Transcript
Good day, and welcome to The Dixie Group, Inc. 2023 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introduction, I'll turn the floor over to Chairman and Chief Executive Officer, Dan Frierson. Please go ahead.
Christina, thank you very much, and welcome, everyone, to our fourth quarter and 2023 year-end conference call. Allen Danzey is with me today. Allen is our CFO. Our Safe Harbor statement is included by reference both to our website and press release. Adjusted for the additional week in our prior fiscal year, weekly sales in the fourth quarter were approximately 2% better in 2023 as compared to 2022. Net sales for the year 2023 were down 9% from the prior year but were down 7.2% on an adjusted weekly basis. The lower net sales amount was the result of a slowdown in the floor covering industry, driven by high interest rates, which have dramatically impacted the housing and residential remodeling markets. We believe the overall flooring industry experienced a significantly higher reduction in year-over-year sales volume, indicating we are continuing to gain market share in our core markets. Due to the numerous actions we took to reduce costs and improve operations during the last two years, our fourth quarter gross margin improved by 13 percentage points to 27% of net sales as compared to 14% of net sales in the fourth quarter of '22. At this time, Allen will review our financial results, after which I will have additional comments. Allen?
Thank you, Dan. In the fourth quarter of 2023, net sales were $66.7 million compared to $70.5 million in 2022. And as Dan pointed out, the fourth quarter of 2022 included 14 weeks compared to the fourth quarter of 2023 at 13 weeks. So on an average weekly basis, sales in the fourth quarter of 2023 were 1.8% above 2022 average weekly sales. The net income for the fourth quarter of 2023 was $3.2 million that compares to a loss of $18.5 million in the quarter prior. The fourth quarter of 2023, the income included expenses of $1.5 million for facility consolidations and a net gain of approximately $8 million as a result of the sale leaseback of our Adairsville, Georgia facility. The loss in the fourth quarter of '22 was related to higher costs, driven by inflation, freight rates and the forced change in our raw materials, as well as under absorbed fixed costs from our planned decrease in production. For the fiscal year '23 net sales were $236.3 million compared to $303.6 million in the prior fiscal year. The company's fiscal year '22 included an additional 53rd week, while the '23 fiscal year consisted of the traditional 52 weeks. On an adjusted average weekly comparative basis, the net sales in '23 were 7.2% below the prior year. A primary driver of the lower net sales was the unfavorable impact of higher interest rates and inflationary concerns that impacted consumer confidence and were reflected in lower home remodeling activity. Gross margins in '23 were significantly improved over '22 as a result of our restructuring and facility consolidation efforts beginning in '22 and continuing through the early part of '23. Our gross margins year-to-date '23 were 26.7% of net sales compared to margins in the prior year at 17.7%. The low margins in '22 were the result 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 '22, we changed our raw material fibers over to multiple suppliers at lower cost points, and the ocean freight rates have returned to normal levels. We also saw reductions in the cost of raw materials and favorable operating results from our manufacturing facility. Selling and administrative expenses in the full year of '23 were $2.8 million lower compared to the prior year, but higher as a percent of the lower net sales. The selling expenses are primarily driven by samples and marketing investments in our new growth initiatives. We incurred $3.9 million in expense for facility consolidations during 2023. This expense primarily related to facility closure and maintenance costs. Also, as previously mentioned, in the fourth quarter of '23, we recognized a gain of approximately $8 million in other operating income as a result of the sale and leaseback of our Adairsville, Georgia facility. Our operating income, inclusive of the facility consolidation expenses and the gain on sale was $5 million compared to a $28.2 million operating loss in 2022. Our interest expense on the year was $7.2 million compared to $5.3 million in 2022. This increased interest expense was primarily driven by higher interest rates in the current year. Our net loss on the year was $2.7 million compared to a net loss in the prior year at $35.1 million. Looking at our balance sheet. Our receivables decreased by $1.3 million from the prior year-end balance. The decrease was driven by increased timing of customer payments during the last month of the current period. As a result of decreasing costs and planned reduction in volume, our inventory was down from the prior year-end balance by $7.5 million or 9%. Accounts payable and accrued expenses were below prior year-end by $1.3 million, primarily due to the lower year-over-year costs. Our capital expenditures on the year totaled under $1 million, and depreciation was at $7.3 million. Our debt decreased by $16.8 million from the end of '22, driven by the sale of our Adairsville facility along with operating results, decreased inventory and the timing of lower cost of expense payments and purchases. These favorable cash flow items were offset by the cost of our facility consolidations. Our borrowing availability on our senior line of credit is currently at $14.5 million. Our investor presentation is available on our website at www.dixiegroup.com. Dan?
