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

Good day, and welcome to The Dixie Group, Inc. 2024 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.

Thank you, Shamali. Welcome, everyone, to our fourth quarter 2024 conference call. I have with me Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by reference both to our website and press release. In the fourth quarter of 2024, net sales were approximately $64.4 million compared to $66.7 million in the fourth quarter of the prior year. The net loss for the fourth quarter of '24 was $7.198 million compared to $3.160 million in the fourth quarter of 2023, which included an $8.198 million gain on the sale of assets. For the fiscal year 2024, net sales for the company were $265 million as compared to $276 million for the fiscal year 2023. The net loss from continuing operations on the year was $12.210 million in 2024 or $0.83 per diluted share compared to a net loss of $1.952 million or $0.13 per diluted share in the previous year. The net loss on the year was $13 million or $0.88 per diluted share compared to a net loss of $2.718 million or $0.18 per diluted share in 2023. At this time, Allen Danzey will review our financial results, after which I will have additional comments.

Thank you, Dan. As Dan mentioned, net sales for the fiscal year 2024 were 4.1% down from the prior year. High interest rates and low consumer confidence have delayed consumer decisions around large discretionary spending that includes home purchasing and remodeling, which are big drivers for our business. The lower sales volume and fourth quarter planned inventory reductions resulted in under-absorbed fixed costs in our manufacturing plants. In addition, significant unusually high charges related to utility expenses in our California operations as well as expenses under our self-insured medical plan and write-downs of inventory all had an unfavorable impact on our gross margin. The gross profit margin in 2024 was 24.7% of net sales compared to 26.7% in the prior year. Selling and administrative expenses in 2024 were reduced from 2023 by $4.3 million or 5.8% of net sales. This was the result of year-over-year planned cost-cutting initiatives, particularly in our sample areas where we're able to reduce costs and still continue to service our customers and new product introductions. For comparative purposes in our other operating income and expenses, 2023 fourth quarter results benefited from an $8.2 million gain on sale of assets showed in other operating income. Facility consolidation expenses, which include the residual cost of our East Coast manufacturing consolidation plan were $2.5 million lower than the prior year, and that included $238,000 in additional write-down of idled assets in the fourth quarter of '24. Our interest expense on the year was $6.4 million compared to $7.2 million in 2023. The decrease was primarily driven by lower interest rates in the current year. The net loss in the year 2024 was $13 million compared to a net loss of $2.7 million in the prior year. From our balance sheet, our year-end receivables of $3.3 million is slightly below or 1.5% down from the prior year-end balance of $3.7 million. Our net inventory balance at the end of 2024 was $66.9 million. This was a $9.3 million or 12.3% below the inventory balance of 2023. That reduction again was primarily achieved in the fourth quarter as we implemented our plan to reduce inventories, and we continue to maintain timely service to our customers. Accounts payable and accrued expenses were slightly down 1.9% in the same period in the prior year with lower year-over-year costs and inventory-related areas driving that reduction. Net property, plant and equipment increased by $2.4 million from the prior year-end. This increase included cash purchases of $2.1 million during the year and prior year deposits [indiscernible] $6.5 million related to our extrusion operations. These additions to PP&E were offset by approximately $6.5 million in depreciation. Year-over-year, the debt was relatively flat at $0.2 million or $200,000 lower and current total. We are -- we want to point out, we are pleased to have closed subsequent to year-end on our new $75 million senior credit facility. The timing of closing on the facility did delay our filing of the 10-K as we had to reschedule our normal audit activity. So as soon as the facility was closed, we were able to resume our audit activity and close shortly after the filing was filed. The borrowing availability under this new credit facility is approximately $12.2 million. Our investor presentation will be available on our website at www.dixiegroup.com.

