The Dixie Group, Inc. (NASDAQ:DXYN) Q2 2023 Earnings Call Transcript

The Dixie Group, Inc. (NASDAQ:DXYN) Q2 2023 Earnings Call Transcript August 4, 2023

Operator: Good day, and welcome to The Dixie Group, Inc. 2023 Second Quarter Earnings Conference Call. Today’s call 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.

Daniel Frierson: Thank you, Priscilla, and welcome, everyone. I have with me Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by included by reference to both our website and press release. For the second quarter of 2023, our net sales were approximately $74 million as compared to $83.7 million in the same quarter of 2022. Operating income was $253,000 compared to a loss of $2.9 million in the second quarter of the prior year. The highlight of the quarter was the improvement in our gross margin. The housing market remains under pressure due to limited supply, high interest rates and continued inflation. Consequently, the residential flooring market remains weak as a result of lower home sales and deferred home improvement projects.

For the second quarter, we believe the carpet market was down in the mid-teens, with multifamily and new housing stronger than the residential replacement segment where we mostly play. We do believe we gained market share in our core business. At this time, I would ask Allen to review our financial results for the quarter. Allen?

Allen Danzey: Thank you, Dan. As Dan just mentioned, net sales in the second quarter for the 3 months of 2023 were $74 million compared to $83.7 million in the same period in the prior year. For the 6 months ended July 1, 2023, our net sales were $141.1 million compared to $161.3 million in the prior year period. The decrease in sales was partially attributable to a loss of volume in our mass merchant channel due to the shift in strategy by our largest mass merchant customer to lower price point offerings last year. Net sales were also unfavorably impacted by higher interest rates and inflationary concerns impacting consumer confidence, and that was reflected in lower home remodeling activity. Our gross margin through the first half of 2023 significantly improved over 2022 as a result of our restructuring and facility consolidation efforts that we began in 2022 and continued into the first half of ’23.

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Gross margins in the second quarter and year-to-date ’23 were 26.7% of net sales, and that compares to margins in the prior year in the low 19% range. The low margins in the first half of 2022 were the result of exorbitantly high pricing from our former primary raw material provider, which was tied to their exit from the business. The prior year was also impacted by very high ocean freight rates on imported containers. And by the end of 2022, we had changed our raw material providers over to multiple suppliers and lower cost points, and ocean freight rates have returned to more normal levels. We also saw favorable operating results from our manufacturing facilities throughout the first half of 2023 as we completed our facility consolidation plan.

The selling and administrative expenses in the first half of ’23 were lower in dollars than the same period in the prior year, but was higher as a percent of net sales due to lower sales volume in ’23, as selling expenses are primarily driven by samples and marketing activity and investment in our new product offerings. We incurred $719,000 in expense for facility consolidation during the second quarter of ’23. This expense primarily related to facility closure and maintenance costs. Our operating income, inclusive of the facility consolidation expense was $253,000 compared to a $2.9 million operating loss in the second quarter of ’22. For the first 6 months of ’23, there’s an operating income of $560,000, compared to a loss of $5.2 million in the same period of ’22.

Interest expense on the quarter was $1.8 million compared to $1.1 million in the second quarter of ’22. For the 6 months ended July 1, interest expense was $3.7 million compared to $2.2 million in the prior year. 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 $1.7 million compared to a net loss in the same period of the prior year of $4.5 million. On the year-to-date, we are at a net loss of $3.5 million compared to a loss of $7.8 million in the prior year. Looking at our balance sheet. Receivables increased by $4.5 million from the prior year-end balance. That was driven by higher comparative sales volume during the later periods of the respective timeframes.

As a result of decreased costs and planned reduction in volume, our inventory was down from the prior year-end balance by $4.5 million. Accounts payable and accrued expenses were up from the prior year-end balance by $6.2 million, this primarily due to timing and increased spending related to higher anticipated sales volume going into the stronger third quarter. Capital expenditures for the quarter totaled $238,000, and has brought our year-to-date to $597,000. Total capital expenditures are planned at $3 million for the year and depreciation is estimated to be $6.2 million. Our debt decreased by $7.8 million from the first quarter of 2023 driven by operations, decreased inventory and the timing of lower cost of expense payments, partly offset by high activity related to our samples and new product introductions and the cost of facility consolidations.

We have reduced the debt balance by $3.1 million from our 2022 year-end. Our borrowing availability at quarter end was $19.8 million. Our investor presentation is available on our website at www.dixiegroup.com. Dan?

Daniel Frierson: Thank you, Allen. Our second quarter results continued to show the positive impact of actions we have taken over the last year as well as the decreases we are experiencing in raw material costs. Our facility consolidations have better aligned demand and capacity, and our headcount reductions throughout the company have lowered our fixed costs, and we have experienced operational improvements in our manufacturing facilities. We are still on track to reduce total costs this year by over $35 million. A significant factor in the year-over-year sales decline was a loss of volume in the mass merchant channel due to our customer’s change in strategy. Excluding mass merchant sales, net sales were down 9.1% for the quarter.

