The Dixie Group - Q2 2024
August 8, 2024
Transcript
Allen L Danzey (VP and CFO)
$7 million in the same period of 2023. On the year, we have a net loss of $1.9 million, compared to a net loss in the prior year at $3.5 million. Again, this improvement in our income is a result of the higher margins, primarily related to consolidation of the manufacturing operations on the East Coast, savings from extrusion operations, and other year-over-year cost-cutting initiatives.
Turning to our balance sheet, our quarter-end receivables increased by $4.3 million from the prior year-end balance. The increase was driven by higher billings to customers during the last month of the current period as compared to the seasonally lower December timeframe. Our inventory was in line with prior year-end balance. We will continue to closely manage the inventory levels in line with demand, while continuing to remain focused on maintaining timely service to our customers.
Accounts payable and accrued expenses were above prior year-end by $6.2 million, primarily due to raw material orders online, with a higher mid-year sales activity as compared to the prior year-end. Net property, plant, and equipment increased by $4.7 million from year-end. This increase included cash purchases of $1.4 million and prior year deposits moved to property, plant, and equipment in the amount of $6.5 million.
These additions to PP&E were offset by approximately $3.3 million in depreciation. Our debt increased by $3.4 million from the end of 2023, and that was mainly driven by investments in samples and other costs associated with our product introductions in the first part of the year. At quarter-end, our unused borrowing availability under the revolving credit facility was $14 million.
Our investor presentation is available on our website at www.dixiegroup.com. Dan?
Daniel K Frierson (Chairman and CEO)
Thank you, Allen. Our extrusion facility, which started up in late Q1 of this year, operated exceptionally well throughout Q2. This facility is providing cost reductions in nylon fiber and a continuous supply of fiber to meet our needs and help us serve our customers. This fiber is being used in many of our new carpet styles this year.
We're focused on extruding white-dyeable nylon, which is used in our long, beautiful color lines through all of our carpet brands. During the quarter, we launched our Step into Color campaign, with in-store marketing materials and a digital presence as well. This campaign connects our retail customers, designers, and consumers with a world of color options.
This includes custom color, which is now available in all brands, and is a great option for the customer who is looking for that perfect hue of a particular color. In a residential market, which continues to move toward offering a sea of sameness, that is, solution-dyed polyester, we're setting ourselves apart with beautiful, timely color offerings.
We have launched 18 new carpet styles in Q2 of 2024, including six new DuraSilk solution-dyed polyester styles in our DH Floors line and 11 new decorative styles in our 1866 and Décor offerings. We also launched six new collections with 38 SKUs as updates to our hard surface programs. These included SPC tile looks, high-end WPC, and high-end engineered wood in our Fabrica program. These launches complete our new product launches for 2024.
We did a very good job this year in getting products launched early, and our new products are already generating meaningful volume. When it comes to products, we're not taking our foot off the gas, as our design teams are already busy putting together new products for 2025. On the digital marketing front, we continued our partnerships with Broadlume and Roomvo.
As a result, we're seeing increased lead generations, sample ordering from our website, and product visualization online. This is promising, this is promising, as today's flooring consumers are very much engaged in the digital space, and serving the customer where they are is critical. Our Premier Flooring Center retail program continues to show tremendous promise. After outpacing the market by a wide margin in 2023, we have seen the results improve even more in 2024, with strong growth for Q2 and first half.
Our investment in samples, merchandising, and training in these stores is paying dividends with increased business and share gain. We're excited to see where we can take the PFC concept in the future. Our improved margins are a result of our cost reduction program starting in 2023 of $35 million, and our cost reduction this year of some $10 to 12 million. We have also already begun a cost reduction plan for next year.
These plans have enabled us to better manage the controllable aspects of our business. In addition, we have continued to manage our working capital to improve cash flow and will continue to minimize capital expenditures until business conditions improve. When interest rates begin to decline, the industry will begin to improve. We feel our business is closely tied to existing home sales and mortgage rates.
Existing home sales have gone from over 6 million units to below 4 million, the lowest since 1995, when there were far fewer homes. As business conditions improve, we think existing home sales will improve and revert to the mean. We do not expect Q3 to show improvement, but think interest rates should decline later this year or early next year.
Q3 to date continues to lag last year with soft surface, which is down slightly, performing better than hard surface for us. We're excited about the leasing out of our entire Saraland facility and the impact it will have on our company's income and cash flow over the ten-year period. We do have additional space of over 400,000 sq ft that we will be attempting to lease out in the future.
Again, the good news is that we have returned to profitability in a very challenging business environment. At this time, we'll open the meeting to questions.
Operator (participant)
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star One on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press Star Two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question comes from Mike Hughes with SGF Capital. Please proceed with your question.
Mike Hughes (Analyst)
Good morning. Thanks for taking my questions. First one, you said in the press release, I think in your commentary, that the new product launches are complete for 2024. Will that have an impact on the SG&A in the back half? I think maybe you run sampling costs through SG&A. Would that step down in the third and Q4?
