The Dixie Group - Q3 2024

Executive Summary

• Net sales declined 5.4% year over year to $64.9M, and the company swung from Q2 profitability to a Q3 operating loss (-$2.1M) as gross margin compressed to 24.6%; diluted EPS from continuing operations was -$0.26, with margin pressure driven by lower plant volumes plus non-recurring California utility capacity charges and higher self-insured medical/workers’ comp costs.
• Sequentially, revenue fell from $70.5M in Q2 to $64.9M, with gross margin down from 28.1% to 24.6% and operating profit turning to loss; management noted Q4-to-date sales are ~1% below prior year and soft surface sales slightly above prior year, pointing to stabilization into year-end.
• The company continues to execute cost programs (2023 $35M, 2024 $10–12M), leverage in-house extrusion for lower-cost fiber and supply security (amid a white nylon supplier shutdown), and expand digital marketing and Premier Flooring Center retail programs, helping Dixie outperform industry soft surface trends (DXYN -3% vs industry ~-6.5% in Q3).
• Structural items remain in focus: OTCQB transition (post NASDAQ delisting) to reduce internal costs and maintain reporting; revolving credit availability was $11.7M at Q3 end (down from $13.6M in Q2), and management fielded questions on refinancing the October 2025 line without providing specifics.

What Went Well and What Went Wrong

• What Went Well
  • Soft surfaces outperformed industry again (DXYN down ~3% YoY vs industry ~-6.5%), supported by Step Into Color campaign and brand positioning in piece-dyed nylon versus solution-dyed polyester “sea of sameness”.
  • Extrusion line operating successfully since Q1, lowering raw material costs and securing fiber supply; particularly important after a white nylon supplier announced shutdown later in 2024.
  • Digital marketing and Premier Flooring Center stores showed strong growth, driving increased lead generation, sample activity, and share gains; management emphasized ongoing retail program returns.
• What Went Wrong
  • Gross margin compressed to 24.6% (from 28.1% in Q2 and 26.6% in Q3 2023) on lower manufacturing volume, California utility capacity charges, and higher self-insured medical/workers’ comp costs, driving an operating loss.
  • Macro headwinds (high interest rates, low existing home sales, low consumer confidence) continued to depress overall sales volume; management also cited hurricane impacts and elevated ocean freight rates during Q3 as additional headwinds.
  • Liquidity indicators softened sequentially (revolver availability $11.7M vs $13.6M in Q2) while debt increased $3.9M YTD through Q3, driven by product introductions and operating needs amid lower Q3 sales.

Transcript

Daniel Frierson (CEO)

Operating margins in the third quarter were unfavorably impacted by the lower manufacturing volume in the plants and significant non-recurring costs for capacity charges from utilities at our manufacturing facilities in California, and higher costs related to our self-insured medical benefits and workers' compensation. At this time, for a financial review, I will turn it over to Allen Danzey.

Allen Danzey (CFO)

Thank you, Dan. As Dan mentioned, our net sales in the third quarter were down 5.4% from the prior year, and they are down 4.3% on the year to date. The high interest rates and low consumer confidence have delayed our consumer decisions around large discretionary spending, which includes the home purchasing and remodeling, which are drivers for our business. Dan mentioned the impact on our gross profit margin, which in the third quarter was 24.6% of net sales compared to 26.6% in the same quarter of the prior year. For the year to date, September 2024, the gross margins were 25.7% compared to 26.6% in the prior year.

Despite the lower third-quarter margins, we believe the positive results of our cost reductions throughout the company, our facility consolidation on the East Coast, and the savings from the successful startup of our extrusion operations will restore the higher margins in line with volumes. Selling and administrative expenses for the third quarter and year to date September were lower in dollars and as a percent of sales when compared to the prior year. This was the result of year-over-year cost-cutting initiatives, particularly in our sales and administrative areas. Our interest expense on the quarter was $1.6 million compared to $1.8 million in 2023. Excuse me. And for the year to date, we had $4.8 million in interest expense in 2024 compared to $5.5 million in 2023. This decrease in interest expense is being driven by a lower average debt in the current year.

The net loss from continuing operations in the third quarter of 2024 was $3.9 million compared to a net loss of $2.4 million in the same period of 2023. On the year, we have a net loss from continuing operations of $5.5 million compared to a net loss in the prior year at $5.4 million. Turning to our balance sheet, our quarter-end receivables increased by $2.9 million from prior year-end balance, but was $1.5 million lower than the same period of the previous year due to lower sales volume in the current period. Our net inventory balance at the end of the third quarter was $76.8 million. This was $3.2 million, or 4% below the inventory balance at September of 2023. We do plan to reduce inventories in the fourth quarter while remaining focused on maintaining timely service to our customers.

