The Dixie Group, Inc. (DXYN) Earnings Call Transcript & Summary

Good day, and welcome to the Dixie Group, Inc. 2023 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.

Christina, thank you very much, and welcome, everyone, to our fourth quarter and 2023 year-end conference call. Allen Danzey is with me. Allen is our CFO. Our safe harbor statement is included by reference both to our website and press release. Adjusted for the additional week in our prior fiscal year, weekly sales in the fourth quarter were approximately 2% better in 2023 as compared to 2022. Net sales for the year 2023 were down 9% from the prior year, but were down 7.2% on an adjusted weekly basis. The lower net sales amount was the result of a slowdown in the floorcovering industry, driven by high interest rates, which have dramatically impacted the housing and residential remodeling markets. We believe the overall flooring industry experienced a significantly higher reduction in year-over-year sales volume, indicating we are continuing to gain market share in our core markets. Due to the numerous actions we took to reduce costs and improve operations during the last 2 years, our fourth quarter gross margin improved by 13 percentage points to 27% of net sales as compared to 14% of net sales in the fourth quarter of '22. At this time, Allen will review our financial results, after which I will have additional comments. Allen?

Thank you, Dan. In the fourth quarter of 2023, net sales were $66.7 million compared to $70.5 million in 2022. As Dan pointed out, the fourth quarter of 2022 included 14 weeks compared to the fourth quarter of 2023 at 13 weeks. So on an average weekly basis, sales in the fourth quarter of 2023 were 1.8% above 2022 average weekly sales. The net income for the fourth quarter of 2023 was $3.2 million. That compares to a loss of $18.5 million in the fourth quarter of 2022. The fourth quarter of 2023, the income included expenses of $1.5 million for facility consolidation and a net gain of approximately $8 million as a result of the sale leaseback of our Adairsville, Georgia facility. The loss in the fourth quarter of '22 was related to higher costs driven by inflation, freight rates and the forced change in our raw materials as well as under-absorbed fixed costs from our planned decrease in production. For the fiscal year '23, net sales were $276.3 million compared to $303.6 million in the prior fiscal year. The company's fiscal year '22 included an additional 53rd week, while the '23 fiscal year consisted of the traditional 52 weeks. On an adjusted average weekly comparative basis, the net sales in '23 were 7.2% below prior year. A primary driver of the lower net sales was the unfavorable impact of higher interest rates and inflationary concerns that impacted consumer confidence and was reflected in lower home remodeling activity. Gross margins in '23 were significantly improved over '22 as a result of our restructuring and facility consolidation efforts beginning in '22 and continuing through the early part of '23. Our gross margins year-to-date '23 were 26.7% of net sales compared to margins in the prior year at 17.7%. The low margins in '22 were the result of exorbitantly high pricing from a former primary raw material provider tied to their exit from the business. The prior year was also impacted by very high ocean freight rates on imported containers. By the end of '22, 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 reductions in the cost of raw materials and favorable operating results from our manufacturing facilities. Selling and administrative expenses in the full year of '23 were $2.8 million lower compared to the prior year, but higher as a percent of the lower net sales. The selling expenses are primarily driven by samples and marketing investment in our new growth initiatives. We incurred $3.9 million in expense for facility consolidations during 2023. This expense primarily related to facility closure and maintenance costs. Also, as previously mentioned, in the fourth quarter of '23, we recognized a gain of approximately $8 million in other operating income as a result of the sale and leaseback of our Adairsville, Georgia facility. Our operating income, inclusive of the facility consolidation expenses and the gain on sale, was $5 million compared to a $28.2 million operating loss in 2022. Our interest expense on the year was $7.2 million compared to $5.3 million in 2022. This increased interest expense was primarily driven by higher interest rates in the current year. Our net loss on the year was $2.7 million compared to a net loss in the prior year at $35.1 million. Looking at our balance sheet. Our receivables decreased by $1.3 million from the prior year-end balance. The decrease was driven by increased timing of customer payments during the last month of the current period. As a result of decreasing costs and planned reduction in volume, our inventory was down from the prior year-end balance by $7.5 million or 9%. Accounts payable and accrued expenses were below prior year-end by $1.3 million, primarily due to the lower year-over-year costs. Our capital expenditures on the year totaled under $1 million, and depreciation was at $7.3 million. Our debt decreased by $16.8 million from the end of '22, driven by the sale of our Adairsville facility along with operating results, decreased inventory and the timing of lower cost of expense payments and purchases. These favorable cash flow items were offset by the cost of our facility consolidations. Our borrowing availability on our senior line of credit is currently at $14.5 million. Our investor presentation is available on our website at www.dixiegroup.com. Dan?

