The Dixie Group - Earnings Call - Q1 2025

Executive Summary

• Revenue declined 3.5% year over year to $62.99M, but gross margin expanded 260 bps to 26.8%; operating income turned slightly positive at $0.01M and net loss narrowed to $1.58M ($0.11) from $2.41M ($0.16) in Q1 2024. Bold positives: gross margin expansion and positive operating income.
• Cost actions and operating efficiencies drove margin improvement; soft surfaces and premium products outperformed, while hard surface lagged amid tariff uncertainty.
• Liquidity strengthened with a new $75M revolving senior credit facility; availability stood at ~$12.0–$12.3M, subject to a $6M minimum excess availability requirement.
• Near‑term narrative catalysts: tariff risk prompting industry price increases, continued margin focus, and product initiatives (Step Into Color, TRUCOR/Fabrica wood) that support mix; sequential sales early in Q2 tracked ~10% above Q1 levels despite soft demand.

What Went Well and What Went Wrong

What Went Well

• “Despite the lower sales volume, our gross margins in the first quarter were favorable to prior year at $16.9M or 26.8% vs. 24.2%,” driven by cost reductions and operating efficiencies.
• Operating income improved to ~$0.01M vs. a loss of $0.86M in Q1 2024; net loss from continuing ops narrowed to $1.58M ($0.11) vs. $2.41M ($0.16).
• Strategic progress: successful major trade shows and 25 new carpet styles; hard surface pipeline expanded (TRUCOR PRIME X/WPC, Boardwalk SPC, SPC tile/stone visuals), supporting premium mix and future growth.

What Went Wrong

• Net sales fell to $62.99M (−3.5% YoY), with hard surface products trailing amid tariff uncertainty and weak remodeling/housing backdrop (low existing home sales, low consumer confidence).
• Selling and administrative expenses slightly above prior year ($16.87M vs. $16.37M) due to higher employee benefit costs and professional fees; interest expense remained elevated at $1.49M.
• Working capital intensity increased sequentially: receivables up $4.6M (seasonality), combined accounts payable and accrued expenses up ~$11.0M to replenish inventory ahead of expected Q2 demand.

Transcript

Operator (participant)

Good day and welcome to the Dixie Group Incorporated's 2025 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.

Daniel Frierson (Chairman and, CEO)

Thank you, Rob, and welcome everyone to our First Quarter 2025 Conference Call. I have with me Allen Danzey, our CFO. Our safe harbor statement is included by reference both to our website and press release. For the first quarter of 2025, the company had net sales of $62.99 million as compared to $65.254 million in the same quarter of 2024. The company had an operating income of $11,000 in the first quarter of 2025 compared to an operating loss of $0.857million in the first quarter of 2024. The net loss from continuing operations in the first quarter of 2025 was $1.582 million or $0.11 per diluted share. In 2024, the net loss from continuing operations for the first quarter was $2.410 million or $0.16 per diluted share. The industry continues to experience weak market conditions driven by low existing home sales and lower consumer confidence.

Our first quarter net sales were down 3.5% from the same period a year ago. Sales of our soft floor covering products again outperformed our hard surface products, and we continued to gain market share in the soft surface category. Just as in the previous quarter, premium products performed better than the market in all categories. Despite the lower sales volume, our gross margins in the first quarter were favorable to prior year at $16.902 million or 26.8% of net sales compared to $15.008 or 24.2% of net sales in the prior year. The improvements are primarily the result of our continued focus on cost reductions and operating efficiencies throughout the company. At this time, Allen will review our financial results, after which I'll have additional comments regarding our results.

Allen Danzey (CFO)

Thank you, Dan. As Dan commented, we're very pleased to see the strong improvements in the year-over-year gross margins, and that's despite the lower sales volume. This is a result of our ongoing initiatives to reduce costs and materials and throughout our production processes. The selling and administrative expenses in 2025 were $0.5 million or about 3.1% higher than prior year, and that increase was partially driven by higher professional fees in our administrative areas during the quarter. Our first quarter operating income was $11,000, and that compared to an operating loss in 2024 of $0.85 million. The 2025 operating income included income from our leasing of available warehouse space to other tenants and the year-over-year reductions in facility consolidation expenses. Our interest expense on the year was $1.5 million. That compared closely to the interest expense in the same period of the prior year.

The net loss on the year 2024 was $1.7 million compared to a net loss of $2.5 million in the prior year first quarter. On our balance sheet, our year-end receivables of $27.9 million was up from our seasonally low year-end balance of $23.3 million. Our net inventory balance at the end of the first quarter was $66.7 million, and that compared to a net inventory balance of $75 million in the first quarter of the previous year. We had a planned reduction of inventory in the fourth quarter of last year, and we continue to manage inventory at lower levels while maintaining timely service to our customers. Cost payable and accrued expenses were $41 million compared to $39 million in the same period of the previous year.