Accounts payable and accrued expenses were $1 million lower than the same period in the previous year, in line with the planned reduction on spending in inventory-related areas as we enter into the fourth quarter. Net property, plant, and equipment increased by $3.6 million from year-end. This increase included cash purchases of $1.9 million and prior year deposits that were moved into PP&E in the amount of $6.5 million. These additions to PP&E were offset by approximately $4.8 million in depreciation. Our debt increased by $3.9 million from the end of 2023, mainly driven by operating needs and investment in samples and other costs that were associated with product introductions in the first part of the year. Our year-over-year debt was lower by $9.5 million, and our current unused borrowing availability under our revolving credit facility is $12.3 million. Our investor presentation is available on our website at dixiegroup.com. Dan?

Daniel Frierson (CEO)

Thank you, Allen. We are pleased by the results of the successful operation of our extrusion equipment that began in the first quarter of this year. Along with providing raw material at a lower cost, the importance of securing an internal supply of fiber became even more apparent as one of our suppliers of white nylon announced they would be shutting down their operations later this year. Throughout the third quarter, we continued to promote our Step Into Color campaign through marketing materials placed in our customers' retail stores, as well as digital advertising. The Step Into Color campaign connects our retail customers, designers, and consumers with a world of color options, including custom color availability in all our brands. This provides the end user with colorful options in piece-dyed nylon as opposed to the sea of sameness that is solution-dyed polyester.

Our marketing activities in the third quarter included continued focus on expanding our digital marketing efforts, which has resulted in increased lead generation, sample order activity from our websites, and improved capabilities for online product visualization. We also saw strong growth from retail stores where we have placed our Premier Flooring Center program. The investment in samples, merchandising, and training in these stores have provided returns of increased business and greater market share. Our product and marketing initiatives should allow us to continue to outperform the industry in what has been a difficult flooring market. Our cost-savings initiatives, including the successful operation of our extrusion equipment and the consolidation of our East Coast manufacturing facilities, have us in a strong position to maximize the return from an anticipated improvement in demand going into 2025.

This higher demand is expected to be driven by higher existing home sales and remodeling as a result of decreasing interest rates and access to elevated home equity. Due to the lower level of business in the third quarter, we did not build inventory as we normally would in anticipation of a strong fourth quarter. We also anticipate lowering inventory in the fourth quarter, so we will underproduce our sales during this period. The hurricane season impacted business in several geographical areas where we do business. During the last half of the year, that certainly has impacted us and should provide an uplift during the following year. Higher ocean freight rates also adversely impacted third-quarter results and also probably led to increased inventory of hard-surface products in anticipation of the dock worker strike.

At this point, ocean freight rates are returning to more normal levels, but there's uncertainty about the impact of dock workers' negotiations going into next year. The preliminary thoughts about next year point to continued lowering of interest rates and mortgage rates, which, along with the wealth effect of higher home values and a bullish stock market, should increase existing home sales and remodeling. It's impossible to determine the mortgage rate level that will change the current market dynamics. Around 60% of outstanding mortgage holders have a rate below 4%. There also is a pent-up demand to sell homes, and equity as a share of total real estate value is above 70%, which is the highest level since the 1950s. This could make homeowners willing to take the hit on a more expensive mortgage sooner than most people think.

Also, we anticipate getting elections behind us will help clear the air and provide a more positive environment for consumers. It certainly will change the advertising that we see daily on TV. Total sales in the fourth quarter to date are slightly below year-ago levels, but our soft-surface sales so far in the fourth quarter are slightly above year-ago levels. This time, we would like to open up the call to questions.

Operator (participant)

Thank you. At this time, we would be happy to open the conference call to your questions. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two to remove yourself 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. Once again, ladies and gentlemen, to ask a question, please press star one on your telephone keypad. Thank you. We do have a question coming from the line of Barry Gartner with Frog. Please proceed with your question.

Hey, good morning. I wanted to know, in the last call, we discussed the Nasdaq delisting, and Allen and Danny had mentioned that you're trying to get ahead of it. Subsequently, the stock did get delisted. I was curious what the thinking is with management going forward and how this ties into the refinancing of the October 2025 line, if that discussion there has started.

Allen Danzey (CFO)

Yeah. As far as the stock situation as you talked about, we were monitoring that. We made efforts on our side as well as speaking with our board and investors, and felt like as we approached the deadline, the best option for us was to move through the OTC markets. I think that's worked out very well for us. The reporting requirements are much the same, so we'll continue to provide information out to investors, and we'll be able to save some internal costs as we move forward under the OTC market. We are, as you mentioned, approaching or within the one-year period of our current stock lenders and working through considering what steps have to work in the area.

Operator (participant)

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

Daniel Frierson (CEO)

Jesse, thank you very much, and thank all of you for being on the call. And we look forward to discussing our fourth quarter with you next year. Thank you.

Operator (participant)

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