The Dixie Group, Inc. (DXYN) Earnings Call Transcript

Greetings, and welcome to the Dixie Group's Third Quarter 2026 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Dan Frierson, Chief Executive Officer. Please go ahead.

Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by reference both to our website and press release. First, a few highlights from our press release. Net sales rose 4.6% to $65.2 million, up from $62.4 million in the third quarter of 2025. Gross profit margin improved 180 basis points to 26.6% from 24.8% a year ago, reflecting cost reductions and improved operating efficiencies. Operating income was $2.4 million compared with an operating loss of $2 million in the previous year quarter, a $4.4 million improvement. Net income was $577,000 or $0.04 per diluted share compared with a net loss of $4.1 million or $0.29 per diluted share in the third quarter of 2025. The third quarter was the company's third consecutive profitable quarter, bringing net income for the first 9 months of 2026 to $2.8 million compared with a net loss of $4.6 million in the prior year period, a swing of $7.4 million. Business conditions in the flooring industry continue to be challenging. Historically, low existing home sales, high and increasing home prices and high interest rates have all adversely impacted the industry. Additionally, the war in Iran and the midterm elections have added to the uncertainty in the marketplace. Fortunately, the midterm elections are now behind us and the Blue Wave has ensured we will have grid lock for the next 2 years. At this time, I'll turn the meeting over to Allen.

Thank you, Dan. As Dan said, our third quarter net sales were 4.6% higher than the same quarter in the prior year at $62.4 million. Gross margin also improved by 1.8% to 26.6%. On the year-to-date, net sales were 193.2 , which was close in line with the prior year at $193.9 million. The current year gross profit margins were 29.4% or 2.4% higher than the prior year. This did include the favorable impact of recording the IEEPA tariff refund in the first quarter. Adjusted for that out-of-period impact of the refund, the year-to-date gross profit margin would be 28.2% compared to the 27% margin in the prior year. The improved margins in 2026 were the result of cost reductions and profit improvement initiatives that we implemented in 2025 and the earlier part of this year. Year-to-date selling and administrative expenses were favorable 5.3% to prior year. This was due to lower sample related expenses, which included a favorable adjustment for the capitalization of sample display costs. Our facility consolidation expense in the third quarter of '26 included $85,000 for our cost-saving initiative of consolidating a portion of our West Coast yarn processing to our existing plant in Roanoke, Alabama. Our interest expense in the quarter was $1.9 million compared to $2 million in the prior year. And on the year, interest expense was $5.8 million compared to $5.4 million in the prior year due to higher net internal interest rates and financing expenses. For the third quarter of 2026, we had a net income of $577,000 and a $2.8 million income on the year. The prior year net loss was $4.1 million on the quarter and a loss of $4.6 million for the 9 months. On our balance sheet, our quarter end net receivables balance was $28.2 million compared to the prior year-end balance of $23 million. The increase was driven by higher sales activity in the final month of the third quarter compared to year-end. Our net inventory balance was also up over year-end at $67.6 million in quarter 3 compared to $66.4 million at the end of 2025. Accounts payable and accrued expenses were $45.5 million. This compares to $38.8 million at the end of the previous year as a result of higher purchases of raw materials and inventory as compared to the seasonally low year-end. Our net property and plant and equipment has decreased by $3.4 million from the year-end, which includes $3.7 million in depreciation on the year. Capital expenditures were $247,000. The debt on our balance sheet increased by $486,000 from year-end. Our availability to borrow today under our senior credit facility is estimated to be approximately $14.5 million which is subject to a $6 million excess availability requirement. Our investor presentation is available on our website at dixiegroup.com. Dan?

