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

Greetings. Welcome to The Dixie Group Q2 2025 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the call over to Dan Frierson, Chief Executive Officer. Thank you. You may begin.

Thank you, Devin, and welcome, everyone, to our second quarter 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. The gross profit margin for the second quarter of 2025 was 29.2% of sales compared to 28.1% in the second quarter of 2024. Operating income in the second quarter of '25 was $3.2 million compared to $2.3 million in the second quarter of the prior year. The company had net income of $1.2 million in the second quarter of 2025 compared to net income of $600,000 in the same period of the prior year. Additionally, significant reduction in net debt took place during the last 6 months. Despite lower year-over-year sales volume, we were able to produce stronger gross margins at 29.2% of net sales compared to $28.1 million in the same quarter of the prior year. We also reduced our year-over-year selling and administrative expenses. These favorable results in 2025 are primarily the results of our cost reduction plan for this year, which is estimated to produce $12.6 million in reduced spending year-over-year. Weak market conditions continued to negatively impact the flooring industry sales in the second quarter of 2025, with the high interest rates and low consumer confidence being key factors leading to slow existing home sales and weak home remodeling numbers. Our soft surface sales outpaced the market in the second quarter as we were relatively flat year-over-year, where the industry, we believe, was down approximately 7%. A key growth segment in our soft surface products was our DuraSilk collection, which continues to gain share of the polyester market. Also, continued growth of our high-end decorative segment resulted in one of our strongest quarters for the sales of our decorative products. At this time, Allen will review our financial results.

Thank you, Dan. As Dan discussed, we are pleased to announce the positive results for the quarter despite the lower year-over-year sales volume. Through our ongoing company-wide cost reduction initiatives, we have been able to reduce cost of materials and reduce expenses within our production processes. This helped lead to strong gross margins of 29.2% of net sales in the current quarter compared to 28.1% in the prior year and 28.1% on the year-to-date with a comparison of 26.2% in the prior year. Selling and administrative expenses in our second quarter were $600,000 or 3.4% below the same quarter of the prior year and slightly lower on the year-to-date. With the launch in prior years of product initiatives for hard surfaces, decorative and polyester substantially complete, ongoing selling and marketing expenses are being maintained at a level to support our new product introductions and sample replenishment. Our interest expense on the year was $3.4 million compared to the 2024 year-to-date interest expense of $3.2 million. Higher internal interest rates and amortization of financing fees contributed to this difference. The net income on the quarter was $1.2 million compared to a net income of $600,000 in the prior year. For the fiscal year-to-date June, we had a net loss of $537,000 compared to a net loss of $1.2 million in the prior year. On our balance sheet, our June month end receivables of $28.9 million was up from our seasonally low year-end balance of $23.3 million. The net increase was driven by the comparatively higher sales volume in the second quarter. Our net inventory balance at the end of the quarter was $67.4 million compared to a net inventory balance of $76.1 million in the second quarter of the previous year. We had a planned reduction of inventory in the fourth quarter of last year, and we continue to manage our inventory at lower levels while maintaining timely service to our customers. Accounts payable and accrued expenses were $41 million compared to $37 million in the same period of the prior year. Net property, plant and equipment decreased by $2.4 million from prior year-end, and this decrease was primarily the result of $2.6 million in depreciation with an offset of $155,000 in capital expenditures. We do plan to hold our capital expenditures at a maintenance level of approximately $800,000 for 2025 and depreciation is estimated to be $5.2 million. The net balance of our senior debt and cash on the balance sheet at the end of the second quarter was $45.6 million or $4.4 million lower than the same total of $50 million at prior year-end. The remaining portion of our term debt decreased by $3.2 million from year-end. At the end of the quarter, borrowing availability under our new senior credit facility was $13.1 million, which was subject to a $6 million excess availability requirement. Our investor presentation is available on our website at dixiegroup.com. Dan?

Thank you, Allen. Over the last 3 years, the external environment for the floor covering business has continued to be difficult. We have experienced declining sales as mortgage rates have remained at elevated levels. Existing home sales have declined to the 4 million unit level, and consumer confidence has been at historically low levels. As a company, we've been adjusting to these realities, but we're also faced with 2 of our major suppliers exiting the business in a disruptive manner. These conditions have meant we had to restructure our operations and product offering in a most turbulent environment. To improve our results and restructure our operations, we have embraced a cost reduction plan that is focused on virtually every phase of our business. Doing more with less has meant reducing costs over the last 3 years by well over $50 million while improving quality and service. We have also invested in our growth initiatives over the last 4 years. We have enhanced our hard surface business, particularly our Fabrica Wood program, which has resulted in growth of nearly 10% in the second quarter. We've also invested in our decorative offering through additions to Masland's 1866 offering and Fabrica's Decor line. We have also broadened our DH home offering by introducing more highly-styled DuraSilk polyester products. These actions and activities have helped us to continue growing market share in the soft floor covering market. Thankfully, we also believe soft floor covering is no longer ceding significant market share to hard surface products. From a marketing standpoint, we continued our new TDG Rewards Plus program with new benefits and bonus tiers for our most loyal retail sales associates, and we continued our partnerships with Roomvo and Broadlume in the digital space. These programs, we continue to see increased lead generation, online sampling ordering and room visualizations. These metrics are promising as today's consumer is searching for floor covering products online, and we must meet them where they are. Our Premier Flooring Center retail partners continue to be a strong point for the company. This program includes a selling system, which supports better goods and higher-end products, along with training, unique promotional opportunities and other benefits. The evolving tariff situation is adding to the current economic uncertainty. The major impact on Dixie is with hard surface products and decorative products. When the earlier tariffs were implemented in April, the industry and we implemented price adjustments and supply chain changes to mitigate the impact of the initial tariffs. We no longer source from China, but we will adjust pricing again as it becomes necessary depending on the rates which you are finally implementing. The near-term outlook is very much the same we have experienced for the first half of the year. Sales and orders continue to run slightly behind last year in total, but soft surface products are virtually the same as last year. We continue to reduce costs by improving productivity, conserving energy and expanding our operational cost initiatives. Looking longer term, at some point, consumer confidence will improve and mortgage rates will decline and the market will improve. Today, family formations are outpacing home construction. Home equity is at an all-time high, and there is pent-up demand for more housing. The industry has a history of a prolonged growth period when it exits a prolonged downturn, just as it did after the 2008-'09 great recession. After that recession, the next 4 years experienced 8% compounded annual growth. We believe our cost reductions and growth initiatives in place will be an excellent -- we will be in an excellent position to take advantage of the changed market dynamics when they occur. At this time, we would like to open the meeting to your questions.

