The Dixie Group, Inc.

Thank you, Joyce, and welcome, everyone, to our fourth quarter and year-end conference call. I have with me, Jon Faulkner, our Chief Financial Officer.

Our Safe Harbor statement is included by reference to our website and press release. Dixie saw a year of changes in 2012, although our sales were up slightly in 2012 versus the prior year on a comparable 52-week basis, we’ve been building a foundation that will create optimal opportunity for significant sales growth in 2013 and beyond.

2012 was a year of swings in the marketplace. We had a strong first quarter due to consumer sentiment and external factors followed by a disappointing summer, then returned to an above industry average growth in the last quarter of the year.

Though 2012 was not satisfactory from a profitability standpoint, we saw a shift in the overall market dynamics that leads us to be more confident for the future. In residential market, we have seen rising existing home sales driven by higher consumer confidence and low interest rates, pointing to a stronger 2013.

From a commercial perspective, businesses have excess cash and appear willing to spend it on projects that will drive their sales growth.

Finally, now with the distraction of the election and the fiscal cliff are behind us, we see the consumer confident -- consumer more confident as the stock market has returned to the highest levels since the financial crisis of 2008. Despite the industry uncertainties during the past year, we have developed several growth initiatives to take advantage of these improving market conditions.

Operationally, we expanded our yarn operation in 2012 and are in the process of expanding it again in 2013.

We will have a combined increase of 43% in our yarn capacity within the 2 year period. In addition, we reestablished our Eton tufting operations as well as simplified our Atmore operations to increase throughput and to lower cost.

Late in 2012, we purchased the Colormaster continuous dyeing facility, allowing us to expand our product offering and improve margins once the conversion of our styles is complete, late in 2013.

We will triple Colormaster’s output 2013 as we convert our existing products to utilize this technology. The cost of implementing this conversion will negatively impact earnings initially, but will become positive by the end of this year.

Further, we purchased an existing rug supplier to increase the supply of our successful Infinity and Rugs 4.0 wool rug program.

In addition, we have modified our tufting equipment for modular carpet tile so that we can better respond the market demands by using a make-to-order model that improves throughput times and reduces inventory.

Finally, we’ve installed new raw material processing for our modular carpet tile business, lower cost and improve delivery. We installed new management in our commercial business and are implementing several growth initiatives as a result.

These include launching our Speak modular tile product line, which offers highly styled products with a strong infusion of color play allowing the design community to specify products on a budget without sacrificing the design aesthetic.

In addition, we have re-aligned and expanded our sales force to service select commercial markets more efficiently. Jon Faulkner will review our fourth quarter and annual fiscal financial results, after which I’ll comment further on business conditions.

Jon?

Thank you, Dan. Looking at sales for the year, our sales were $266.4 million, a decrease of 1.4%.

However on a comparable 52-week basis, they were up 0.4%. Fourth quarter sales were $71.1 million, up 8.9% on a fiscal period basis versus last year.

Our commercial products for the year were down 11.1% while the industry was up in the low single-digits. The residential products were up 4.3% for the year while the industry had a slight growth.

For the quarter, our total sales were up 8.9% while the industry was up in the low single-digits. Commercial products were up 2.9% again while the industry was up in the low single-digits.

Our residential products were up 9.1% while the industry was up several points. We outperformed the residential market for both the quarter and the year.

For the fourth quarter, we saw strong sales growth in the mass merchant category and -- but are still pleased with the retail growth at both ends of the market spectrum.

Our continued growth in residential has proved that our continued investment in new products is allowing us to gain market share in the upper end. Our commercial business declined significantly in the first 3 quarters of the year, but is up in line with industry growth in the fourth quarter.

We are confident that the management change we’ve made in August to bring in a stronger management team of the commercial business is pretty successful.

For the year, gross profit was 24.5% of net sales as compared to 24.3% for the prior year. For the fourth quarter, gross profit dollars were up 5.8% compared with the year ago and as a percentage of sales, gross profit was 24.5% versus the prior year of 25.2%.

SG&A for the quarter and the year was 23.8% of sales or 0.4% below the fourth quarter of the prior year, up 1.25% above for the full-year versus the year ago. The higher selling for the year is primarily due to added selling expenses for product development samples.

