The Dixie Group, Inc. (NASDAQ:DXYN) Q1 2023 Earnings Call Transcript May 5, 2023

Daniel Frierson: Welcome everybody to our first quarter conference call. I have with me Allen Danzey, our CFO who will also be participating. As a reminder, our Safe Harbor statement is included by reference both to our website and the press release. The company had net sales of approximately $67 million as compared to $77.5 million in the same quarter of last year. Operating income was $300,000 compared to a loss of $2,247,000 in the first quarter of 2022. The operating income in 2023 included expenses totaling $1,050,000 related to facility consolidations. Our results from the first quarter reflected the positive impact of the restructuring efforts we initiated in 2022. Although, net sales in the first quarter of 2023 were 14% below the same period in the prior year, we had strong gross margins driven by more efficient operations from our manufacturing plants during the quarter.

A significant factor in the year-over-year sales decline was a loss of volume in the mass merchant channel with low strategy shifting toward lower price points. Excluding our mass merchant sales net sales were down 7% from the prior year. The decline in year-over-year sales was primarily the result of high inflation and increased interest rates impacting consumer confidence and demand in the first quarter. At this time, Allen if you would review our financial results, I would appreciate.

Allen Danzey: All right. Thank you, Dan. As Dan just mentioned, net sales in the first quarter of 2023 were $67.1 million comparing against $77.6 million in the first quarter of the prior year. Also as Dan was talking about our first quarter 2023 gross margins were significantly improved over 2022 as a result of our restructuring and facility consolidation efforts that we began in 2022 and continued into the first quarter of 2023. The gross margin in the first quarter was 26.6% of net sales compared to 19.6% in the first quarter of 2022. The low margins in the first quarter of 2022 were the result of extraordinarily high pricing from our former primary raw material provider as a result of their exit from the business. The prior year quarter was also impacted by very high ocean freight rates on imported containers.

At the end of 2022, we had changed our raw material fibers over to multiple suppliers at lower cost points. And ocean freight rates have returned to normal levels. We also saw favorable operating results from our manufacturing facilities in the first quarter of 2023 as we completed our facility consolidation plan. The selling and administrative expenses in the first quarter were $1 million lower than the same period in the prior year, but higher as a percent of net sales due to lower sales volume in the first quarter of 2023. We incurred just over $1 million in expense for facility consolidation during the first quarter of 2023. This expense primarily related to facility closure costs and severance payments. Our operating income inclusive of the facility consolidation expenses was $306,000 compared to $2.2 million operating loss in the first quarter of 2022.

Interest expense in the first quarter was $1.9 million compared to $1.1 million in the first quarter of 2022. This increased interest expense was driven by increased borrowings on our senior line of credit and higher interest rates in the current period. Our net loss in the quarter was $1.8 million compared to a net loss in the same period from the prior year of $3.4 million. Turning over to our balance sheet. Our receivables increased by $5 million from the prior year end balance. The increase was driven by the higher competitive sales volume during the last month with the respective periods. Inventory volume was down from prior year end balance, but the decrease in volume was offset by increased costs leaving our net sales and our net inventory values relatively flat over the two periods.

Our accounts payable was up over prior year end by $2.7 million primarily due to increased spending related to higher anticipated sales plan going into the seasonally stronger second quarter. Capital expenditures for the year were $359,000 and are planned at $3 million for the year with depreciation on the year being estimated at $6.2 million. Our debt increased by $4.7 million during the quarter driven by the cost of operations during the first quarter tied to seasonally low sales volume, high activity-related samples for new products and the cost of facility consolidations. Our borrowing availability at quarter end was $13.5 million and current availability is at $14.6 million. Our investor presentation is available on our website at www.thedixiegroup.com.

Dan?

Daniel Frierson: Thank you, Allen. Although the industry is experiencing a difficult environment we’ve been able to improve our performance relative to the industry. Our sales to our residential retail customers in the first quarter were down 7% and we believe the industry was down at least double that percent. Our Masland brand displayed strong performance with self-surface sales flat with the previous year. In the hard surface category, our engineered wood products had strong growth during the quarter. The good news is that we were able through our restructuring and cost reduction efforts to convert the sales into higher margin results. Our gross margin as Allen pointed out, the first quarter was 26.6% or seven percentage points higher than the same quarter, a year ago and 9% higher than our results for the full year of 2022.

The improvement was a direct result of our restructuring and cost reductions. The restructuring meant closing the yarn and carpet manufacturing at our Atmore Alabama plant, and moving the production to our Roanoke Alabama yarn plant and Eton Georgia carpet, manufacturing facility. This meant we moved production from a higher cost facility, to two lower-cost facilities and added additional production to those facilities. Our cost reduction plan included a 25% reduction in people company-wide, and numerous other internal cost reductions as well as reductions of raw materials, freight and energy costs. Our total plan should reduce cost this year in excess of $35 million. During the first quarter, the cost reductions were in excess of $6 million.