[Operator Instructions] Our first question comes from the line of Barry Blank with J.H. Darbie & Company.

Good quarter that you had. I got one question that's a little difficult, and I don't know if there's an answer to it. But historically, every 1% drop in interest rate, what would that equal usually in percentage of increase in sales, if you could answer that?

Barry, I wish I could give you a definitive answer to that. Obviously, I think any reduction in mortgage interest rates would have a positive impact, but I don't think I can give you a definitive number.

Is there a lag time if interest rates should come down? Is there usually a lag time from when that comes down to when business would pick up?

Yes, I think there is because floor covering is not the first thing that goes into a house. However, with existing home sales, a lot of time people fix up a home before they sell it and others fix it up after they buy it to put their stamp on it or their look. So it is not a long period of time, but I think I would look at consumer confidence at the same time. If consumer confidence is coming up, I think it would be fairly quickly.

Our next question comes from the line of Mike Hughes, a private investor.

First, on the tariffs, I would assume with the gross margin you put up in the quarter, a little north of 29%, there wasn't much of an impact from the tariffs in the June quarter. First, can you confirm that? And then do you think the pricing you've put in place will fully cover you in the third quarter? Or should we expect a little bit of a delayed negative impact on the tariff front?

Mike, as you know, the whole tariff situation has been very volatile and a lot is happening today. But to answer your questions, first of all, probably about 85% of our sales are not impacted at all by tariffs because we manufacture our goods in the United States. The only thing we import is hard surface and some decorative products. So having said that, we did increase prices that we felt covered the cost of the April round of tariffs. And the industry had an industry-wide increase in decorative products and in hard surface products. I would anticipate that the industry will do the same thing once it's really determined what these rates are. And each country, obviously, is a little different, and it's difficult to project. But no, there wasn't a major impact in the second quarter nor do we expect a major impact in the third quarter because of the price increase.

Okay. Makes sense. And then outside of tariffs, can you just comment on your cost of goods sold, raw material inputs, what you're seeing on that front?

Basically, we have not seen any inflation in raw materials yet. I say yet, but we still are seeing some reductions in raw materials basically. And that has obviously helped with our gross margin.

Okay. So just on that front, was there a LIFO credit in the quarter that helped the gross margin number?

Yes. We adjust our LIFO each quarter and then in line with cost reductions as well. The cost reductions in the period did result in lower cost of our inventory, which we adjusted through to LIFO. We look at our LIFO at a year-end basis and adjust if needed for any LIFO-related changes that would be pushed through the income statement. Those would only be specific to a tier reduction. The gross margins would reflect LIFO-based costing. So we absorb that or recognize that through the year based on changes to our inventory values.

Okay. And then the cost savings program, how much incremental savings is in front of you?

We are anticipating or planning $12.6 million over the course of the year. We have achieved and identified approximately half of that through the first 6 months. So we feel very good about being able to achieve that goal. We'll continue to look for other cost savings throughout the remainder of the year to try and improve upon that.

Okay. So there's a little over $6 million left on an annualized basis on that program, right?

Yes. Actually, maybe even a little less than that. We've been very successful through the first half of the year. So we're running very well on track to achieve our goal.

Okay. Great. And then my last question, some commentary in the press release, part of the hard flooring business did well and then the other part was challenged. It sounds like maybe those challenges are behind you. Can you just comment on that part of the business, if you expect better performance in the second half?

The wood part of our business is what did do exceptionally well. That is the very high-end Fabrica Wood program. We anticipate that will continue to do well. The SPC and WPC luxury vinyl tile products are more challenged. There's more competition there. And I think it's going to depend on how much inventory is out there and how some respond to tariffs. So that's a little more problematic and has not been as good for us as the wood business has.

Okay. So the hard flooring business, I think, is roughly 20% of revenue. Is that correct in rough terms?

I would say it's less than 15% today.

Okay. Okay. Can you, just in rough terms, break out the part that's performing well, what percentage that is and then the more challenged piece?

Mike, unfortunately, we don't break out those numbers publicly.

[Operator Instructions] It appears we have no further questions at this time. I'd like to turn the floor back over to Dan Frierson for additional comments.

Thank you all for joining us for this quarterly meeting. We're happy to report net income and reduction of debt. Both are important parts of our position and going forward. We hope you will join us next quarter. Thank you.

Ladies and gentlemen, that will conclude today's conference. Thank you for your participation, and have a wonderful day.