Thank you, Allen. 2023 was a year of transition for our company. We spent much of 2022 adjusting to the exit of Invista from the fiber business and the sale of the Stainmaster brand to Lowe's, which resulted in the loss of our business in the home center channel. These changes, along with our sale of our commercial business to Mannington necessitated numerous restructuring of our operations, which we began in 2022 and finished in 2023. These changes would have been difficult under any circumstances, but were also adversely impacted by the slowdown in the floorcovering business. During the year, we had to match capacity levels to current business activity. While the economy has thus far avoided a recession, many of those industries which are interest rate sensitive have already experienced a hard landing. Our particular business is focused on the independent residential retailer, and our customers have been severely impacted by the rapid increase in interest rates, which have dramatically impacted the housing and residential remodeling markets. While new home construction has begun to improve, the sale of existing homes is at the lowest point since 1995. Because of this economic environment, floorcovering sales decreased during 2023. Actual square yards of carpets sold by the industry in '23 were about 20% lower than 2 years before in 2021. As we begin 2024, our industry is at a cyclical low point. So we're continuing to minimize expenses, reducing overhead and lowering costs. During '23, we were able to reduce costs over $35 million and have a plan to further reduce costs in 2024 by an additional $10 million. As a result of these actions taken in '23, our gross margin percentage improved by 900 basis points, as Allen has pointed out. We also gained market share in 2023 and believe we can continue to do so through our growth initiatives. Our initiative to grow our hard surface business has continued to gain momentum as we have invested in our TRUCOR brand by broadening our product offering as well as a high-end program -- high-end wood program as part of our Fabrica offering. Today, hard surface products represent about 20% of our sales, and we believe can continue to gain market share. We have been the leader in the industry in the wool category. The addition of more distinct woven patterns, hand-loomed and hand-crafted products have made us a more important supplier to the designer and high-end retail community. Through our 1866 by Masland and Décor by Fabrica collections, we have broadened our offering and made a significant investment for the future. Our third initiative has been to broaden our polyester product offering by incorporating our style and design capabilities at price points we cannot reach with nylon products. We continue to add products to our DuraSilk collection and sales have reflected the strong acceptance of these looks. With these 3 initiatives, in '23, we invested heavily in displays and samples, which has enabled us to expand our retail exposure. While we think the industry will not grow significantly in '24, these initiatives should enable us to gain market share. A major initiative for us this year is the starting up of our extrusion capability. The ability to produce our own nylon yarn will give us the assurance of having our own source of raw material and not be in the position we were in when Invista exited the business. Production began and -- has begun and in the future will give us more cost-effective source of raw materials. Our commitment to [ p-stab old ] nylon fiber enables us to be the leader in the industry in offering a wider variety of fashionable products, colored to the taste of our discerning customers. The movement in the industry to solution dyed products has created a sea of sameness from which our customers can escape. During the year, we have taken numerous actions to improve operational and sales results and have made structural changes to prepare us better for the future. Simultaneously, we've been investing in the future through our growth initiatives and extrusion capability. We believe that the actions we have taken to prepare us for the current difficult environment also position us for the eventual upturn, which we will inevitably experience. The actions we have taken have been done with an eye to the future. When interest rates recede and housing rebounds, we will be in a great position to take advantage of a prolonged upturn in existing home sales in a strong residential remodeling market. During '24, we are celebrating with our industry partners the 50th anniversary of Fabrica. We will be celebrating a 50-year commitment to quality without compromise, which has positioned Fabrica as an industry leader in style, design and color as well as quality. We have been fortunate to have Lowry Kline as a director for the past 20 years. His input and counsel have been most helpful as we progress through the turbulent times with which we have been faced during his tenure. His presence has provided a calming and insightful influence regardless of the issues at hand. He will not be standing for election at this year's shareholder meeting, and we will miss his presence and greatly appreciate his tremendous contributions to our company. Looking at current business conditions. For the first 10 weeks of the year, our sales are slightly behind last year, but orders are in line with the first 10 weeks of the quarter last year. While this is better than we had expected and projected, we believe a reduction of interest rates is the catalyst that will positively change business conditions. At this time, we'd like to open up the meeting to any questions.

