Dixie Group, Inc. (NASDAQ:DXYN) Q3 2023 Earnings Call Transcript November 13, 2023 10:00 AM ET
Company Participants
Daniel Frierson – Chairman & CEO
Allen Danzey – VP & CFO
Conference Call Participants
Barry Blank – J.H. Darbie
Operator
Good day and welcome to the Dixie Group, Inc. 2023 Third Quarter Earning Conference Call. Today’s call is being recorded. At this time for opening remarks, I’ll turn the floor over to Chairman and Chief Executive Officer, Dan Frierson. Please go ahead.
Daniel Frierson
Thank you, Rob, and welcome everyone to our third quarter conference call. I have with me today Allen Danzey, our CFO. Our Safe Harbor Statement is included by reference both to our website and press release.
For the third quarter, our net sales of $68.6 million were down approximately 4% compared to the same quarter of last year. Net operating income was a loss of $913,000 compared to a loss of over $7 million in the third quarter of 2022. Despite the lower sales volume, this year our gross margin for the third quarter improved by over 9 percentage points from 17.5% a year ago to 26.6% this year. First nine months of 2023 operating income was a loss of $354,000, which included facility consolidation expenses in the amount of $2.3 million. The $354,000 loss compared to an operating loss of $12.3 million for the same period a year ago.
The housing market remains constrained due to limited supply, high interest rates, and continued inflation pressure. Consequently, the residential flooring market remains weak as a result of lower home resales and deferred home improvement projects. Our sales for the quarter, as I indicated, were down 4%, but we believe the industry was down significantly more. So we believe we gained market share in our markets again this quarter. The flooring industry is experiencing a cyclical downturn like we’ve had many times over the years. It’s too early to determine when the economic situation will improve, but at some point it will, and the industry will experience a rebound and growth.
After Allen reviews our financials, we’ll discuss how we’re working through the downturn and preparing for the future. Allen?
Allen Danzey
Thank you, Dan. To reinforce what Dan said about our sales, in the third quarter we did see the 4% decline in sales down to $68.6 million from the prior year quarter at $71.8 million. [indiscernible] on the nine months ended September 30th, net sales of $210 million was 10% below the net sales of $233 million in the same period of the prior year. A decrease in sales over the nine month period was partially attributable to a loss in volume in the mass merchant channel due to a shift in strategy by our largest mass merchant customer to lower price point offerings.
Net sales are also unfavorably impacted by high interest rates and inflationary concerns impacting consumer confidence as reflected in lower home remodeling activity. As Dan mentioned, the gross margins through the first nine months of 2023 are significantly improved over 2022, as a result of our restructuring, facility consolidation efforts that we began in 2022 and that continued into 2023. Our gross margins in the third quarter and year to date were 26.6% of net sales compared to margins in the prior year below 19%. Low margins in the first half of 2022 were the results of exorbitantly high pricing from our 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 2022, we had changed our raw material fibers over to multiple suppliers at lower cost points and the ocean freight rates had returned to more normal levels. We also saw reductions in the cost of raw materials and favorable operating results from our manufacturing facilities in 2023.
The selling and administrative expenses in the first nine months of 2023 were slightly lower in dollars compared to the same period in the prior year, but higher as a percent of the lower sales in 2023. Selling expenses are primarily driven by samples of marketing investment and new growth initiatives. We incurred $552,000 in expenses for facility consolidation during the third quarter of 2023. This expense was primarily related to facility closure and maintenance costs. Our operating loss inclusive of facility consolidation expenses was $913,000 compared to a $7.2 million operating loss in the third quarter of 2022. For the first nine months of 2023, we had an operating loss of $354,000 compared to a loss of $12.3 million in the same period of 2022. The 2023 year-to-date operating loss included $2.3 million in facility consolidation expenses.
Interest expense on the quarter was $1.8 million compared to $1.3 million in the same quarter of 2022. Interest expense on the nine months ended September 30th, 2023, was $5.5 million compared to $3.5 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 $2.4 million compared to a net loss in the same period of the prior year at $8.8 million. On the year-to-date, we had a net loss of $5.9 million compared to a loss of $16.6 million in the prior year.
Looking at our balance sheet, our receivables increased by $3 million from the prior year end balance. The increase was driven by the higher comparative sales volume during the last months of the respective periods. As a result of decreasing costs and plan reduction in volume, our inventory was down from the prior year-end balance by $3.8 million. Accounts payable and accrued expenses were up over prior year-end by $5.9 million, primarily due to timing and increased spending related to higher anticipated sales volume going into the seasonally stronger early fourth quarter.
Capital expenditures for the quarter totaled $166,000, bringing the year-to-date to $763,000. Total capital expenditures are planned around $1 million for the year, and depreciation is estimated to be $6.2 million. Our debt increased — excuse me, our debt decreased by $3.4 million from the end of 2022 driven by operations, decreased inventory and timing and lower cost of expense payments and purchases offset by the high activity related to samples for new products and the cost of facility consolidations. Our borrowing availability at quarter end was $15.9 million. Our investor presentation is available on our website at www.dixiegroup.com.
At this time, I’ll hand it back over to Dan Frierson.
Daniel Frierson
Thank you, Allen. We are continuing to manage the controllable aspects of our business by implementing productivity improvements, reducing costs and headcounts, restructuring assets where appropriate, and managing our working capital to optimize our cash flow, all of which lowers our expenses, improves our results, and decreases debt.
Our third quarter results and improved gross margin show the positive impact of the actions we have taken over the last year or so. Our facility consolidations have better aligned demand with lower cost capacity. Our headcount reductions have lowered our costs. And we have experienced operational improvements in our manufacturing facilities. We are still on track for reduced costs this year by $35 million. In addition to lowering costs and improving operations over the last year, we have continued to invest in our growth initiatives, which has enabled us to gain market share.