We also had higher G&A by $409,000 due to acquisition-related expenses. 2013, we are expanding both our residential and commercial sales forces to take advantage of market opportunity, as a result we will continue to have high selling expenses in 2013 as we have added demand for samples and marketing materials.

However our G&A should drop as a percentage of sales, as we do not have the acquisition-related expenses, therefore we anticipate that our SG&A percentage will be in line with our 2011 results at 22.5%. Operating income was $1.8 million for the year as compared to $5.7 million a year ago.

We had an additional expense of $1.4 million for manufacturing, realignment and conversion cost of the Colormaster facility, $600,000 relates to management changes and $409,000 in acquisition-related expenses during the year.

Also in 2011, we had a gain of $563,000 due to terminating a lease as part of our facility consolidation on the West Coast. 2013, we estimate we’ll have approximately $1.9 million in additional costs to convert our production around the Colormaster continuous dye line.

For the fourth quarter, we had an operating income of $415,000 compared to an income of $520,000 in the same period in 2011, with manufacturing re-alignment in Colormaster conversion expenses of $530,000 during the quarter.

Our interest expense for the year, $3.1 million was down 9% from the prior year due to lower interest rates. But the fourth quarter interest expense of $877,000 was above the prior year due to higher debt levels.

Our effective income tax benefit rate for the year is 38%. Our normal rate going forward at reasonable levels of profitability should be in the 34% range.

Related loss from continuing operations for 2012 was $0.05 per share compared to $0.10 per share income in 2011. For the fourth quarter, we had a loss of $0.03 per share compared to a loss of $0.02 per share in the fourth quarter of 2011.

Looking at our balance sheet, our receivables increased $3.3 million during the year while inventories increased $8.3 million.

Approximately one-fourth of the 13% increase in the inventories was due to higher raw material costs and the balance higher unit volumes to support anticipated higher sales in 2013. Capital expenditures and leases were $4.1 million while a fair value of assets acquired between the Colormaster and the Rug acquisitions were $9.2 million as compared to depreciation and amortization of $9.4 million.

We anticipate capital expenditures for 2013 of $8.2 million and depreciation and amortization of $10.1 million. Our debt stood at $84.2 million at the end of the period up $16.1 million for the year.

The current portion of our internal debt is $4.1 million at this year end. We ended the year with availability under our loan agreements of $20.5 million and our updated Investor presentation is on our website at thedixiegroup.com.

Dan?

Thank you, Jon. In the fourth quarter, we began to see improvement in our sales which was a result of more favorable business conditions and our continued investment in the business.

The favorable trends have continued into the New Year. The investments we’ve made in people, productive capability and products have enabled us to outperform the industry.

Sales for the first 7 weeks of this quarter are well ahead of year ago levels.

Our residential brands are showing significant growth in our TruSoft and SolarMax, Stainmaster products as well as our wool introductions. We have added a number of new sales people as we assimilated some of the Gulistan products into our Dixie Home offering.

Purchase of the Colormaster continuous dye facility during the fourth quarter will ultimately improve our cost position and level of service which should enhance our inventory turn.

Masland Contract under new leadership has also added sales people and is introducing additional modular products which had been well received in the marketplace. The investments we’re making in people, new product and machinery are designed to take advantage of favorable industry conditions, better utilize our facilities and improve our financial results.

Our introduction of new products is still higher than historical levels because of the changes and improvement of fabrics currently being offered. We believe overtime sample and product cost should return to more normal levels.

Certain companies in the industry have recently announced price increases to offset higher raw material and other operating costs. We’ll continue to monitor these activities and take appropriate action.

We are optimistic that this year we’ll see industry conditions improve and we expect the upper end of the market will continue to grow faster than the overall market. As I mentioned, the first 7 plus weeks of the year have started strong and our sales are up double-digits both for the residential and commercial businesses, compared with a strong first quarter last year.

At this time, we would like to open the call for questions.

Couple of questions here, what do you peg your capacity utilization at right now, I mean let’s assume that over the next few years each year you’re growing your top line high single, low double-digit, how many years can you under-spend D&A from a CapEx standpoint?