Thank you, Allen. As all of you know, during the third quarter of 2026, the flooring industry continued to experience sluggish conditions. Existing home sales is a strong indicator for the residential replacement flooring segment and 2026 marks the fourth straight year of existing home sales at an historic low in the 4 million unit level, down from $6 million several years ago. Despite the difficult environment, our sales for the quarter were 4.6% above year ago levels. Our soft surface sales were up 7%, while the industry carpet sales, we believe, were essentially flat. Key growth areas included our Duracell solution by polyester category and our Envision solution did nylon products. Our new introductions fueled the growth for our DH Floors business in our Masland and Fabrica brands offer the industry diverse and beautiful color options and continue to outperform the competition. Our hard surface sales declined, but our Fabrica wood program continued to be a highlight, growing 15% in the quarter. During these difficult times, we have continued to focus on ways to reduce costs and improve operations. We have held capital expenditures to a very low maintenance level. And yet due to current low capacity utilization, we have ample capacity to grow the business when the market improves. Remember, the longer and deeper the downturn, with better business returns, the upturn will be that much stronger and longer. We entered the year with a profit improvement plan of about $14 million. We have added additional items and expect to reduce costs about $18 million for the year. Part of this additional savings came from the yarn consolidation plan, which resulted in the partial downsizing of our Quarterville yarn plant in California. We had significant cost increases in many areas this year. Medical costs continue to rise more rapidly than we anticipated. Many of the other cost increases have been the result of the Iranian war. Raw materials, which are derivative oil have continued to rise during the year as the war is prolonged. This is also drastically impacted freight costs of both imported goods as well as product shipment to customers. During the year, we have had 2 price increases to mitigate the impact of these increases. The first price increase was implemented during the second and early third quarters. And the last 1 began implementation last week. The increases have been industry-wide and as a result of the major cost increases. Unfortunately, the cost of raw materials and freight have risen rapidly, and the price increases are just now beginning to get into the market. For this reason, our fourth quarter margins will be somewhat impacted, but the first quarter should return to our more normal margins. We have begun developing a profit improvement plan for next year. We continue to see operational improvements in our plants and believe we can continue to lower operating costs and provide beautiful quality products on a timely basis for our customers. So far, in the fourth quarter, our order entry continues to be slightly ahead of last year. At this time, we would like to open the meeting to your questions.

[Operator Instructions] Our first question is from Barry Blank with J.H. Darbie & Company.

Dan, I got a couple of questions. The first 1 is, what do you think any more interest rate hikes will do to the industry in the next year. Do you think we're at the bottom or it can still go lower if interest rates go up another quarter, half or 3/4 of a point during that period of time?

Barry, from what we can tell, we are pretty much at the bottom and have been now for some time. Certain segments of the market, obviously, are going to do better there. And I think the upper end continues to do better than the market overall. And I think in a higher interest rate environment, we'll continue to do that. But we won't see major improvement in the marketplace. I don't think until we've seen some lower interest rates.

Is it only the interest rates that are causing this lower volume? Or are there other factors that not just including the interest rate that causes this?

Well, it depends on how you look at cause and effect. We really look at existing home sales as the best barometer and that is highly influenced by interest rates. They're just -- it has been at a level of about 4 million units for the last several years. Prior to that, it was at 6 million and above. It's at the lowest levels really since the 1990s, but we have a lot more people than we had in the 1990s. So it's at a very historical low point. And I think at some point, we'll revert to the mean.

Are you seeing any competitors dropping out of the business or everybody is just pretty being maintained status quo?

We have not had combined -- well, we had a competitor a year ago drop out but since then, no, we have not seen any further reduction. Hard surface business may be a little different in that there are many, many players there and the soft surface, there are just not many players today. In the hard surface area, I would think we probably will see some shakeout in the next year or 2.

Another question is with the stock prices depressed as it is there any way that you can reinitiate a stock buyback program? Or are you prohibited the covenants on your borrowing.

We do have opportunity on that. We work with our Board, of course, as far as making a decision on what we want to do on that front, and it is something that we do consider each quarter. But nothing has -- we do not have anything active at this time.

Do you have a buyback program in place if you so desire to buy something?

Yes, we would be able to initiate that if we so desire that the board approves that as well.

And my last question is, is there any way that you could give guidance for the next year from the worst to the best case scenarios and somewhere in between. So kind of some sort of numbers to think about for the next year?