The Dixie Group - Earnings Call - Q4 2024

Transcript

Operator (participant)

Good day and welcome to The Dixie Group Inc 2024 earnings conference call. Today's call is being recorded. At this time, for open remarks and introductions, I would like to turn the call over to Chairman and Chief Executive Officer, Dan Frierson. Please go ahead.

Dan Frierson (Chairman and CEO)

Thank you, Shomali. Welcome, everyone, to our fourth quarter 2024 conference call. I have with me Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by reference both to our website and press release. In the fourth quarter of 2024, net sales were approximately $64.4 million compared to $66.7 million in the fourth quarter of the prior year. The net loss for the fourth quarter of 2024 was $7,198,000 compared to $3,160,000 in the fourth quarter of 2023, which included an $8,198,000 gain on the sale of assets. For the fiscal year 2024, net sales for the company were $265 million as compared to $276 million for the fiscal year 2023. The net loss from continuing operations on the year was $12,210,000 in 2024, or $0.83 per diluted share, compared to a net loss of $1,952,000 or $0.13 per diluted share the previous year.

The net loss on the year was $13 million, or $0.88 per diluted share, compared to a net loss of $2.7 million, or $0.18 per diluted share in 2023. At this time, Allen Danzey will review our financial results, after which I will have additional comments.

Allen Danzey (CFO)

Thank you, Dan. As Dan mentioned, net sales for the fiscal year 2024 were 4.1% down from the prior year. High interest rates and low consumer confidence have delayed consumer decisions around large discretionary spending, and that includes home purchasing and remodeling, which are big drivers for our business. The lower sales volume and fourth quarter planned inventory reduction resulted in under-absorbed fixed costs in our manufacturing plants. In addition, significant unusually high charges related to utility expenses in our California operations, as well as expenses under our self-insured medical plan and write-downs of inventory, all had an unfavorable impact on our gross margin in 2024. The gross profit margin in 2024 was 24.7% of net sales compared to 26.7% of the prior year. Selling and administrative expenses in 2024 were reduced from 2023 by $4.3 million or 5.8% of net sales.

This was the result of year-over-year planned cost-cutting initiatives, particularly in our sample areas, where we were able to reduce costs and still continue to service our customers and do product introductions. For comparative purposes in our other operating income and expenses, 2023 fourth quarter results benefited from an $8.2 million gain in sales of assets, which showed in other operating income. Utility consolidation expenses, which include the residual costs of our East Coast Manufacturing Consolidation Plant, were $2.5 million lower than the prior year, and that included $238,000 in additional write-down of idled assets in the fourth quarter of 2024. Our interest expense on the year was $6.4 million compared to $7.2 million in 2023, a decrease primarily driven by lower interest rates compared to the year.

The net loss on the year 2024 was $13 million compared to a net loss of $2.7 million compared to the prior year. From our balance sheet, our year-end receivables of $23.3 million is slightly below, or 1.5% down from the prior year-end balance of $23.7 million. Our net inventory balance at the end of 2024 was $66.9 million. This was a $9.3 million, or 12.3% below, the inventory balance at the end of 2023. That reduction, again, was primarily achieved in the fourth quarter as we implemented our plan to reduce inventories and we continue to maintain timely service to our customers. Sales and accrued expenses were slightly down, 1.9%, within the same period of the prior year, with a lower year-over-year cost in inventory-related areas driving that reduction. Net property, plant, and equipment increased by $2.4 million from the prior year-end.

This increase included cash purchases of $2.1 million during the year and prior year deposits that moved into the PP&E, down to $6.5 million related to our extrusion operations. These additions to PP&E were offset by approximately $6.5 million in depreciation. Year-over-year, the debt was relatively flat at $0.2 million or $200,000 lower, and current total we are we want to point out we are pleased to have closed subsequent to year-end on our new $75 million senior credit facility. The timing of closing on this facility did delay our filing of 10-K, as we had to reschedule our normal audit activity. As soon as the facility was closed, we were able to resume our audit activity and close shortly after the filing was filed. Our borrowing availability under this new credit facility is approximately $12.2 million current. Our investor presentation will be available on our website at www.dixiegroup.com.

Dan.