Sam, that’s a difficult question to answer in that every process through the manufacturing process is somewhat different. But I think probably the pinch point for us and the industry is going to be in cabling capacity of raw yarns.

And as we’ve noted there in the last -- really from the third quarter of last year, we have added 43% to our capacity. I think other than that, we obviously we’ll be investing in new tufting equipment where it helps us differentiate product and/or produce more but that would be the primary pinch point for us in terms of capacity.

So that having been established and added, we can expect your CapEx to be below D&A for the foreseeable future for the next 3 to 5 years or so?

I won’t say for 3 to 5 years, I don’t -- I wish our crystal ball were that clear, but it’s not. We are spending money additionally on the Colormaster acquisition to upgrade and improve that facility.

We are adding some high speed tufting equipment which will lower our costs and improve our productivity and we will be looking at some other tufting equipment that would add product capability to what we -- to our current abilities. But it shouldn’t be significantly more, but it depends on what opportunities might arise.

All right, my next question I guess, this is the $64,000 question here. At what point do you begin to leverage all of these incremental selling costs that you’ve incurred largely in order to pick up market share, and what keeps your market share strong once you end up making the decision to reduce the relative selling costs like sampling and the like?

Let me start the answer to that and then turn it over to Jon. I want to speak to what we are doing to increase sales.

We have added a number of sales people on the commercial side, along with the new management of our commercial business. When we acquired certain Gulistan products, we also were able to bring on board a number of the Gulistan sales people, which gives us greater coverage in the country for our Dixie Home line.

So we have significantly more sales people going forward, we have more product being introduced this year than we’ve ever introduced before and a lot of that is due to the fact that Stainmaster has introduced the new TruSoft and the SolarMax products. And we see a real opportunity to gain real estate at retail by doing this and then improve our coverage and increase our sales.

And I’ll ask Jon to talk to the leverage of that.

Sam, basically if you look at our sampling expenses, they have as you noted they’re projected they will be higher in ‘13 just the things that Dan just described but then historically our sample expenses have been about a point lower than where they are today and so we would anticipate as we get into 2014 and beyond, we would see that return to back more normal level.

And that’s one point as a percentage of sales?

Correct.

Okay. Now would you be taking your absolute sampling costs down or would you just expect sales growth which naturally would take the percentage of your sampling expenses as a percent of sales down, or I guess what I am getting is it’s a step function lower in ‘14?

I would view it's a combination of both of those effects, both higher sales and lower absolute dollars.

So then I’ll return to my last question then, so what gives you confidence then that once the sampling costs return back to normal levels, that you’ll be able to maintain these obviously above industry average growth rates?

Sam, I think it’s a question of sales coverage and displays at retail throughout the country, and we’ve been growing faster than the industry for some time. If we go back to the peak period which in sales was the third quarter of ‘06, and we look at the industry declined about 40% by the end of ‘09, we also declined about 40% from our peak which was somewhat later than the industry’s peak.

The industry has come back about 5% and we’ve come back about 35%. So I feel very confident that the upper end of the market will outperform the market generally, and that we’ve been able to outperform due to continuing our product introductions and gaining market share at retail.

The other thing, Sam, is it’s somewhat self-limiting and that the number of retailers, store fronts are not increasing, have actually decreased over this time period. And there is a point at which you have a saturation, second of all you have the number of coverage in terms of the sales force penetration.

Again, once you cover markets you need - you are not at the same level of growth in terms of people. So those 2 things somewhat become a little bit self-limiting.

Last question, not looking for numbers, just looking for metrics here. Can you remind us with the management’s variable compensation what metrics are used to determine that on a year-to-year basis?

What financial metrics do you use to determine variable comp?

Largely based on our operating profit, but also on individual goals for each of our top associates.

In a broader sense that operating profit is looked at in line of asset utilization at the board level and initiatives which we have undertaken in whether we’ve accomplished those initiatives.

Okay, so what I am getting at is management’s compensation is tied to profitability as opposed to revenue growth or something along those lines?

That is correct, Sam.

I’ve got a couple of questions. You mentioned a couple of times, the increase in the sales force both residential and commercial.

Could you give us some color on that, are we talking 5% or 10 people or 100 people, what’s?