Net property plant and equipment decreased by $1.2 million from prior year-end, and that decrease was driven by $1.3 million in depreciation during the quarter, offset by $74,000 in capital expenditures. The planned capital expenditures for 2025 total $2.5 million, and depreciation is expected to be $5.4 million. Within the quarter, we were pleased to announce the closure on our new $75 million senior credit facility with MidCap Financial. Proceeds from this facility were used to pay off and close our former senior credit facility with Fifth Third Bank. This new agreement is for a three-year term. The debt on our balance sheet increased by $2.3 million from year-end. As part of our new loan agreement, we now have restricted cash of $4.3 million to secure our letters of credit. Under our former loan agreement, this amount for the letters of credit was a reduction of our loan availability.

The increase in debt includes the additional borrowing to cover this restricted cash that was held for letters of credit. Our availability at standard our new senior credit facility was $12.3 million, which is subject to a $6 million excess availability requirement. Our investor presentation will be available on our website at www.dixiegroup.com.

Daniel Frierson (Chairman and, CEO)

Thank you, Allen.

Low consumer confidence was further impacted during the quarter by the uncertainty around the announcement of tariff increases. We had previously minimized the amount of our products being imported from China, and we have worked with all of our suppliers of imported products to reduce the impact of tariffs on the costs of our products. The situation is very volatile at this time and is difficult, if not impossible, to predict what the impact of increased tariffs will be on imported products. At this time, several industry players have already announced price increases to mitigate the impact of increased tariffs and/or potential tariffs. We were pleased by the success of the first quarter trade show, including services, where we showcased 25 new styles of carpet across our nylon, polyester, and decorative collections.

Our focus continues to be on creating differentiated styles for the residential market, with an emphasis on color, pattern, and textural visuals. This includes our Step Into Color campaign, where we offer the best and broadest color lines in the industry, including custom color offerings. In our white dyeable nylon collections produced through our nylon extrusion operation that began production last year, we also showcased eight hard surface collections with new visuals and innovations and 10 new colors in our Fabric of Wood program, which were all very well received and will continue to fuel growth in this program. In our true core brand, we are focused on simplification of our product line and consumer-friendly messaging. We featured new visuals and constructions in several of our SPC, WPC, and laminate programs.

The residential remodeling market continues its multi-year slump, and no one knows for sure when the market dynamics will change. Until that happens, we will continue to manage our business to reflect the current conditions. We have seen continued improvements in our operations, with major strides being made in productivity, quality, and raw material utilization. We've also had reductions in inventory and with better service to our customers. We are continuing to minimize expenses and capital expenditures, reduce overhead costs, and lower operating costs, thereby improving gross margins. As Allen noted, during the first quarter, we closed on a new three-year $75 million credit facility.

First quarter, we completed the first year of our extrusion operation, which has contributed to our margin improvement and supports our commitment to piece-dyeable nylon fiber, which enables us to offer a broad palette of color to our discriminating customers, which we are promoting with our Step Into Color marketing campaign. Sales for the first five weeks of the second quarter are running slightly behind the year-ago period, but sequentially about 10% above the first quarter levels. We believe that the actions we have taken to improve our results during 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 on 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 and a strong residential remodeling market. At this time, we would like to open the call to questions.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question at this time, you may press Star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press Star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we pull for questions. Thank you. Thank you. We have a question from the line of Barry Blank with JH Darbie. Please proceed with your question.

Barry Blank (Broker)

Good morning, Dan. It was a good quarter.

Oh, Barry.

A couple of questions. Previously, you mentioned there was a stock buyback program. Is that program still in effect? If so, how much have you used of the allocation?

Daniel Frierson (Chairman and, CEO)

Barry, that program is not in effect anymore. We ceased that during the latter part of last year.

Barry Blank (Broker)

Okay. My second question is, due to this downturn, are you seeing much consolidation in the industry? Companies either merging or going out of business?

Daniel Frierson (Chairman and, CEO)

In terms of manufacturers, no. We have not seen much consolidation at all, much consolidation activity. At the retail level, there have been some smaller retailers who have gone out of business, and I think that will—there's always churn there because there are so many retailers of floor covering product. No, we have not seen at the manufacturing or distribution level much consolidation.

Barry Blank (Broker)

My last question is, have you seen much of a change in the buying habits between people going to the big box stores versus the more, I guess, boutique kind of places that you would buy the flooring from, or is it pretty much the same?

Daniel Frierson (Chairman and, CEO)

As I tried to point out in my comments, I think in every flooring category, the premium products are performing better than the market for those products overall. We certainly have seen that in the soft floor covering market in spades. Our Fabric of Brands has done exceptionally well and is obviously premium products. I think you're seeing that overall, but that's not uncommon in a downturn. Matter of fact, the only downturn I can remember when that did not happen was in 2008 and 2009 during the Great Recession.

Barry Blank (Broker)

Okay. Thank you very much.

Daniel Frierson (Chairman and, CEO)

Thank you, Barry.

Operator (participant)

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 (Chairman and, CEO)

Bob, thank you very much, and we appreciate everybody being with us for the first quarter conference call. We're looking forward to your being with us again in about three months for our second quarter conference call. Thank you.

Operator (participant)

This will conclude today's conference. We disconnect your lines at this time, and thank you for your participation.