Dan Frierson (Chairman and CEO)

Thank you, Allen. Existing home sales, which tend to be the catalyst for our industry improvement, continued to be subdued during last year. Existing home sales over the last three years have declined dramatically from over 6 million homes per year to under 4 million. The interest rate reductions, which we were projected for earlier in the year, did not come about until late 2024. Even though the economy has avoided a recession, our industry has been in a recession for several years, and existing home sales were at the lowest point since 1995. At that time, our population was 25% lower, which means the weak existing home sales numbers are even more impactful today. Actual square yards of carpet shipped in the last three years are down 25%.

Despite having gained market share during this period, we have had to take significant action to lower costs, restructure facilities, and streamline operations. Since the end of the year, we have successfully renegotiated our existing asset-backed loan for a new three-year period. This transaction puts us in a stronger position to weather storms in the future and enhanced our ability to grow our business. During 2023, we reduced costs by over $35 million as a result of our restructuring plan to better align capacity and cost with current volume. In 2024, we further reduced costs by over $10 million and are taking actions which will again reduce costs by over $10 million in 2025. We have also been stewards of our working capital and reduced inventories by $16 million over the last two years.

The reduction in business has also necessitated reducing our number of associates by approximately 28% over the last three-year period. Our capital expenditures have been maintained at a very low level other than the investment in extrusion equipment, which was made to not only provide us with lower-cost raw material but ensure a consistent supply if additional suppliers were to exit the business, which took place in late 2024 with the exit of Ascend from the marketplace. Our extrusion equipment started up in late first quarter of last year and is now running at capacity. Our commitment to piece-dyeable nylon fiber enables us to offer a larger palette of color to our discriminating customers, which we are promoting with our Step Into Color campaign. This allows our designers to create unlimited color options for every market, as well as offering custom color to our most discerning customers upon demand.

During this period of floor business, we have continued to invest in additional products through our commitment to several initiatives, which are enhancing our customer relationship, helping us gain market share in a difficult period. Our initiative to grow our hard surface business centered around our Trucor brand, to which we continue to add new offerings. These products of wood, stone, and tile visuals provide waterproof, easy-to-clean solutions for today's residential customers. The Fabrica high-end wood program has performed well, and it's consistent with Fabrica's best-in-class reputation. By expanding our significant wool offering with the introduction of a wider variety of decorative products through 1866 by Masland and Z-Tour by Fabrica, we have enhanced our position in the high-end of the floor covering market and gained market share in the current environment. This investment in products and displays should help make us more important to the design community.

In 2024, we continue expanding our Duracolor solution-dyed polyester offering. This expansion reinforces our dedication to diversify our DH Floors product portfolio and has made a positive contribution to our market share gain. By incorporating our well-known style and design capabilities at price points we cannot reach with nylon products, we have broadened our differentiated offering to our customers and the ultimate consumer. Our marketing initiative has 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. Investment in samples, merchandising, and training in these stores have provided returns of increased business and greater market share. The recent actions taken by the U.S.

To implement tariffs on the rest of the world have created a sense of uncertainty regarding the cost of imported products. At this point, we are endeavoring to ascertain what the impact will be from each of our sources. The potential impact on us would be primarily felt by our hard surface business and the decorative products we import. Our broad-loom carpet business, basically serviced from our U.S. operations, would not be significantly impacted. It appears industry participants will need to raise prices to mitigate the impact of tariffs if these tariffs are not negotiated away. This is a volatile time, and we will take appropriate action once the fog has cleared. Our sales so far this year in 2025 have followed the same pattern as last year.

The highest-end soft surface sales are up, and overall soft surface are near year-ago levels, while the hard surface product categories are down from the previous year. Until demand improves, we will continue reducing costs. We've already implemented a cost-reduction plan for this year, which exceeds $10 million, and we're also continuing to reduce inventory to reflect the level of demand. At this time, we will open the meeting to your 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 *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 to remove yourself from the queue. Participants using speaker equipment may need to pick up their handset before pressing the * key. One moment, please, while we pull up for questions. Our first question comes from the line of Mike Hughes, a private investor. Please proceed with your question.

Good morning. Thanks for taking my questions. First, on the hard surfaces side of the business, what % of that product is imported from China? What other countries do you import, and how quickly could you potentially pivot to other countries outside of China?

Dan Frierson (Chairman and CEO)

At this point, very little is imported from China, and that would be practically none very soon. We do import from Thailand, Cambodia, Vietnam, and some from Europe.

