Q2 2023 The Dixie Group Inc Earnings Call

Good day and welcome to the Dixie Group, Inc.

Three second quarter earnings conference call.

Today's call is being recorded.

For opening remarks, and introductions I would like to turn the call over to the chairman and Chief Executive Officer in Firestone. Please go ahead.

Thank you Priscilla and welcome everyone I have with me Alan <unk>, our Chief Financial Officer.

Our safe Harbor statement is included in <unk>.

<unk> 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.

In the same quarter of 2012.

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Operating income was $253000 compared to a loss of $2 $9 million in the second quarter.

The prior year.

The highlight of the quarter with a seven 5% pointed point improvement in our gross margin.

The housing market remains under pressure due to limited supply.

Interest rates and continued in place got.

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 in new housing stronger than the residential replacement segment, where we mostly play.

We do believe we gain market share.

Our core business.

At this time I would ask Alan.

To review our financial results for the quarter Alan Thank you Dan.

Dan just mentioned.

Net sales on our second quarter for the three months of 2023 were $74 million compared to $83 7 million at the same period in the prior year.

Six months ended July one 2023.

Net sales were $141 1 million and $161 3 million in the prior year periods.

The decrease in sales was partially attributable to a loss of volume in our mass merchant channel.

She has a strategy by our largest mass merchant customer, it's a lower price point offerings last year.

Net sales were also unfavorably impacted by higher interest rates and inflationary concerns impacting consumer confidence that was reflected in lower home remodeling activity.

Our gross margin through the first half of 2023.

Was 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 'twenty three.

Gross margins in the second quarter and year to date 23, or 26, 7% of net sales and that compares to Martin as in the prior year in the low 19% range.

Well the margins in the first half of 2022 were the result of absorbing silly high pricing from our former primary raw material provider, which was tied to their exit from the business.

Prior year was also impacted that very high ocean freight rates on the importance of containers by the end of 2022, we have changed our raw material fibers over to multiple suppliers at lower cost points and ocean freight rates have returned to more normal levels.

So a favorable operating results of our manufacturing facilities throughout the first half of 2023.

Completion of our facility consolidation plan.

Selling and administrative expenses in the first half of 'twenty three were lower in dollars in the same period in the prior year, but was higher as a percent of net sales due to lower sales volume in 'twenty three.

The selling expenses are primarily driven by samples and marketing activity and investment in our new product offerings.

We incurred 719000 of expense for facility consolidation during the second quarter of 'twenty three.

The expense primarily related to facility closure and maintenance costs.

Our operating income inclusive of the facility consolidation expense.

That's $253000 compared to $2 $9 million operating loss in the second quarter of 'twenty two.

For the first six months of 'twenty three.

Operating income of 560000 compared to a loss of $5 2 million in the same period of 'twenty two.

Interest expense on the quarter was $1 8 million compared to 1.1, and the second quarter of 'twenty two.

For the six months ended July 1st interest expense was $3 seven 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 at $4 5 million.

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 about $4 5 million from the prior year end balance that was driven by higher comparative sales volume during the later periods of the respective time frames.

As a result of decreased costs and planned reduction in volume of inventory was down from the prior year end balance of about $4 $5 million.

Accounts payable and accrued expenses were up from the prior year end balance of about $6 2 million. This was 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 238000, this brought our year to date to five.

97000.

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 2020 pretty driven by operations decreased inventory and the timing of lower cost of expense statement.

Actually offset by activity related to our samples and new product introductions and the calls the facility consolidations.

We have reduced the debt balance by $3 $1 million from our 2022 year end.

Borrowing availability at quarter end was $19 8 million.

Our investor presentation is available on our website at Www Dot Dixie group Dotcom Dan.

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 and raw material costs.

Our facility consolidations had better align demand and capacity.

Our head count reductions throughout the company have lowered our fixed costs and we have experienced operational improvements in our manufacturing facilities.

We're still on track to reduce total costs this year by over $35 million.

A significant factor in the year over year sales decline was the loss of volume in the mass merchant channel do our due to our customer's change in strategy excluding.

Excluding mass merchant sales net sales were down nine 1% for the core.

Despite the issues in the marketplace, we have continued to invest for the future.

We've 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.

