The Dixie Group, Inc. ($DXYN)

Good day, and welcome to the Dixie Group, Inc. 2026 First Quarter 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, Christine, and welcome, everyone, to our first quarter 2026 conference call. With me, I have Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by reference both to our website and press release. For the first quarter of 2026, the company's net sales were $59.38 million as compared to $62.99 million in the same quarter of 2025 or down 5.7%. The company had an operating income of $3.264 million in the first quarter of 2026 compared to an operating income of $11,000 in the first quarter of the previous year. The net income from continuing operations in the first quarter of 2026 was $1.354 million or $0.09 per diluted share. In 2025, the net loss from continuing operations for the first quarter was $1.582 million or $0.11 per diluted share. At this time, Allen will review our financial results, after which I will have additional comments regarding our improved results.

All right. Thank you, Dan. In the first quarter of 2026, the company recognized a receivable for the anticipated refund of the IEEPA tariffs that were incurred in 2025 and 2026. The amount of that receivable was $3.3 million and a corresponding gain was recorded to the cost of goods sold. Without the IEEPA tariffs, the gross margin in the first quarter of 2026 was 28.6% as compared to 26.9% in the prior year. The improved margins in 2026 despite the lower year-over-year net sales was a result of cost reductions and our profit improvement initiatives that were implemented in 2025 in the early part of this year. The savings from our Profit Improvement Plan were also evident in our selling and administrative expenses in the first quarter, which were $878,000 or 5.2% below the prior year. Our net other operating expenses were fairly close year-over-year, and our interest expense in the quarter was $1.9 million compared to $1.5 million in the prior year due to higher internal interest rates and financing expenses year-over-year. Net income on the quarter, inclusive of the IEEPA tariff receivable was $1.2 million compared to a net loss of $1.7 million in the prior year. On our balance sheet, our quarter end net receivables, excluding the IEEPA tariff receivable, was $26.6 million compared to the prior year-end balance of $23 million. This increase was driven by higher sales activity in the final month of the first quarter compared to the year-end. Our net inventory balance was also up over year-end at $68.1 million in Q1 of 2026 compared to $66.4 million at the year-end 2025. Accounts payable and accrued expenses were $43.1 million compared to $38.8 million at the end of the previous year, and that was a result of the higher purchases of raw materials and inventory as we enter the seasonally stronger second quarter. Net property, plant and equipment decreased by $1.1 million from prior year, and this included $1.2 million of depreciation on the year. Capital expenditures were approximately $59,000 on the quarter. The debt on our balance sheet increased by $2.1 million from year-end. Our balance for term debt decreased by $0.5 million. Our availability to borrow today under our senior credit facility is estimated to be approximately $10.2 million, which is subject to a $6 million excess availability requirement. Our investor presentation is available on our website at dixiegroup.com. Dan?

Thank you, Allen. Continued soft market conditions within the flooring industry, driven by historically low existing home sales, high home prices and high interest rates were compounded in the first quarter of 2026 by the uncertainty caused by the conflict in the Middle East. Our gross profit margin in the first quarter of '26 was boosted by the recognition of a $3.3 million receivable for the refund of IEEPA tariffs, as Allen has explained. Without the impact of the IEEPA tariffs, year-over-year margins improved by 2% of net sales despite lower sales volume in 2026. The improved year-over-year gross profit margin is mainly the impact of our previously announced profit improvement plan. Based on our first quarter activity, including the recognition of the IEEPA tariff refund and additional new initiatives, we estimate the impact of our plan to be an improvement in year-over-year profit of $17.8 million. In the second quarter of 2026, we started seeing our -- seeing higher costs for our raw materials driven primarily by the higher price of oil. We have implemented a price increase in the second quarter as many others in the industry have to offset these rising material costs. In March, order entry was impacted by the beginning of the Iranian situation that seemed to improve later in the month. For the first 5 weeks of the second quarter, we have begun to see the seasonal improvement in sales activity. At this point, sequential improvement from first quarter has been reflected by improvement in orders and sales in the mid-teen range, which means order entry has been equivalent to the same period a year ago. We continue to see our soft surface business outperform the industry. In the first quarter, we participated in multiple trade shows, including the International Surfaces trade show in Las Vegas, where we showcased 34 new broadloom carpet styles across our nylon polyester and decorative collections. Our focus continues to be the creation of differentiated styles for the mid- to high-end consumer with an emphasis on color, pattern and textural visuals. We also showcased new visuals and innovations in our hard surface offerings. This included new colors and patterns in our Fabrica wood program and expanded WPC offerings with new visuals and colors in our TRUCOR brand. Due to the uncertain geopolitical situation, we're still unsure when existing home sales will break out of its current level of about $4 million per year, which is at a 30-year low despite the fact that our population has grown during that 30-year period by 70 million people. Hopefully, the Iranian situation will be resolved soon and raw material pricing volatility will be reduced. Currently, the Section 122 tariffs are set for all countries at 10%, which will expire on July 24. We anticipate the ongoing Section 301 investigations will lead to new tariffs, probably at rates similar to what we experienced under the IEEPA tariff rates. During these volatile and uncertain times, we continue to take actions that will enhance our profit improvement plan. During the second quarter, we're downsizing our Porterville, California yarn operation, which will have a positive impact on our future cost structure. We continue to explore ways to improve profitability. At this time, we will open the meeting to questions.