Okay. As of today, the hard surfaces side of the business would face the 10% tariff. I know it's a dynamic situation, and it could change. Is that correct?

That is correct. Other than China, yes.

Okay. How quickly can you pass along price on that side of the business? Is there a little bit of a period where you have to absorb the higher costs?

That's still up in the air, Mike. Several companies have announced price increases, but that was based on the first initial increases in tariffs. It's a little unclear at this time, but basically, I think the industry will. 81% of the LVT sold in this country is imported. I think it's very likely that very quickly, as these tariffs become impactful, they will be passed on.

Dan, do you know, are your competitors, are any of them more over-indexed importing from China, more reliant on China, or is everyone pretty much exporting to China at this point, like your company has?

I would say everybody is more diligently exporting to China, and I think today it's fractional of what it was a couple of years ago.

Okay. I may have missed this in the prepared comments, but did you say what the amount of the Q4 inventory write-down was? Maybe you could just provide a little bit of color on it.

Allen Danzey (CFO)

Yeah. In the fourth quarter, as we mentioned, the overall reduction in inventory of $9.8 million. We had put in that increase in our LIFO reserve of $456,000 on the year, but there was a tier liquidation in the fourth quarter that did result in a $381,000 gain income. As far as the write-down, the assets are up less than reserve, increased by $1.3 million in Q4, and it was an $822,000 increase year-over-year.

Okay. That was just a result of doing the physical inventory and kind of aging the inventory, is that right?

Yeah. We worked on our plan of reduction of inventory and identified areas where we had some excess inventory. We did make an additional reserve in the third quarter, I guess the fourth quarter, for that amount, and that gives us the opportunity to move that inventory out and generate cash flow from it in 2025.

Okay. You talk about an incremental $10 million in cost takeout. How soon will you be at that run rate of taking $10 million out of the cost structure?

Dan Frierson (Chairman and CEO)

I would say we're very close to that level today. Most of that was planned some months ago.

Okay. On the new credit facility, it looks like it has minimum EBITDA thresholds. I think the number for the 12-month ended December 27, 2025 is $9 million. That seems like a really high hurdle given, I think, the adjusted number in the fourth quarter, my adjustment, which may be incorrect, is a loss of about $1.5 million-$2 million of EBITDA, excluding the inventory write-down. Help me get to that $9 million number. What needs to happen to revenue? Does the revenue, does the top line need to start to grow again for that to happen?

Allen Danzey (CFO)

Yeah. We're working closely with our new partner on the senior credit facility as we work through the covenant, particularly as it relates to EBITDA. We feel comfortable with the amount that was calculated, even in an expectation of a generally flat year. We did have, as we talked about, a number of items this year that we're not expecting to be recurring from an unfavorable standpoint, as well as the cost savings that Dan talked about in 2025, and for a greater part, is in place at this time. We felt like, and I believe our partner felt as well, that the amount that was provided was a reasonable amount that we were capable and projecting forward towards that.

Okay. You talk about reducing the inventory further. You ended the year at $66.9 million. How much more can you take out of the inventory?

Dan Frierson (Chairman and CEO)

We don't make projections, but we feel like we've already reduced inventory some this year.

Okay. Two final questions for you. On the soft side of the business, is there any potential benefit from the tariffs or because you compete at the high end or there are fewer imports there? Just talk through that dynamic.

It depends on where the tariffs end up. Whether it's the punitive ones or the 10% or something else is negotiated. We're not looking at that as a potential windfall, but for the domestic tufted carpet business, imports are not a major factor.

Okay. Last question, the liquidity. I just want to make sure I'm clear because I read the credit agreement, and I thought there was an incremental sort of a carve-out of $6 million that had to be left available. Are you saying that $12.2 million is available to borrow, that full amount is available?

Allen Danzey (CFO)

That includes the $6 million. The $12 million is the full availability inclusive of the $6 million excess. $6 million plus $6.2 million.

Okay. Super. Thank you very much.

All right. Thank you. Bye.

Operator (participant)

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

Dan Frierson (Chairman and CEO)

Thank you, Shomali, and thank everyone for joining us today. Sorry we are a little late this quarter. We anticipate being timely with our first quarter results. We look forward to talking with you then. Thank you.

Operator (participant)

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