[Operator Instructions] Thank you. Our first question comes from the line of Barry Gertner with [ Improverb ].

Congratulations on a great margin quarter. It seems to be improvements are really coming along. And I just -- I had a question along the lines of, for our model, is it fair to think about these gross margins kind of improving and trailing upwards now that some of this consolidation is done and you're doing a bunch of in-house that you're relying on third parties for?

Yes. As far as the gross margin, we do not provide the forward-looking data, but as we've discussed, the manufacturing operations and the consolidations that we've done there, produced significant efficiencies. We project to continue forward, and we've identified and continue to implement cost savings initiatives in the current year. So we're very happy, of course, with the margins that we saw in '23 and plan to continue the momentum there to build upon.

Understood. And if I can just one more, does NASDAQ like [ deficiency ] filing date, the company hasn't like mentioned any plan of that. I'm assuming is this something the company is looking to address to make sure that you stay in compliance with the listing?

Barry, first of all, thank you for your questions. And obviously, yes, we will be addressing that soon.

Our next question comes from the line of Chris Riemenschneider with Morgan Stanley.

Just a couple of industry questions. Back in '15, the soft market -- the soft surface market was about 55% of the overall foreign market. In '18, it dropped to 50%. Currently, where are we in 2024 with soft surface, seeing that 80% of our business is soft surface? And every quarter, you mention that you gained market share. Can you quantify that?

Chris, we can quantify it. We get numbers through our industry association, but those are not published. So we cannot give you exact numbers, but we certainly have gained market share. Carpet has continued to lose market share to hard surface, I would say, until the last year. It seems to be -- to have leveled off. And I think probably, we'll maintain that percentage. We are about 5% of the soft floorcovering business. And consequently -- and we're in the upper end of the soft floorcovering business. I don't believe the upper end, and we don't have empirical data to back this up, but I think the upper end of the market has done much better than the market overall, and that obviously has helped us gain market share, but we don't have data that separates the market by price points.

In addition, can you just discuss a little bit about the balance sheet and what is the Board's goal with the debt as it relates to equity?

Yes. Our balance sheet, we've taken great steps this year as far as to continue to decrease our debt. But it will fluctuate with our operating needs. We did discuss with our Board in the past Board meeting as far as what our financing opportunities are and watching the economic conditions, our CapEx and inventory investments as well as any new product initiatives may drive the need for some more financing opportunities. But we're -- again, as we talked about on the margins, we're excited about the opportunity to continue to improve our margins and grow the -- or you can see the cash flow contributions from that, but we're watching the economy as everyone is. And we'll continue to monitor that and make sure that we identify our financing opportunities, if needed, but hopefully, the economy, as Dan said, the interest rates reductions come in early, and we start seeing a rebound, then we look forward to positive cash flow from operations and continue to focus on reducing our debt position.

With no further questions in the queue, I would now like to turn the call back to Dan Frierson for any additional or closing remarks.

Christina, thank you, and thank all of you for being with us for our call, and look forward to visiting with you again at the end of next quarter. Thank you.

Ladies and gentlemen, that will conclude today's conference. Thank you again for your participation.