During the first quarter, we celebrated the 20th anniversary of Dixie Home and created a fresh new look for the brand, with a new logo and a subtle shift to the brand — of the brand to DH Floors. Within DH Floors, we began our launch of the Elements Collection, made with Durasilk, solution dyed polyester staying true to the DH Floors brand promise, of affordable fashion. In our higher-end brands, we launched 21 new styles to kick off the second year of our decorative segment. This includes eight new styles in Décor by Fabrica, and seven in 1866 by Masland, and six in our new 1866 All Seasons Collection. We have an additional 21 new decorative styles to be launched during second and third quarter this year. In our traditional soft surface categories for Masland and Fabrica, we continued our development of the EnVision Nylon and EnVision Solution Dyed Pet Solutions product lines, with two new styles in the first quarter and seven additional styles to be launched in the coming months.

In our hard surface segment, we expanded our distribution of key collections, which were launched into the market late last year. This includes our Boardwalk collection, which features lighter colors, clean visuals and a new rolled-edge bevel, for an authentic wood look. During the first quarter, we launched an innovative product TRUCOR Refined, which combines a melamine finished top layer, with a mineral fiber core that is impervious to water or moisture. Because business activity levels during the first quarter were lower than last year, we did not build inventory at — inventory as we normally would. This meant, we ran our manufacturing at lower levels than normal. As we enter second quarter, our order entry is running 14% above first quarter.

So our facilities will be operating on a more normal schedule. This higher order entry level, reflects our normal seasonality of the business as well as the impact of many new products hitting the retail floor earlier than last year. We continue adapting our strategies to a more challenging environment, as we continue improving operations, while investing for the future through our three growth initiatives. First, we expect — we continue to expand our hard surface offering, with a great variety of — greater variety of wood and LVT products and have added to our Elements Collection. Our hard surface products now represent 20% of our sales. Secondly, we continue adding additional products to our new decorative collections and have added the new All Seasons offering.

Our decorative products have been extremely well received and gaining sales momentum in the marketplace. Our last initiative is to develop nylon style polyester products that reached the price points, that had been vacated by nylon products. This program is gaining traction in the market, and will allow us to offer a broader array of products representing affordable fashion. All of these initiatives are enabling us to gain market share, with our residential retail customers by offering beautiful, stylish, quality products through our selective distribution. We create an environment where our retail customers can please their customer and simultaneously generate additional gross margin dollars. At this time, we would be happy to answer questions.

Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session Our first question comes from the line of Mike Hughes with SGF Capital. Please proceed with your question.

Mike Hughes: Thanks for taking my questions. Just the first one I think you said you realized $6 million in savings in the first quarter, which I assume that would annualize to $24 million and the goal is $35 million. First question on that. What’s the pacing on that incremental $11 million? Will it be all in the second quarter, or will it take the balance of the year? And where will those savings come from principally?

Daniel Frierson: Well, let me start with the latter part of your question. It’s principally coming from 25% reduction in people in our company and that will be throughout the year. Some of the other savings like raw material and freight are tied to volume. And as the volume increases — and first quarter tends to be our lowest volume quarter. So, as the volume increases and we achieve additional cost savings, those savings should be greater in the second, third, and fourth quarter.

Mike Hughes: Okay. And then I thought your gross margins in the quarter were very good. I think they were the second highest in the last five years. And they were weighed down a little bit from overhead cost absorption issue in the quarter. Is that correct?

Daniel Frierson: We certainly will run our plants at higher levels in the second quarter than we did in the first. If that is what you’re asking.

Mike Hughes: Okay. Okay. And then will there be additional restructuring charges or other charges in the June quarter?

Allen Danzey: In the second quarter as we’ll be releasing our Q here late today or early tomorrow with our restructuring expenses, but we have a residual balance estimated $300,000 to $500,000 just remaining maintenance cleanup of our existing facilities as well as some residual severance costs that will be running through our second quarter results again is an estimate.

Mike Hughes: Okay. And what do the gross margins look like on the hard surface business at this point?

Daniel Frierson: We do not separate the results for our different product categories and therefore, can’t respond to that directly. But obviously with the income, we import a lot of our hard surface from the Far East and it’s very obvious with the freight rates — ocean freight rates down dramatically. They’re certainly a lot better than a year ago.

Mike Hughes: Okay. And then just last question on liquidity. Do you think you’ll generate operating cash flow in the current quarter from AR inventory drawdowns?

Allen Danzey: We will not project anything I guess as far as the forward-looking statement in that regard. As I mentioned the our availability borrowing availability at the end of the quarter was $13.5 billion whereas it is $14.6 million now. So, that’s certainly indicative of improved operations. And results coming from a stronger quarter as Dan mentioned with order activity coming in. So, as you would expect with that activity it’s certainly a positive for us but wouldn’t do any projections of that matter.

Mike Hughes: Okay. Makes sense. And then just a follow-up on that. Your next major debt maturity is 2025. Is that right?

Allen Danzey: Yes, our renewal on our senior credit facility will be in 2025.

Mike Hughes: Okay, great. Thank you very much for your time.

Daniel Frierson: Thank you.

Allen Danzey: Thank you, Mike.

Operator: There are no further questions in the queue. I’d like to hand the call back to Dan Frierson for closing remarks.

Daniel Frierson: Thank you. We appreciate all of you being with us this quarter and we look forward to speaking with you again next quarter. Thank you.