Thank you, Allen. Existing home sales, which tend to be the catalyst for our industry improvement, continued to be subdued during last year. Existing home sales over the last 3 years have declined dramatically from over 6 million homes per year to under 4 million. The interest rate reductions, which were projected for earlier in the year, did not come about until late 2024. Even though the economy has avoided a recession, our industry has been in a recession for several years, and existing home sales are at the lowest point since 1995. And at that time, our population was 25% lower, which means the weak existing home sales numbers are even more impactful today. Actual square yards of carpet shipped in the last 3 years are down 25%. Despite having gained market share during this period, we have had to take significant actions to lower cost, restructure facilities and streamline operations. Since the end of the year, we have successfully renegotiated our existing asset-backed loan for a new 3-year period. This transaction puts us in a stronger position to weather storms in the future and enhance our ability to grow our business. During 2023, we reduced costs by over $35 million as a result of our restructuring plan to better align capacity and cost with current volumes. In '24, we further reduced costs by over $10 million and are taking actions, which will again reduce costs by over $10 million in 2025. We have also been stewards of our working capital and reduced inventories by $16 million over the last 2 years. The reduction in business has also necessitated reducing our number of associates by approximately 28% over the last 3-year period. Our capital expenditures have been maintained at a very low level other than the investment in extrusion equipment, which was made to not only provide us with lower cost raw material, but ensure a consistent supply if additional suppliers were to exit the business, which took place in late 2024 with the exit of Ascend from the marketplace. Our extrusion equipment started up in late first quarter of last year and is now running at capacity. Our commitment to [indiscernible] nylon fiber enables us to offer a larger palette of color to our discriminating customers, which we are promoting with our step into color campaign. This allows our designers to create unlimited color options for every market as well as offering custom color to our most concerning customers upon demand. During this period of core business, we have continued to invest in additional products through our commitment to several initiatives, which are enhancing our customer relationships, helping us gain market share in a difficult period. Our initiative to grow our hard surface business is centered around our TRUCOR brand, which we continue to add new offerings. These products of wood, stone and tile visuals provide waterproof, easy-to-clean solutions for today's residential customers. The Fabrica high-end wood program has performed well and is consistent with Fabrica's best-in-class reputation. By expanding our significant wool offering with the introduction of a wider variety of decorative products through 1866 by Masland and Decor by Fabrica, we have enhanced our position in the high end of the floor covering market, gain market share in the current environment. This investment in products and displays should help make us more important to the design community. In 2024, we continued expanding our DuraSilk solution die, test solution polyester offering. This expansion reinforces our dedication to diversify our Dixie Home floors product portfolio and has made a positive contribution to our market share gain. By incorporating our well-known style and design capabilities at price points we cannot reach with nylon products, we have broadened our differentiated offering to our customers and the ultimate consumer. Our marketing initiatives have included continued focus on expanding our digital marketing efforts, which has resulted in increased lead generation, sample order activity from our websites and improved capabilities for online product visualization. We also saw strong growth from retail stores where we have placed our premier flooring center program. Investment in samples, merchandising and training in these stores have provided returns of increased business and greater market share. The recent actions taken by the U.S. to implement tariffs on the rest of the world has created a sense of uncertainty regarding the cost of imported products. At this point, we are endeavoring to ascertain what the impact will be from each of our sources. The potential impact on us would be primarily felt by our hard surface business and the decorative products we import. Our broadloom carpet business basically serviced from our U.S. operations would not be significantly impacted. It appears industry participants will need to raise prices to mitigate the impact of tariffs if these tariffs are not negotiated away. This is a volatile time, and we will take appropriate action once the fog has cleared. Our sales so far this year in 2025 have followed the same pattern as last year. The highest-end soft surface sales are up and overall soft surface are near year ago level, while the hard surface product categories are down from the previous year. Until demand improves, we will continue reducing costs. We already implemented a cost reduction plan for this year, which exceeds $10 million, and we're also continuing to reduce inventory to reflect the level of demand. At this time, we will open the meeting to your questions.

[Operator Instructions] Our first question comes from the line of Mike Hughes, a private investor.

First, on the hard surfaces side of the business, what percent of that product is imported from China? What other countries do you import? And how quickly could you potentially pivot to other countries outside of China?