Allen L Danzey (VP and CFO)
From an expense standpoint, we do spread the cost of our sampling activities in line with sales in the year of introduction. It is, to some degree, leveled. The expenses will not be as greatly impacted, but it will be a positive to our cash flow as we pay for that investment, heavily weighted to the first half of the year.
Mike Hughes (Analyst)
The $10 million in cost savings, how much have you achieved at this point? Secondarily, you alluded to another cost savings program for next year. Would it be of equal magnitude, or is it too, really too early to say?
Daniel K Frierson (Chairman and CEO)
Let me respond and then ask Allen to respond also. Of the $10 to 12 million reduction this year, I would say we were about 35% to 40% in the first half and the remainder in the last half of the year. In terms of the plan for next year, we are just beginning that plan. It is not the same magnitude. Right now, we're at about half the level of the reduction for this year.
Allen L Danzey (VP and CFO)
I would agree with that. As we do expect to be able to achieve the savings that we have discussed for this year, as the year plays out, the extrusion operations, which started in the February timeframe, are contributing now and will continue to contribute going forward. We continue to look next year and on for additional cost savings, and we'll update on that as we can.
Mike Hughes (Analyst)
The gross margins this quarter at a little over 28% were impressive. Was there anything one-time in nature in that number that would make that unsustainable? I know, I know it's gonna vary with the level of revenue, but if you were to repeat this level of revenue, would that be the number on a go-forward basis?
Allen L Danzey (VP and CFO)
We do. There's always one-time things going both directions every period, but there was nothing of any significant magnitude during the quarter. We feel like these are sustainable margins at the volume that we are at, reflecting again cost savings throughout the company, particularly on the East Coast, as we've consolidated manufacturing operations, which made available space that we're also able to take advantage of by leasing out.
Mike Hughes (Analyst)
The hard surfaces business, I think your commentary about soft surfaces would imply that hard surfaces was down maybe 15% to 20%. Number one, is that correct? If it is, can you just comment on that?
Daniel K Frierson (Chairman and CEO)
Yes, that is correct. Of course, hard surface is less than 20% of our total business. our soft surface being down slightly is a positive for us, and we are gaining market share on the soft surface side. We don't have good data on the hard surface side to know exactly what the market is down. We do on the soft surface side. Yes, our hard surface business was down in the 15% to 20% range for the quarter.
Mike Hughes (Analyst)
On the $1.8 million in sublease income, is that all incremental? Would you just straight line that we'll start to see $450,000 a quarter in other income?
Allen L Danzey (VP and CFO)
It is straight line. It's incremental, except to the point that we do have 200,000 sq ft of the space in Saraland is already under lease at a similar lease rate. This is replacing that, taking the full place of that. It's incremental, but we already have about $1 million, just under $1 million, current lease revenue. The $800,000 additional would be incremental.
Mike Hughes (Analyst)
Okay, and the additional space you're looking to lease out, what's the level of interest at this point?
Allen L Danzey (VP and CFO)
We're not able to say at this point. We focused most of our efforts on the Saraland facility because of the market stability that we have in that area. We are shifting our focus now to the other available space that we have also been working to clean out to make available to lease.
We're early in the stage of that, excited about the opportunity to focus on it and see if we can get some return. We do not expect the rates to be as high as what we were able to get in the Saraland market, but certainly a great opportunity for us, and we look forward to working on that.
Mike Hughes (Analyst)
Last, I'm sorry, last question for you. What do you expect the cash CapEx to be in the back half of the year?
Allen L Danzey (VP and CFO)
In total, we expect to be in the $9.2 to 9.4 range, which includes the-
Daniel K Frierson (Chairman and CEO)
He said the last half, the back half.
Allen L Danzey (VP and CFO)
The CapEx for the back half. We're in the $1 to 1.5 million range, looking at just general maintenance projects. As Dan mentioned earlier, we're looking at our CapEx over the upcoming periods, to maintain at low levels, waiting on business to improve and basing our decision around operations.
Mike Hughes (Analyst)
Did the first half include CapEx for the extrusion projects? Is that why that number is a little bit elevated?
Allen L Danzey (VP and CFO)
We've recognized the CapEx of the extrusion equipment in Q1. Again, the cash portion of that was most heavily spent in deposits in the prior years. It was not a cash commitment this year, as much as it was just recognizing the capital on our books.
Daniel K Frierson (Chairman and CEO)
The cash portion for this year was in Q1?
Allen L Danzey (VP and CFO)
Yes.
Mike Hughes (Analyst)
Thank you very much. That's all I had.
Daniel K Frierson (Chairman and CEO)
Thanks for your question, Mike.
Operator (participant)
With no further questions in the queue, I will now turn the call back over to Dan Frierson.
Daniel K Frierson (Chairman and CEO)
Maria, thank you very much. We appreciate everybody being with us this quarter. Again, we're pleased to be returning to profitability in a very difficult business environment, and looking forward to, hopefully, lower interest rates in the future, which we think will have a major impact on our industry. Thank you.
Operator (participant)
Ladies and gentlemen, that will conclude today's conference. Thank you again for your participation.