We have continued to invest in our hard surface initiative and have broadened our product offering with particular emphasis on innovative products. In this category, we have continued to gain retail floor space and market share. The products today include SPC, WPC, laminate, and engineered wood with appropriate merchandising for each category. Our decorative products initiative, which encompasses 1866 by Masland and Décor by Fabrica, has continued to grow this category for us — has continued to grow this category for us, while the industry has not grown. We now have a broad offering of domestic and imported products which allows our customers to offer a wide assortment of wool and other decorative products to their most discerning customers. We continue to gain momentum as our new product samples hit the floor.
The third initiative has been to emphasize innovative polyester products to fill price points which are important to certain customers seeking affordable fashion. Our DuraSilk solution dyed program, merchandised as the Elements Collection, has gained traction quickly in the market this year, and we have experienced significant growth. With these three initiatives in place, we have invested heavily in displays and samples, which has enabled us to expand our retail exposure. This investment has helped us outperform the market in sales, but at a cost. We would expect our selling costs next year to return to a more reasonable level. Despite the investment in many new products, we were able to reduce debt by over $3 million at the end of the third quarter compared to the end of the prior year.
Raw material costs peaked early in the year and prices have decreased as demand declined and inflation moderated. The decrease in raw material costs has helped offset the increase in people costs, which have increased significantly due to the rapid inflation which we all have experienced. In order to better position our company strategically, we will begin our extrusion of nylon in the first quarter of next year. We have taken this action to moderate the impact of any future disruptions of raw materials and to lower costs.
The industry continues to experience a difficult period as discretionary spending seems to be focused on experiencing things rather than purchasing items. Despite these trends, the upper end of the market is outperforming the market in general. Our focus on the upper end continues to be a plus. And for the first six weeks of the fourth quarter, our sales and orders are slightly better than a year ago. At this time, we’ll open the meeting for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Thank you. Our first question is from Barry Blank with J.H. Jarby. Please proceed with your questions.
Barry Blank
Good morning, Dan. Dan, I have a question. Assuming that interest rates start to come down in the second half of next year, what do you anticipate the lag time is of an interest rate decrease to the sales starting to increase for current homeowners?
Daniel Frierson
Barry, that’s an excellent question. I wish I had a crystal ball that could tell me that. I don’t know exactly when. Certainly, remodeling comes first and then, obviously, more home resales. But I think lower interest, significantly lower interest costs, there would not be too long a lag. I think if it is a very slow decline, it obviously will take much longer.
Barry Blank
I have one additional question. The fact is that the Lowe’s business is no longer there. Have you increased distributors or selling different companies that are selling the product to make up for some of the lost volume in Lowe’s?
Daniel Frierson
Well, as you know, our focus is on the residential retailer all across the country. We do not at this time sell the big boxes. We think their market share has declined, however. And our focus is on retailers throughout the country, and we feel like we are gaining market share in that piece of the market.
Barry Blank
Thank you very much.
Daniel Frierson
Thank you, Barry. The next question is from the line of Barry Gertner with [Improver] (ph). Please proceed your questions.
Unidentified Analyst
Thanks, Dan. I guess it’s a call of Barry’s today. I just had two quick questions for you. The first being, these facility consolidation costs that we’re seeing and then kind of in conjunction with announcing kind of in-house production of materials not to rely on supply chain partners. Could you give us an idea specifically around like which one of the facilities you’ve kind of been able to gain sort of progress on consolidating into and how we should think about your footprint going forward with this new activity of manufacturing in-house?
Daniel Frierson
Let me take a stab at that and then ask Allen to comment on it as well. In terms of [indiscernible] perfect manufacturing or tufting, we had two facilities that were in operation, we consolidated that into one, into our Eton plant, which was a lower cost operation. And therefore, there were not only advantages of the consolidation, but consolidation into a lower cost facility. The same thing was true of our yarn manufacturing. We were producing yarn in Atmore, as we do in Roanoke, Alabama. We consolidated all that into our Roanoke, Alabama plant, which was the lower cost producer. And it has enabled us to lower our costs overall.
Allen, you have comments there?
Allen Danzey
Yes, the facility consolidation expenses that we continue to incur this year, we have estimated about $500,000 left in that process, which is mainly focused on taking down existing racks and equipment in the facilities that we vacated down in the South Alabama area. We continue to utilize those facilities for administrative and distribution of LDF and we have some space available that we are looking to be able to lease out going forward as well.
Unidentified Analyst
Thank you. That’s extremely helpful, guys. And then just one quick follow-up. On the [Ardennes Ville] (ph) facility, you had mentioned a little while back kind of a complete, like, announced the sale lease back and then that had fallen through. I want to know if there had been any progress or if you guys are still in the — considering looking at a deal there?
Daniel Frierson
Yes, as we announced — when we did announce the mass opportunity that we were working for, following through, we continued to pursue opportunity for a sale lease back situation that we would be able to close by the end of the year.
Unidentified Analyst
Thank you very much.
Allen Danzey
Thank you.
Daniel Frierson
Thank you.
Operator
Thank you. With no further questions in the queue, I’ll turn the call back to Dan Frierson for any additional closing remarks.
Daniel Frierson
Thank you, Rob, and thank all of you for being with us today. Obviously, the market — our market has been very slow this year. Despite that, we have continued to lower costs. We plan to continue lowering costs going into next year. And — but have invested in our growth initiatives, which we think once business improves will have a significant impact on our sales. Thank you for being with us.
Operator
Ladies and gentlemen, now we will conclude today’s conference. Thank you again for your participation.
