Dixie Group Inc

You are currently on hold for the Dixie Group conference call. We are currently gathering additional participants. Please continue to hold. The call will begin in a few minutes. Good day and welcome to the Dixie Group Inc. 2026 Second Quarter Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Chief Operating Officer Kennedy Frierson. Please go ahead.

Thank you, Maria, and welcome everyone to our 2026 Second Quarter Conference Call. As reported last month by Floordaily.net, my father, Dan Frierson, Chairman and CEO of the Dixie Group, had a bad fall on July 5th, which required surgery the following day to the pelvis and hip area. He is continuing to recover extremely well at home and will be back in short order when his recovery is complete. I will be sitting in for him today for the conference call. With me, I have Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by reference both to our website and press release. For the second quarter of 2026, the company's net sales were flat with last year at $68.6 million. The company had an operating income of $3,093,000 in the second quarter of 2026 compared to an operating income of $3,189,000 in the second quarter of the previous year. The net income from continuing operations in the second quarter of 2026 was $1,130,000 or 7 cents per diluted share versus net income of $1,254,000 or 8 cents per diluted share in the second quarter of 2025. At this time, Allen will review our financial results after which I will have additional comments regarding these results.

Thank you, Kennedy. As Kennedy said, our second quarter net sales at $68.6 million were closely in line with the same quarter in the prior year, but we were able to report a higher gross profit margin for 2026 at 29.5% compared to 29.2% in 2025. On the year to date, net sales were $128 million compared to $132 million in the prior year. The 2026 year to date gross profit margin was 30.9% or 2.8% higher than prior year, but this did include the favorable impact of recording the IEPA tariff refund in the first quarter. Adjusted for that refund, the 2026 year-to-date gross profit margin would be 29.1% compared to the 28.1% margin in the prior year. The improved margins in 2026 despite the lower year-over-year net sales was the result of cost reductions and profit improvement initiatives implemented in 2025 in the early part of this year. Selling and administrative expenses were relatively flat year over year in the second quarter, but are 3% lower on the year to date. Our facility consolidation expense in the second quarter of 2026 included $389,000 for a cost-saving initiative to consolidate a portion of our West Coast yarn processing to our existing plant in Roanoke, Alabama. Our interest expense on the quarter was $2 million compared to $1.9 million in the prior year. On the year, interest expense was $3.9 million compared to $3.4 million in the prior year. For the second quarter of 2026, we had a net income of $1.1 million and $2.2 million on the year to date. The prior year net income was $1.2 million on the quarter and a loss of $537,000 for the six-month period. On our balance sheet, our quarter-end net receivable balance, excluding the IEPA tariff receivable, was $27.8 million compared to the prior year-end balance of $23 million. This increase was driven by higher sales activity in the final month of the second quarter compared to year-end. Our net inventory balance was also up slightly over year-end at $67 million and Quarter 2 compared to $66.4 million at year end 2025. Accounts payable and accrued expenses were $42.2 million compared to $38.8 million at the end of the previous year as a result of the higher volume compared to the seasonally low year end. Net property, plant and equipment decreased by $2.2 million from prior year, which included $2.3 million in depreciation. Capital expenditure was $175,000. The debt on our balance sheet increased by $1 million from year end. Our availability to borrow today under our senior credit facility is estimated to be approximately $13.3 million, which is subject to a $6 million excess availability requirement. Our investor presentation is available on our website at dixiegroup.com. Kennedy?

Thank you, Allen. We were encouraged by our slightly higher gross margins of 29.5% for the second quarter versus 29.2% in the prior year on flat sales but slightly lower unit volumes. Although we saw raw material increases in the second quarter, the results of our profit improvement initiatives drove this improvement. As mentioned last quarter, we did increase prices in the second quarter to offset some of these raw material increases. We expect that our profit improvement plan will contribute approximately $17 million in year-over-year cost reductions and profit enhancements. The downsizing of our Porterville, California yarn processing operation is substantially complete and we should begin to see benefits in the second half of this year from this action. The restructuring costs recognized in the second quarter for this downsizing were nearly $400,000 with another approximate $100,000 to be recognized in the third quarter. These restructuring costs for the quarter explain the lower net income from continuing operations in second quarter 2026 versus prior year, even with the slightly higher gross margin on flat sales and flat SG&A spending year over year. As mentioned previously, Our net sales were flat with slight improvement in our soft surface business similar to the residential carpet industry results. However, we do not believe that the slight improvement that was seen in residential soft surface during the second quarter means that we are in the recovery phase yet. Our fabrica wood continued to show significant growth during the period. The tariff transition from section 122 to section 301 tariffs on July 24th was pretty much a non-event. As some countries moved from 10% to 12.5% tariff rates, this was a welcome relief in terms of the magnitude of volatility that we have seen in this area since Liberation Day in April 2025. Our order activity for the first five weeks of the third quarter has been higher than prior year in the mid single digit range with greater strength in soft surfaces. However, market conditions remain extremely challenging. Historically low existing home sales, high mortgage interest rates, and economic uncertainty from Middle East conflicts have dampened the benefit of record stock market highs. We are still unsure when existing home sales will improve from the current level of 4 million units per year, a 30-year low where we have been stuck for over three and a half years. Our focus continues to be the creation of differentiated styles for the mid to high-end consumer, with an emphasis on color pattern and textural visuals. In our soft surface offerings, we remain committed to our Step Into Color campaign and believe that our ability to provide more extensive and on-trend color palettes remains a key differentiator in our offerings. We will remain focused on reducing expenses, improving our profitability during this challenging period of economic uncertainty and housing market struggles. We are encouraged by recent initiatives and legislation at the federal level drive improvement in the housing market. Resolution to current Middle East conflicts and improvement in the housing market will be the key components to the recovery of the foreign market. At this time, we will open the meeting to questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 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 keys. One moment, please, while we poll for questions. Our first question comes from Barry Blank with JH Darby & Co. Please proceed with your question.

