The Dixie Group Inc. Q1 2023 Earnings Call

[music].

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.

Thank you, Doug and welcome everybody to our first quarter conference call.

I have with me Alan Tse, 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.

Compared to 77, and a half million in the same quarter of last.

Last year operating income was 300000 compared to a loss of 2.247 million in the first quarter of 'twenty two.

Operating income come in 2023 included expenses totally.

A million $50000 related to facility consolidation.

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 'twenty three were 14% below the same period in the prior year.

Strong gross margins driven by more efficient operations for our manufacturing plants during the quarter.

A significant significant factor in the year over year sales decline was a loss of volume in the mass merchant channel with low strategy shifting towards 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.

Packaging consumer confidence and demand in the first quarter.

At this time.

Alan If you would review our financial results I would appreciate it alright.

Alright, Thank you Dan Dan just mentioned.

In the first quarter of 2023, we're at $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 'twenty three.

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 was a result of Exorbitantly high pricing from our four 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 important containers.

Into 2022, we had changed our raw material fibers over the multiple suppliers at lower cost points and ocean freight rates have returned to normal levels.

That's a favorable operating results from our manufacturing facilities in the first quarter of 2023, as we completed our facilities consolidation plan.

Selling and administrative expenses in the first quarter were $1 million lower than the same period of the prior year, but higher as a percent of net sales due to the lower sales volume in the first quarter of 'twenty three.

We incurred just over $1 billion of 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 306000 compared to $2 $2 million operating loss in the first quarter of 'twenty two.

Interest expense in the first quarter was $1.9 million compared to $1 1 million in the first quarter of 'twenty two.

Increased interest expense was driven by increased borrowings on our senior line of credit and higher interest rates in the current period.

Yeah.

Our net loss on the quarter was $1 8 million compared to a net loss in the same period from the prior year.

$3 4 million.

Turning over to our balance sheet, our receivables increased by $5 million from the prior year imbalance. The increase was driven by the higher comparative sales volume during the last month of 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 in our net inventory value is relatively flat over two periods.

Our accounts payable was up over prior year and $2 7 million, primarily due to increased spending related to higher anticipated sales volume going into the seasonally stronger second quarter.

Capital expenditures for the year were 359000, and our plan to $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 kind of the seasonally low sales volume.

Activity related to samples for new products and the cost of the facility consolidations.

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 Dot Dixie group [laughter] Dan.

Thank you Alan although the industry has experienced 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 Maslin brand displayed strong performance with soft 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.

Through our restructuring and cost reduction efforts to convert to sales in the higher margin results. Our gross margin as Alan pointed out in 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 the closing the yarn and carpet manufacturing at our Atmore, Alabama plant.

And moving the production to our.

Roanoke, Alabama yarn plant in Utah, and Georgia carpet manufacturing facility.

This meant we move production from our higher cost facility to 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 of 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 after brand DH floors.

Within DH Force, we began our launch of the elements collection made with Duracell solution dyed polyester staying true to the DH, Florida brand promise of affordable fashion.

And our higher end brands, we launched 21, new styles to kick off the second year of our decorative sac.

This includes eight new styles and decor by Fab breaker, seven and 18 66 by Massillon.

<unk> and our new 18 66, all seasons collection.

We have an additional 21, new deck yourselves to be lost during second and third quarter. This year.

And our traditional soft surface categories for Massillon and fab breaker, we continued our development of the envision nylon and envision solution pest solutions product plant.

With two new styles in the first quarter and seven additional styles to be lost in the coming months.

And 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 plain visuals in her new role <unk> Bell for an authentic look.

During the first quarter, we lost an innovative product true core fad, which combines the melamine finished top layer with our mineral fiber core that is in pervious 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 core 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 the 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 in L. V. P products and have added to our Atlanta collection.

Our hard surface products now represent 20% of our.

Our sales.

Secondly, we continue adding additional products to our new decorative collections and have added the new all seasons offer.

Our decorative products had been extremely well received and gaining sales momentum in the marketplace. Our last initiative is to develop highly style polyester products that reached the price points that had been vacated by now on products. This program is gaining traction in the market and will allow.

As 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.

Offering beautiful stylish quality products through our selective distribution.

We create an environment, where our retail customers can pleased their customer and simultaneously generate additional gross margin dollars.

At this time, we would be happy to answer questions.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

If you'd like to ask a question you May press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star gate.

Our first question comes from the line of Mike Hughes with <unk>. That's G. F capital. Please proceed with your question.

Thanks for taking my questions are just just the first one I think you said you realized $6 million in savings in the first quarter, which I assume that that would annualize to 24 million and the goal is 35 billion. A first question on that what's the pacing on that incremental $11 million or will it be all.

In the second quarter or will it take for the balance of the year and where will those savings savings come from principally.

Well, let me start with the latter part of your question is principally coming from 25% reduction in people in our company and that will be throughout the year.

Uh huh.

Some of the other savings like raw material and freight are tied to volume and as the volume increases and some 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.

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 our overhead cost absorption issue in the quarter is that correct.

We certainly.

We will run our plants at.

Higher levels in the second quarter.

And then we did in the first is that what you're asking.

Okay, Okay and then.

Will there be additional restructuring charges or other charges in the in the June quarter.

Okay.

In the second quarter as you can.

We'll be releasing our Q here.

Late today early tomorrow with our restructuring expenses, but we have a residual balance estimated of three to $500000 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 as an estimate.

Okay.

What are the gross margins look like on the hard surface business at this point.

We do not separate.

The results for our different product categories, and therefore can't respond to that directly but.

Hum.

Obviously with the income.

We import a lot of our hard surface from the far east and its very obvious with the.

Freight rates ocean freight rates down dramatically, there certainly a lot better than a year ago.

Okay and then.

Just last question on liquidity.

Do you think you'll generate operating cash flow and in the in the current quarter from a a R inventory drawdowns.

Moving and we will.

Not project anything I guess as far as the forward looking statements in that regard as I mentioned.

Our availability borrowing availability at the end of the quarter was 13 and a half we are at 14 six now.

So that certainly indicative of improved.

Improved operations and our results coming from <unk>.

Stronger quarter, as Dan mentioned with the order activity coming in so.

As you would expect with that.

Activity is certainly a positive for us.

And do any projections of that matter.

Okay makes sense and then just follow up on that your next major debt maturity is 2025 is that right.

Yes, our renewal all of our senior credit facility will be in 2025.

Okay, great. Thank you very much for your time.

Thank you Mike.

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

Thank you and we appreciate all of you being with US this quarter and we look look forward too.

Speaking with you again next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

Okay.

Thank you.