The Dixie Group, Inc. (NASDAQ:DXYN) Q2 2024 Earnings Call Transcript

The Dixie Group, Inc. (NASDAQ:DXYN) Q2 2024 Earnings Call Transcript August 11, 2024

Dan Frierson: I would like to welcome everyone to our Second Quarter Conference Call. I have with me Allen Danzey, our CFO, who will be participating. Our Safe Harbor statement is included by reference to our website and our press release. The good news from our second quarter is that we returned to profitability in a very challenging business environment. I’d like to go through some of the highlights of the quarter before Allen goes into more detail on our financial results. Net sales in the second quarter of 2024 were $70.5 million compared to $74 million in the same period of the prior year, down approximately 4.7%. Despite that, the gross profit margin for the three months of the second quarter was 28.1% of net sales, compared to 26.7% in the second quarter of 2023.

Operating income in the second quarter of 2024 was $2.3 million, compared to $300,000 in the second quarter of the prior year. The company had a net income from continuing operations of $700,000 in the second quarter of 2024, compared to a net loss of $1.6 million in the same period of the prior year. Subsequent to quarter-end, the company completed a 10-year sublease agreement to lease out all the available warehouse space in our Saraland, Alabama facility. The company will recognize an annual amount of approximately $1.8 million in other income over the term of the lease. High interest rates affecting the housing and home remodeling market, and the impact on the economy from continued inflation, continue to negatively impact the industry.

Our net sales from soft surfaces during the quarter were less than 1% below the prior year, while the industry, we believe, was down approximately 5%. We saw favorable margins in the second quarter as a result of the consolidation of our manufacturing operations on the East Coast and other cost-saving initiatives, which we will be discussing in more detail. At this time, I’d like to turn the meeting over to Allen to review our financial results.

Allen Danzey: Thank you, Dan. Our net sales in the second quarter were down 4.7% from the prior year and are down 3.8% on a year-to-date basis. The higher interest rates and inflationary concerns have impacted our consumers’ decision-making, which has delayed decisions around large discretionary spending, including home purchasing and remodeling, which are drivers for our business. Although year-over-year sales were lower in the second quarter, gross profit margins did improve to 28.1% of net sales, compared to 26.7% in the same quarter of the prior year. This improved gross profit margin in 2024 is a reflection of the positive results of our cost reductions throughout the company, our facility consolidation on the East Coast, and savings from the successful start-up of our extrusion operations.

For the year-to-date, gross margins were 26.2%, compared to 26.7% in the prior year. The year-to-date 2024 margins were unfavorably impacted by seasonally lower production volumes in our manufacturing plants in the earlier part of the first quarter. Production volume was higher from March forward, and the gross margin returned to a level exceeding the prior year and in line with our expectations. Selling and administrative expenses for the second quarter and year-to-date June of 2024 were lower in dollars and as a percentage of net sales when compared to the prior year. This was the result of cost-cutting initiatives, particularly in our samples and administrative areas. Our interest expense in the quarter was $1.6 million compared to $1.8 million in 2023.

For the year-to-date, we had $3.1 million in interest expense in 2024, compared to $3.7 million in the prior year. This decrease in interest expense is being driven by the reduction in debt in the current year. Despite the lower year-over-year sales, the net income in the second quarter of 2024 was $603,000, compared to a net loss of $1.7 million in the same period of 2023. For the year, we have a net loss of $1.9 million, compared to a net loss in the prior year of $3.5 million. Again, this improvement in our income is a result of the higher margins primarily related to the consolidation of the manufacturing operations on the East Coast, savings from extrusion operations, and other year-over-year cost-cutting initiatives. Turning to our balance sheet, our quarter-end receivables increased by $4.3 million from the prior year-end balance.

The increase was driven by higher billings to customers during the last month of the current period as compared to the seasonally lower December time frame. Our inventory was in line with prior year-end balance. We will continue to closely manage the inventory levels in line with demand, while continuing to remain focused on maintaining timely service to our customers. Accounts payable and accrued expenses were above prior year-end by $6.2 million primarily due to raw material orders online with a higher midyear sales activity as compared to the prior year-end. Net property plant and equipment increased by $4.7 million from year-end. This increase included cash purchases of $1.4 million and prior-year deposits moved to property plant and equipment in the amount of $6.5 million.