At this point, very little is imported from China, and that would be practically none very soon. We do import from Thailand, Cambodia, Vietnam and some from Europe.

Okay. So as of today, the hard surfaces side of the business would face the 10% tariff. I know it's a dynamic situation and it could change. Is that correct?

That is correct. Other than China, yes.

Okay. And then how quickly can you pass along price on that side of the business? Is there a little bit of a period where you have to absorb the higher costs?

That's still up in the air, Mike. And several companies have announced price increases, but that was based on the first initial increases in tariffs. So it's a little unclear at this time. But basically, I think the industry will -- 81% of the LVT sold in this country is imported. So I think it's very likely that very quickly as these tariffs become impactful, they will be passed on.

And Dan, are your competitors or any of them more over-indexed importing from China, more reliant on China? Or is everyone pretty much exited China at this point like your company has?

I would say everybody worked diligently to exit China. And I think today, it's a fraction of what it was a couple of years ago.

Okay. And then I may have missed this in the prepared comments, but did you say what the amount of the 4Q inventory write-down was? And then maybe you could just provide a little bit of color on it.

Yes. In the fourth quarter, as we mentioned, the overall reduction in inventory of $9.8 million. We had included in that net increase in our LIFO reserve of $456,000 on the year. But there was a [indiscernible] liquidation in the fourth quarter that did result in a $381,000 gain. As far as the write-down of the assets, [indiscernible] reserve increased by $1.3 million in Q4, it was $822,000 increase year-over-year.

Okay. And that was just a result of doing the physical inventory and kind of aging the inventory. Is that right?

Yes. As we worked on our plan of reduction of inventory in identified areas where we had some excess inventory, we did make an additional reserve in the third quarter -- fourth quarter for that amount, and that gives us the opportunity to move that inventory out and generate cash flow from it in 2025.

Okay. And then you talked about an incremental $10 million in cost takeouts. How soon will you be at that run rate of taking $10 million out of the cost structure?

I would say we're very close to that level today. Most of that was planned some months ago.

Okay. And then on the new credit facility, it looks like it has minimum EBITDA thresholds. And I think the number for the 12 months ended December 27, 2025, is $9 million. So that seems like a really high hurdle given I think the adjusted number in the fourth quarter, my adjustment, which may be incorrect, is a loss of about $1.5 million to $2 million of EBITDA, excluding the inventory write-down. So help me get to that $9 million number. What needs to happen? Does the revenue -- does the top line need to start to grow again for that to happen?

No. We work closely with our new partner on the senior credit facility as we work through the covenant, particularly as it related to EBITDA. We feel comfortable with the amount that was calculated even in an expectation of a generally flat year. We did have, as we talked about a number of items this year that we not expect to be recurring from an unfavorable standpoint as well as the cost savings that Dan talked about in 2025 and for a greater part is in place at this time. So we felt like, and I believe our partner felt as well that the amount that was provided was a reasonable amount that was achievable and we're projecting towards that.

Okay. And then you talked about reducing the inventory further. You ended the year at $66.9 million. How much more can you take out of the inventory?

We don't make projections. So -- but we feel like we have already reduced inventory some this year.

Okay. And then two final questions for you. On the soft side of the business, is there any potential benefit from the tariffs or because you compete at the high end, there are fewer imports there. Just talk through that dynamic.

It depends on where the tariffs end up, whether it's the punitive ones or the 10% or something else is negotiated. We're not looking at that as a potential windfall. But for the domestic tufted carpet business, imports are not a major factor.

Okay. Then last question. The liquidity, I just want to be -- make sure I'm clear because I read the credit agreement, and I thought there was an incremental sort of a carve-out of $6 million that had to be left available. So are you saying that $12.2 million is available to borrow, that full amount is available?

That includes the $6 million. So the $12 million is the full availability, inclusive of the $6 million excess. So $6 million plus $6.2 million.

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

Thank you, Shamali, and thank you, everyone, for joining us today. Sorry, we're a little late this quarter. We anticipate being timely with our first quarter results. And we'll look forward to talking with you then. Thank you.

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