Thank you, Allen. 2023 marked a transitional year for our company. We spent a significant amount of 2022 adapting to the exit of Invista from the fiber business and the sale of the master brand to Lowe's, which led to the loss of our business in the home center channel. These shifts, coupled with the sale of our commercial business to Mannington, required multiple restructurings of our operations, starting in 2022 and concluding in 2023. These adjustments were challenging under any circumstances and were further affected by the slowdown in the floor covering sector. Throughout the year, we had to align our capacity levels with current business activity. Although the economy has so far avoided a recession, many interest-sensitive industries have already faced significant downturns. Our business primarily serves independent residential retailers, who have been greatly impacted by the rapid rise in interest rates, severely affecting the housing and residential remodeling markets. While new home construction has started to pick up, the sales of existing homes have reached their lowest levels since 1995. Consequently, floor covering sales saw a decrease in 2023, with the square yards of carpets sold by the industry being approximately 20% lower than in 2021. As we move into 2024, our industry is at a cyclical low. Therefore, we are continuing to reduce expenses, cut overhead, and decrease costs. During 2023, we successfully lowered costs by over $35 million and have a plan to cut an additional $10 million in 2024. Because of these actions, our gross margin percentage improved by 900 basis points. We also gained market share in 2023 and believe we can maintain this through our growth initiatives. Our efforts to expand our hard surface business have gained traction as we have invested in our TruCor brand by diversifying our product line and launching a high-end wood program as part of our Fabrica offering. Currently, hard surface products account for about 20% of our sales, and we believe we can continue to increase market share. We have been a leading player in the industry in this category. The introduction of more unique woven patterns, along with hand-loomed and hand-tested products, has strengthened our position as a key supplier to designers and the high-end retail market. Through our 1866 by Masland and Decor by Fabrica collections, we have expanded our offerings and made significant future investments. Another initiative has been to widen our polyester product offerings by leveraging our style and design capabilities at price points that nylon products cannot reach. We keep adding to our DuraSilk collection, with sales reflecting the strong acceptance of these styles. Through these three initiatives in 2023, we invested heavily in displays and samples, which has broadened our retail presence. While we anticipate limited growth in the industry in 2024, these initiatives should allow us to capture more market share. A major focus for us this year is establishing our own extrusion capability. Producing our own nylon yarn will ensure we have a reliable source of raw materials, alleviating the challenges we faced when Invista exited the business. Production has commenced, which in the future will provide a more cost-effective raw material source. Our commitment to p-stable nylon fiber allows us to lead the industry by offering a wider range of fashionable products tailored to our discerning customers' preferences. The industry's shift toward solution-dyed products has resulted in uniformity, but our offerings provide an escape from that. Over the year, we implemented several actions to enhance operational and sales performance and made structural changes to better position ourselves for the future. At the same time, we've invested in our growth initiatives and extrusion capability. We believe the steps we've taken to navigate the current challenging environment will also set us up for the eventual recovery that we are sure to see. The measures we've implemented are geared towards the future. When interest rates eventually decrease and the housing market rebounds, we will be well-positioned to benefit from a prolonged increase in existing home sales and a robust residential remodeling sector. In 2024, we will commemorate the 50th anniversary of Fabrica with our industry partners, celebrating a five-decade commitment to uncompromising quality, which has established Fabrica as a leader in style, design, color, and quality. We have been fortunate to have Lowry Kline with us for the past 20 years. His insights and guidance have been invaluable as we navigated through these turbulent times. His steady and wise influence has been a constant regardless of the challenges faced. He will not be standing for election at this year’s shareholder meeting, and we will miss him greatly, appreciating his significant contributions to our company. Reviewing the current business conditions for the first 10 weeks of the year, our sales are slightly lower than last year, but orders are in line with the same period last year. While this is better than we anticipated, we believe a reduction in interest rates is the key factor that will positively shift business conditions. We would now like to open the meeting for any questions.
Our first question comes from Barry Gertner with Improverb.
Congratulations on a great margin quarter. It seems that the improvements are really coming along. And I just had a question along the line. For our model, is it fair to think about these gross margins kind of improving and trailing upwards now that some of this consolidation is done and you're doing a bunch of in-house that you're relying on third parties for?
Yes. As far as the gross margin, we do not provide forward-looking data, but as we've discussed, the manufacturing operations, and consolidations we've done there produced significant efficiencies. We project to continue forward, and we've identified and continue to implement cost savings initiatives in the current year. So we're very happy, of course, with the margins that we saw in '23 and plan to continue the momentum there build upon.
Understood. And if I can just one more does NASDAQ like efficiency filing date, the company hasn't mentioned any plan of that. I'm assuming this is something the company is looking to address to make sure that you stay in compliance with the listing?
Barry, first of all, thank you for your questions. And obviously, yes, we will be addressing that soon.
Our next question comes from the line of Chris Riemenschneider with Morgan Stanley.
I have a couple of questions about the industry. In 2015, the soft surface market represented about 55% of the overall flooring market. By 2018, it had fallen to 50%. Where do we stand in 2024 in terms of the soft surface market, considering that 80% of our business comes from this segment? Additionally, you've mentioned gaining market share each quarter. Could you provide some quantification of that?
Chris, we can quantify it. We get numbers through our industry association, but those are not published, so we cannot give you exact numbers, but we certainly have gained market share. Carpet has continued to lose market share to hard surfaces. I would say until the last year, it seems to have leveled off. And I think probably, we'll maintain that percentage. We are about 5% of the soft floor covering business, and consequently, we're in the upper end of the soft floor covering business. I don't believe the upper end, and we don't have empirical data to back this up. But I think the upper end of the market has done much better than the market overall, and that obviously has helped us gain market share, but we don't have data that separates the market by price points.
In addition, can you just discuss a little bit about the balance sheet and what is the Board's goal with the debt as it relates to equity?
Yes. Our balance sheet, we've taken great steps this year in continuing to decrease our debt. But it will fluctuate with our operating needs. We did discuss with our Board in the past Board meeting as far as what our financing opportunities are and watching the economic conditions, our CapEx and inventory investments as well as any new product initiatives may drive the need for some more financing opportunities. But we're, again, as we talked about on the margins, we're excited about the opportunity to continue to improve our margins and grow the — or you can see the cash flow contributions from that, but we're watching the economy as everyone is. And we'll continue to monitor that and make sure that we identify our financing opportunities if needed, but hopefully, the economy, as Dan said, the interest rates reductions come in early, and we start seeing a rebound in and we look forward to positive cash flow from operations and continue to focus on reducing our debt position.
With no further questions in the queue, I would now like to turn the call back to Dan Frierson for any additional or closing remarks.
Christina, thank you, and thank all of you for being with us for our call, and look forward to visiting with you again at the end of next quarter. Thank you.
Ladies and gentlemen, that will conclude today's conference. Thank you again for your participation.