These additions to PP&E were offset by approximately $3.3 million in depreciation. Our debt increased by $3.4 million from the end of 2023 and that was mainly driven by investments in samples and other costs associated with our product introductions in the first part of the year. At quarter end, our unused borrowing availability under the revolving credit facility was $14 million. Our investor presentation is available on our website at www.dixiegroup.com. Dan?

Dan Frierson: Thank you, Allen. Our extrusion facility, which started up in late first quarter of this year operated exceptionally well throughout the second quarter. This facility is providing cost reductions in nylon fiber and a continuous supply of fiber to meet our needs and help us serve our customers. This fiber is being used in many of our new carpet styles this year. We’re focused on extruding white dyeable nylon, which is used in our long beautiful color lines through all of our carpet brands. During the quarter, we launched our Step Into Color campaign with in-store marketing materials and a digital presence as well. This campaign connects our retail customers, designers and consumers with a world of color options.

This includes custom color, which is now available in all brands and is a great option for the customer who is looking for that perfect hue of a particular color. In a residential market, which continues to move toward offering a sea of sameness that is solution-dyed polyester, we’re setting ourselves apart with beautiful timely color offerings. We have launched 18 new carpet styles in the second quarter of 2024 including six new DuraSilk solution dyed polyester styles in our DH Floors line and 11 new decorative styles in our 1866 and Decor offerings. We also launched six new collections with 38 SKUs as updates to our hard surface programs. These included SPC Tile Looks, high-end WPC and high-end engineered wood in our Fabrica program. These launches complete our new product launches for 2024.

We did a very good job this year in getting products launched early and our new products are already generating meaningful volume. And when it comes to products, we’re not taking our foot off the gas as our design teams are already busy putting together new products for 2025. On the digital marketing front, we continued our partnerships with broadloom and room build. As a result, we are seeing increased lead generations, sample ordering from our website and product visualization online. This is promising as today’s flooring consumers are very much engaged in the digital space and serving the customer where they are is critical. Our premier Flooring Center retail program continues to show tremendous promise. After outpacing the market by a wide margin in 2023, we have seen the results improve even more in 2024 with strong growth for the second quarter and first half.

Our investment in samples merchandising and training in these stores is paying dividends with increased business and share gain. We’re excited to see where we can take the PFC concept in the future. Our improved margins are a result of our cost-reduction program starting in 2023 of $35 million and our cost reduction this year of some $10 million to $12 million. We have also already begun a cost reduction plan for next year. These plans have enabled us to better manage the controllable aspects of our business. In addition, we have continued to manage our working capital to improve cash flow and we’ll continue to minimize capital expenditures until business conditions improve. When interest rates begin to decline, the industry will begin to improve.

We feel our business is closely tied to existing home sales and mortgage rates. Existing home sales have gone from over six million units to below four million, the lowest since 1995 when there were far fewer homes. As business conditions improve, we think existing home sales will improve and revert to the mean. We do not expect third quarter to show improvement. I think interest rates should decline later this year or early next year. Third quarter to date continues to lag last year with soft surface which is down slightly performing better than hard surface for us. We’re excited about the leasing out of our entire Saraland facility and the impact it will have on our company’s income and cash flow over the 10-year period. We do have additional space of over 400,000 square feet that we will be attempting to lease out in the future.

Again, the good news is that we have returned to profitability in a very challenging and business environment. At this time, we’ll open the meeting to questions.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Mike Hughes with SGF Capital. Please proceed with your question.

Mike Hughes: Good morning. Thanks for taking my questions. First one, you said in the press release and I think in your commentary that the new product launches are complete for 2024. Will that have an impact on the SG&A in the back half? I think maybe you run sampling costs through SG&A. Would that step down in the third and fourth quarter?

Allen Danzey: From an expense standpoint, we do spread the cost of our sampling activities in line with sales in the year of introduction. So it is to some degree level — so the expenses will not be as greatly impacted, but it will be a positive to our cash flow as we pay for that investment heavily weighted to the first half of the year.