Let me start with that and Jon you add if you have additional information. On the residential side, we hired about 8 or 10 of the Gulistan folks.

We were adding some people anyway. I would say to the Dixie Home line it’s a significant increase, but if you look at the residential business overall, it’s probably 8%.

On the commercial side, it’s probably greater than that as a percentage, but a lot of that is sales people who are associates of the company and some of that is through agents as well in the commercial side. And a significant increase -- more significant increase there than on the residential side, probably in the 15% range.

Okay. Secondly I got a little confused because you were talking about higher sample costs in 2013 and then there was I think Jon said something about SG&A going down to 22.5% in 2013?

Am I confused over here?

We have run high sample expenses in 2012 which are really continuing in 2013. However our G&A also had higher expenses due to acquisitions that will not repeat in 2013.

Therefore the combined SG&A has dropped but it’s due to the G&A component not to the selling component.

Okay, the selling drops in 2014, another point?

Now that would be the goal.

Fairly if nothing else changes, your SG&A would be down another point in 2014?

Correct.

Okay. Finally, your gross margins even adjusting for the unusual expenses of last year, even if I add that back you were somewhere in the area of 25%, by the way before I forget and your sampling expenses, I should know this but I just don’t recall off the top of my head, are they in the cost of goods sold or SG&A?

SG&A.

They’re all in SG&A. When I adjust for your unusual costs last year, your gross margin was about 25%, well down from the historical peaks, could you give me some color, I know you don’t want to talk specific numbers to any great extent but could you give me some color on how you look at that in terms of that decline in terms of capacity utilization, product mix and pricing?

I am trying to, what will it take to get back, without maybe forecast for this year, and next year but what will it take for you to get back to more reasonable gross margin levels?

Arnie, that’s a difficult question to answer. I’ll start and see if Jon has any additional comments, but if you recall, when we were higher levels, we were up in $320 million in sales and numbers of that sort and that was some time ago but obviously we continue to work to improve our gross margin.

There are parts of the business that are very difficult to improve. And there are others where you have better gross margins and we continue to try and find those areas and grow in those areas that allow us to have a higher gross margin and we’ll continue to do that.

Certainly we’re not content with the 25% gross margin relative where we used to be. So I think it’s important to understand that and we without trying to predict anything in the future that’s certainly one of our objectives.

Well let me try to rephrase the question. Assuming your sales got back to I think the peak was $330 million, but maybe $320 million, $330 million just assuming that, without trying to make a forecast for what year, if your sales did get back to that, would that capacity utilization be enough to get you back to your peak gross margins or has the industry fundamentals changed in terms of raw material and pricing and product mix and what have you?

Arnie, I would say that the select segments of the business would achieve the gross margins that they probably would have achieved at the peak. However our mix probably would work against us.

So I would say it would be difficult to break through that 30% range, but I would certainly expect it to improve beyond where we are today as we fulfill capacity.

I think what Jon says there is accurate. Interestingly enough in those days, our average selling price per square yard as a company was about $20 and today it’s about $20.

Don’t you have higher raw material cost today than back at that point?

I think we probably do, yes.

So the higher [ph] income?

I know we have higher medical costs.

So there has been some change there that, unless pricing recovery is a little bit more, would prevent you from getting back to the old gross margin level?

I would say…

Pricing the same when raw material costs are up, but then your gross margin level would not be sustainable unless…

Well but you’re looking at in totality and as Jon just pointed out there are certain segments of the business where we had, if we had the capacity -- if we had the same capacity utilization we'd have the same margins we had in those days.

We have actually held our prices well as an industry, we've passed price increases along I think the industry is fairly disciplined. I think what has happened is our mix between our different segments has tended towards more volume orientation and therefore lower margins as a percentage of our total mix.

We have Dixie Home in there which has all - I would assume a lower margin.

And it is the larger percentage of the business. But at the same time, we have done things such as grow the wool business which has much better margins, but it hasn’t grown as fast as say the Dixie Home segment has.

So we’ve tried to grow all segments but they have not all grown uniformly.

Thank you, Joyce, and thank you all for being with us today. We are certainly looking at 2013 as a year of opportunity in significant top line growth, and again to improve obviously from an operating total profit standpoint.

Thank you and see you next quarter.