have exposure or ability to get to that data.

Okay and on carpet tile my recollection was you were in price points general in North of $30 a yard?

We have been in the $25 to $30 range, obviously the sweet spot has moved South and we have not been as aggressive in doing that as probably should have been. And we are undergoing some changes there that I think we will be very effective in that arena, but that, as you know, our commercial business was more broadloom and much more broadloom and therefore we have not been as aggressive in the modular side and need to be.

And Dan I apologize because I didn’t time to see the product launch at [indiscernible] were those at these newer and lower price points and if so where are you targeting?

No, we will bring out additional product here in the late third quarter.

I am going from my memory now, I don’t have all my notes in front of me but you were doing very well in the tile business after it was introduced for a number of years if I recall, did something happen competitively which changed that trend or am I remembering inaccurately?

Arnie, I think Jon’s comment sort of summarized it. We did get off to a good start and tile.

We had growth, the first year we have been and then dropped back in ’09 like I think most people did than had growth in ’10 and ’11, but we are not experiencing that growth today and I think the price points in that business have changed significantly and I think that’s had a lot to do with our lack of growth this year in the modular.

What you are saying your competition has gotten more aggressive in lower prices and you guys didn’t react quick enough to the change in the competitive landscape, right?

That's a good summary of what I said.

Secondly, can you give us a sense of TruSoft goes across a number of distribution areas, could you give us a price points. So you mentioned it's in Fabrica, Masland and Dixie, what will be the very, the price points for TruSoft.

Arnie, that’s a little difficult to give you but I would say it's everything from the high-teens to the mid-30s or depends on the product, the weight, the style. The first products we introduced were in Fabrica they have done very well.

We did get those in the market earlier, but the biggest portion of them will be introduced in late third quarter. And I think there will be that will -- unfortunately we had hoped to introduced them in the second quarter but due to the development issues, it's taken us longer and it's taken our competition longer to get them to market.

Therefore, normally in the second, third quarter you will would have sales from those products already being introduced, we have not had those or had that. So, we do think it will have a significant impact on fourth quarter and it's a number of products spread out over all of our brands.

Okay, but for the Masland, for the Dixie it's in roughly the higher teens, Masland is probably the mid-20s and the Fabrica is over 30, as ballpark?

Or higher yes.

Who is -- should know this but I don’t remember, who is the competitor in TruSoft?

Shaw is the other mill with TruSoft product.

Okay and finally, to what extent there certainly been a number cyclical problems very slow recovery in housing as opposed to the normal recovery; housing normally leaves everything out and it certainly hasn’t done that at this time but in addition to the housing problem in general is there a secular trend away from carpet towards more of a the wood floor and the rug so to cover the wood floor which is reducing demand for broadloom to some extent over and above the cyclical aspect and if so if you agree what are you doing about it?

Arnie I think if you go back 10 or 20 years there is definitely a cyclical trend to hard surface, of course laminate had its day and now it's declining. There are a lot of trends going on within that.

In the last couple of years, that cyclical trend has not been this great because hard surface was more utilized more heavily in new housing that it was in home resales or older housing. So that hasn’t been as pronounced in the last couple of years.

I think you can make a case that upper-end, higher-style carpet has really prospered next to hard surface. When somebody spends what they have to spend for hard surface, which is a lot more than they typically spend for carpet, higher priced carpet doesn’t look like it's priced high.

And I think if you have beautiful hard surface you want beautiful soft surface next to it. So, I believe you can make a case it's actually has not been a deterrent to our business and that’s one reason I think we have, on the residential side, have continued to outperform the industry for a number of years.

You are not in the rug business are you, if I remember it.

Yes we are in the rug business and that business obviously if somebody puts an hard surface we want to cover up that hard surface with a soft surface.

But it's a very small percentage of your business, is it?

It's a small percent but it's very designer oriented, designer focused.

Thank you Alisa and thank all of you for joining us for our second quarter conference call. We will see you again next quarter.

Thank you.