Mike Hughes: Okay. And then the $10 million in cost savings how much have you achieved at this point? And then secondarily, you alluded to another cost savings program for next year. Would it be of equal magnitude or is it really too early to say?

Dan Frierson: Let me respond and then I’ll ask Allen to respond also. Of the $10 million to $12 million reduction this year, I would say we were about 40% — 35% to 40% in the first half and the remainder in the last half of the year. In terms of the plan for next year, we are just beginning that plan. It is not the same magnitude. Right now, we are at about half the level of the reduction for this year.

Allen Danzey: Yeah. And I would agree with that as we do expect to be able to achieve the savings that we have discussed for this year, as the year plays out, the extrusion operations which started in the February time frame are contributing now will continue to contribute going forward. We continue to look next year and on for additional cost savings and we’ll update on that as we can.

Mike Hughes: Okay. And then the gross margins this quarter at a little over 28% were impressive. Was there anything onetime in nature in that number that would make that unsustainable? I know it’s going to vary with the level of revenue. But if you were to repeat this level of revenue would that be the number on a go-forward basis?

Allen Danzey: Yeah. We do — there’s always onetime things going both directions every period, but there was nothing of any significant magnitude during the quarter. We feel like these are sustainable margins at the volume that we are at reflecting again cost savings throughout the company, particularly on the East Coast as we’ve consolidated manufacturing operations which made available space that we’re also able to take advantage of our leasing out.

Mike Hughes: Okay. And then the hard surfaces business, I think your commentary about soft services would imply that hard surfaces was down maybe 15% to 20%. Number one is that correct? And if it is can you just comment on that?

Dan Frierson: Yes, that is correct. Of course hard surface is less than 20% of our total business. So, obviously our soft surface being down slightly is a positive for us and we are gaining market share on the soft surface side. We don’t have good data on the hard surface side to know exactly what the market is down. We do on the soft surface side. But yes, our hard surface business was down in the 15% to 20% range for the quarter.

Mike Hughes: Okay. And then on the $1.8 million in sublease income, is that all incremental? And would you just straight line that we’ll start to see $450,000 a quarter in other income?

Allen Danzey: It is straight line. It’s incremental except to the point that we do have 200,000 square feet of the space in Saraland are already under lease at a similar lease rate. This is replacing that taking the full place of that. So, it’s incremental, but we already have about $1 million just under $1 million of current lease revenue. So, the $800,000 additional would be incremental.

Mike Hughes: Okay. And the additional space you’re looking to lease out what’s the level of interest at this point?

Allen Danzey: We’re not able to say at this point. We focused most of our efforts on the Saraland facility because of the market ability that we have in that area. We are shifting our focus now to the other available space that we have also been working to clean out to make available to lease. So, we’re early in the stage of that but excited about the opportunity to focus on it and see if we can get some return. We do not expect the rates to be as high as when we were able to get in the Saraland market but certainly a great opportunity for us and we look forward to working on that.

Mike Hughes: Okay. And last — I’m sorry last question for you. What do you expect the cash CapEx to be in the back half of the year?

Allen Danzey: In total, we expect to be in the 9.2 or 9.4 range which includes a on the CapEx for the back half. We are in $1 million to $1.5 million range looking at just general maintenance projects. As Dan mentioned earlier, we’re looking at our CapEx over the upcoming periods to maintain at low levels waiting on business to improve and facing our decision around operations.

Mike Hughes: Okay. So, did the first half include CapEx for the extrusion projects? Is that why that number is a little bit elevated?

Allen Danzey: Yes. We’ve recognized the CapEx of the extrusion equipment in the first quarter. But again the cash portion of that was most heavily spent in deposits in the prior years. So, it was not a cash commitment this year as much as it was just recognizing the capital on our books.

Dan Frierson: So, the cash portion for this year was in the first quarter.

Allen Danzey: Yes.

Mike Hughes: Okay. Thank you very much. That’s all I had.

Dan Frierson: Thank you for your questions Mike.

Operator: With no further questions in the queue, I will now turn the call back over to Dan Frierson.

Dan Frierson: Thank you very much. We appreciate everybody being with us this quarter. Again we are pleased to be returning to profitability in a very difficult business environment and looking forward to hopefully, lower interest rates in the future, which we think will have a major impact on our industry. Thank you.