This reason, we're big experienced much higher selling and marketing expenses.

Then we would in normal times.

In the second quarter.

We launched 11, new products in our synthetic self surface brands. This included four new styles in our D. H floors collection made with the <unk> solution dyed polyester.

In our decorative brands, we have continued to.

Executing our growth strategy with 23, new introductions, including non additions to our new 18 66, all seasons collection.

We have added additional hard surface items, where there are new Bravo and timber select collections.

We're excited about the continued expansion of our digital capability through our partnership with Broadline.

This program provides an excellent consumer experience, including integration with retailer websites personalize online product visualization and easy online sample ordering.

The flooring industry is experiencing a cyclical downturn like we've had in the past.

It's 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 to.

Prepare by cutting costs and improving operations.

Investing in new beautiful product and improving the customer experience.

Results are selling costs had 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'll open up the call to questions.

At this time.

I'll send that complaint culture question.

Sure Good question.

Power one chip.

The other question from me Q3, right by Q.

And our first question comes from Mike Wood.

Capital.

Good morning, Thanks for taking my questions you touched on the step up in SG&A I think it was up a little over two and a half million dollars sequentially. What's the normalized number it was 19 million in the June quarter, assuming a same level of revenue.

Does that number stepped back down to two to enter the 16th well what does that look like going forward.

Yeah, we are continuing to invest in our introductions, particularly around our new.

New decorative product lines as Dan mentioned some of the new products that were coming out and also in the hard surface such as a growth area for us so.

So where it seems like it's been thinking at a high level the effect in our opportunity for our sales growth is in future periods, but.

But we do expect as you mentioned that the cost and.

And next year and going forward would be coming back down to more normalized levels in the $17 billion range.

Yes.

Okay. So it'll be a few quarters from now until it normalizes to the lower level.

Yes, yes. This year is continuing to be investment in some significant growth opportunities that we've identified but we would expect it to be several percentage points lower as a percent to sales.

Okay.

And then can you just speak to you you said that order entry was slightly higher in the month of July how did the the second quarter play out by months did it did strengthen.

Throughout the quarter, maybe just the cadence of the new product introductions, where most of them late in the quarter.

Uh huh.

March was the period with the.

The worst comparison to the year ago period.

It improved in April it improved in May and improved in June and then improved again in July .

Okay terrific.

Then the the LIFO reserve.

Are you in a position over the next few quarters, where we might actually see a release of that number.

Yeah, Mike It's Oh, it's a complicated calculation as we go through this but based upon what.

What we're seeing.

We anticipate lower overall manufacturing volume in 2000 2030 years, 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 cost, but our facility consolidation plan has resulted in improved efficiencies at our plants, which is more.

Offsetting the volume at this time, and we're seeing lower raw material costs going through the first half of the year. So our protection over the life of reserve is that it will decrease through the year as we continue to see.

Favorable results at lower costs.

Okay and then.

Do you expect to be operating cash flow positive in the second half.

Yes, we are we believe with our projects.

It doesn't 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, Washington economy, and the demand.

So we're feeling pretty positive.

Our first half results.

Okay and then last question for you the the Georgia property that you were going to sell I guess there are other interested parties.

Can you give us any color on maybe the timing on that and then is that property. The unencumbered at this point or is there more is there a mortgage on it.

We're looking at multiple opportunities.

One property does have a.

Mortgage against that.

It will be part of the negotiations in the process, but at this time, we are continuing to work with potential buyers in.

Multiple opportunities and there's no we're not.

Are there any projects or anything as we can.

So you're going to have some conversations.

Okay, great. Thank you very much.

Right.

Question comes from Craig.

We thank you Tonight that with Morgan Stanley . Please go ahead.

Alright, thanks for taking the question.

You answered one question regarding the distribution consolidation. The other question I have would be.

You had 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 and what is our market share.

Well.

The way, we measure that we have Oh, 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 received data on quarterly sales.

And that that's what I was basing that on.

Okay. Thank you.

Yeah.

Good luck next quarter.

Chris Yeah for me Chris.

With no other questions in the queue I would turn the call back to pinpoint any closing.

Mike.

Go ahead.

So I. 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 it third core thank you.

Ladies and gentlemen that concludes today's conference. Thank you again for your participation and have a great day.

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