At this time, we'd be happy to open the line to the conference call for questions. [Operator Instructions] Our first question comes from the line of Barry Blank with J.H. Darbie.

Dan, I have one. The first question is with this prolonged drought in housing construction, are you seeing the competitors -- there's a lot of small competitors weaken and possibly getting out of the business. And of course, that would strengthen the others, but maybe be an opportunity for some acquisition or so at a very reasonable price. Do you see any of that?

Barry, to be candid, most of the small competitors are out of the business already in the soft surface side. In the hard surface side, there are many, many competitors. But on the soft surface side, which is the bulk of our business, over 80%, most of that took place in the last 10 to 20 years. There are a few smaller ones, but they're very specialized, and I don't see a lot of more consolidation.

My second question, let's assume...

Barry. We have trouble hearing you.

Can you hear me now?

Yes.

Okay. Let's assume that this prolonged housing starts continue on longer than we expected to. I mean, I, for one, don't see lower interest rates, maybe I'm wrong, but I see maybe possibly higher interest rates and the storm may be longer than anticipated. What's your comments about that?

Well, housing starts are -- haven't been impacted as much as existing home sales and existing home sales tends to be more a barometer of our business. In new homes, typically flooring is not luxury, the more luxurious products. It's the more basic products. We tend to specialize on more luxurious products. So existing home sales would be a better barometer and it has been stuck at that $4 million level for several years and a lot longer than we anticipated. Our response is to continue cutting costs, trying to improve operations, and that's exactly what we've been doing and we'll continue to do.

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

Just first question on the $3.3 million refund, is that number cut for accounting purposes? Or is that the full amount that you do expect?

Yes, that is the full amount. There's a small very inconsequential amount related to liquidated tariffs that were not recognized, but $3.3 million is the expected amount prior to any interest that is applied. We do expect from the Supreme Court ruling and all the information from the CBP that there will be interest, but we do not know that amount, how it would be applied, and it has not yet been recognized.

Okay. And any idea on the timing on the $3.3 million number?

Timing of cash Right. We do not know the timing of cash payment. The CBP in their last meeting, which I believe was on the 28th of April, there was a comment made that it could start as early as this week. We are watching the CAPE system for activity there just to see if there's movement in that direction. I have not seen it at this point, but I believe the long scope or the initial conversation was a 60-day time frame of payment. So hopefully earlier, but within net 60-day period.

Okay. And then any change in the performance between hard and soft? I think over the last few quarters, your soft business rather has outperformed the hard side. Was that the case in the first quarter? And then any changes subsequent to the price increases?

Actually, no. We continue to outperform the industry on soft surface, and we do not on hard surface. Hard surface is a much smaller part of our business, but we continue to perform better with soft surface than we do with hard surface.

Okay. And then you and I think other players put in place price increases in April. Is there any mismatch as far as converting the price increases into revenue and then the cost going up because you're on LIFO? Meaning will you be hit more in the June quarter than September from a margin perspective?

Let me start and then, Allen, you add to this. We are on LIFO, as you correctly indicated, which means our costs impact us right away. We did increase prices in April. It was -- came effective April 27. Those prices will certainly help mitigate the impact of the cost increases, but we will have cost increases before the impact, we see the full impact of the price increase.

Yes. And I would agree with that and wouldn't really be able to add much more. The cost increases are pushed through when identified and when the LIFO are recognized timely.

Okay. And just a technical question. I know it's a complex calculation, but just directionally, the LIFO reserve will step up in the current quarter, correct, Allen?

It will. Yes, it will from recognizing the higher cost, yes.

Okay. And then I think you addressed the liquidity partly. But on the last call, I had asked about the potential to monetize additional real estate assets, and I think you said that was something that you were looking into. How far along is that process?

We are working on it. I wouldn't want to give an assessment on timing because, obviously, it's something that we work through with potential lenders and others who would be involved in that and our Board. So we are continuing to look at our opportunities there. And when an opportunity that meets our expectations and the Board's approval is in place, we'll move forward with that and have that information available.

Okay. Are you pursuing other financing avenues at this point to kind of give you a little bit more wiggle room over the next few quarters from a liquidity standpoint?

Yes. Mike, we do look really constantly assessing our opportunities based on, again, the assets that we have available, we have equipment, we have real estate. We have partners out from a lending perspective that we stay in contact with. And again, just having that available to the Board is opportunities and so we can talk about those opportunities and make decisions around that. So that way the answer is yes. We continue to look and continue to assess opportunities.

Okay. And then just last question. Can you quantify the savings from the announcement you made this morning on the call related to California?

We feel that we will see -- there will be some costs involved in this. The net impact will be close to $0.5 million this year, we think.

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

Christine, thank you, and thank all of you for joining us for our quarterly conference call and look forward to visiting with you at the end of the second quarter.

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