Despite the issues in the marketplace, we have continued to invest for the future. We have invested heavily in the hard surface market and in the decorative arena, with many new products and displays, in addition to our normal annual product introductions. For this reason, we have experienced much higher selling and marketing expenses than we would in normal times. In the second quarter, we launched 11 new products in our synthetic soft surface brands. This included 4 new styles in our DH Floors collection made with the DuraSilk solution-dyed polyester. In our decorative brands, we have continued executing our growth strategy with 23 new introductions, including 9 additions to our new 1866 All Seasons Collection. We have added additional hard surface items with our new Bravo and TYMBR Select collections.

We’re excited about the continued expansion of our digital capability through our partnership with Broadlume. This program provides an excellent consumer experience, including integration with retailer websites, personalized online product visualization and easy online sample ordering. The flooring industry is experiencing a cyclical downturn like we have had in the past. Too early to determine when the economic situation will change. But at some point, it will, and the industry will experience a rebound and grow. To prepare for this, we have taken actions, prepared by cutting costs, improving operations, investing in new, beautiful product and improving the customer experience. As a result, our selling costs have been a greater percentage of sales than we would expect during normal market conditions.

With improved margins and more efficient operations and lower SG&A costs, we will be in a position to improve market share and profitability in the future. Hopefully, we’re at the bottom of the cycle. As we noted in our press release, for the first time this year, order entry for the month of July was slightly ahead of the year ago period. We believe the impact of more new product launches will also add to this momentum. At this time, we will open up the call to questions.

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Q&A Session

Operator: [Operator Instructions]. And our first question comes from Mike Hughes with SGF Capital.

Michael Hughes: You touched on the step-up in SG&A. I think it was up a little over $2.5 million sequentially. What’s a normalized number? It was $19 million in the June quarter, assuming the same level of revenue, does that number step back down into the 16s? What does that look like going forward?

Allen Danzey: Yes. We are continuing to invest in our introductions, particularly around our new decorative product lines, as Dan mentioned, some of the new products that were coming out and also in the hard surface, which is a growth area for us. So we’re still expensing at a high level. The effect in opportunity for sales growth is in future periods, but we do expect, as you mentioned, that the cost in next year and going forward will be coming back down to more normalized levels in the $17 million range.

Michael Hughes: Okay. So it will be a few quarters from now until it normalizes to the lower level?

Allen Danzey: Yes, yes. This year is continuing the investment in some significant growth opportunities that we’ve identified.

Daniel Frierson: But we would expect it to be several percentage points lower as a percent of sales.

Michael Hughes: Okay. And then can you just speak to — you said that order entry was slightly higher in the month of July. How did the second quarter play out by month, did it strengthen throughout the quarter? Maybe just the cadence of the new product introductions were — most of them late in the quarter?

Daniel Frierson: The — March was the period with the worst comparison to the year ago period. It improved in April. It improved in May. It improved in June and then improved again in July. .

Michael Hughes: Okay. Terrific. Then the LIFO reserve, are you in a position over the next few quarters where we might actually see a release of that number?

Allen Danzey: Yes, Mike, it’s is a complicated calculation as we go through this. But based upon what we’re seeing, we’re anticipating lower overall manufacturing volume in 2023 as we’re continuing to plan or do a planned reduction in our inventory levels. And ordinarily, that would drive the values up based on higher absorption of fixed costs. But our facility consolidation plan has resulted in improved efficiencies in our plants, which is more than offsetting the volume at this time, and we’re seeing lower raw material costs coming through the first half of the year. So our projection on the LIFO reserve is that it will decrease through the year as we continue to see these favorable results and lower costs.

Michael Hughes: Okay. And then — do you expect to be operating cash flow positive in the second half?

Allen Danzey: Yes. We believe that — with our projections in expenses, I mean, we don’t want to forecast anything strongly, but we are encouraged by our results and expect to continue to operate well throughout the year. Watching volume, watching the economy and demand, but we’re feeling pretty positive based on our first half results.

Michael Hughes: Okay. And then last question for you. The Georgia property that you’re going to sell, I guess, there are other interested parties. Can you give us any color, maybe the timing on that? And then is that property unencumbered at this point? Or is there a mortgage on it?

Allen Danzey: We are looking at multiple opportunities. One property does have a mortgage against it, which will be part of the negotiations and the process. But at this time, we are continuing to work with potential buyers and multiple opportunities. And there’s — I would not give any projection or anything as we continue to have some conversations.

Operator: Our next question comes from Chris Riemenschneider with Morgan Stanley.

Chris Riemenschneider: You answered one question regarding the distribution consolidation. The other question I had would be, you mentioned that you do believe that you gained market share. How do you quantify that? How are you measuring that? Can you be a little more specific on that? What is our market share?

Daniel Frierson: Well, the way we measure that, we have — I was referring to the soft surface market only because that’s the market that we have the best data for. Through our industry organization, we receive data on quarterly sales, and that’s what I was basing that on.

Operator: With no further questions in the queue, I will turn the call back to Dan Frierson for any closing or additional remarks. Please go ahead.

Daniel Frierson: Priscilla, thank you very much. Thank all of you for being on the call. We appreciate your interest and look forward to speaking with you again at the end of the third quarter. Thank you.

Operator: Ladies and gentlemen, that does concludes today’s conference. Thank you again for your participation, and have a great day.