Yes, good morning. First question is, are you seeing more consolidation in the industry, or has that slowed down any?

Well, Barry, good to hear from you. I'm glad you were able to make the call. We have not really seen much more consolidation, certainly on the soft surface side, as most of that consolidation has occurred over the last 10 to 20 years. And also on the hard surface side, there continue to be a large number of suppliers of a lot of imported flooring. So in general, we have not seen significant consolidation at this point in terms of the suppliers of flooring products to the industry.

What is your feeling on the progress that you're making on the hard surface?

Well, it's a little bit of a tale of two cities. We feel extremely good about the progress we're making with our fabrica wood program. We have not performed as well with our hard surface in the resilient category in our TrueCore brand. We are doing several things this year to improve that and are starting to see some progress in that area, but we have not performed as well as the industry in the resilient category over the last 18 months or so. We do expect to be able to get that going again, but it has not been as strong a part for us as our wood program and our soft surface.

One more quick question. What is your feeling on when the housing downturn that we had will stop and turn around? I know it depends on interest rates, but are you seeing any movement in that area, or is it still pretty flat?

It's still very tough, Barry. You know, unfortunately, as soon as we start to see momentum, you know, interest rates, 30-year mortgage interest rates did below 6% at the end of February, and a few days after that, we entered the conflict with Iran, and at this point, we continue to see interest rates go up, and I think that disrupted some of that activity. The medium-long term is very positive, but we have yet to see those short-term indicators that that tide has turned. We are encouraged. I think JP Morgan has pledged a significant amount of money to help in terms of affordable housing and supporting the housing market. Congress certainly has gotten involved, and there are a lot of people that understand that's an important part of the American economy and really the American dream for the people in this country. But we have yet to see really that trigger or anything to help make that happen and really start the turn. We know it's going to, and we know when it does, it will be a significant recovery in terms of magnitude and duration. but unfortunately we're still waiting until that happens and doing everything we can to operate as effectively, as lean, as well as we can until we're able to capitalize on that opportunity.

Thank you very much.

Thank you Barry.

Our next question comes from Mike Hughes with, go ahead please proceed with your question.

Good morning, thanks for taking my questions. I think you took pricing in April. I was just curious, how much of the volume in the quarter was covered by that pricing increase?

That's a great, I don't have a specific number, Mike. That's an excellent question. That would, I would say probably a quarter to a third. would be my rough estimate in terms of when that, you know, once that gets implemented, you know, including the timing of that and then the delay from order to shipment cycle and so forth. You know, maybe a little bit more than a third, actually. That would probably be the best estimate I could provide for you.

Okay, Alan. So in very rough terms, I understand you're saying we can another two thirds of the price increases still in front of us, as far as flowing through the income statement for the third quarter and beyond. Is that correct?

Yes.

Okay, that's good. And then one of your large peers, when talking about pricing the other day, they indicated that maybe additional pricing might be necessary given where costs stand now. Do you have any thoughts on where your pricing stands and whether you might need to take additional increases?

It's hard for us to project forward, but I will let you know that we were making very quick decisions. Raw materials started to escalate quickly in March after the Middle East conflict. And so the decisions we were making in terms of the magnitude of our increases did not capture all the increases that we have experienced through the second quarter and to date. We did the best we could in terms of estimating what the magnitude of those increases were going to be, and it's been uneven too. We started to see You know, oil prices in June and raw materials in early July looked more encouraging, I think, as the Memorandum of Understanding was signed. Unfortunately, it appeared that there was a misunderstanding for the memorandum, and we've asked the American Historical Society to have that renamed the Memorandum of Misunderstanding. We'll let you know that. gets decided. But overall, we did not recover all of our raw material increases with the amount we went up in the second quarter.

Okay. So I assume you were relatively happy with the gross margin results given you had all of the price increase in the quarter and still a good portion of the price increase in front of you.

I'm sorry, Mike, I think you said price both times. We had most of the raw material cost increase in the second quarter, but only some of the price increase. Yes.

Excuse me. Yes. Yes. Okay. And then was there a life of reserve in the quarter?

There was no adjustment to the life of reserve, Mike. We record any cost changes to our inventory and do adjust that into the life of reserve. So it just flows through on our cost of sales. The only significant adjustment we would have to the LIFO Reserve in concept would be if we had a tier liquidation. Otherwise, we roll it through adjusting in line with any raw material increases.

Okay, and then last question for you. The $17 million in cost reductions, how much of that has been recognized through the second quarter?

Approximately $9 million.

Okay, with no further questions in the queue, I would now like to turn the call back over to Kennedy Frierson for any additional or closing remarks.

Thank you, Maria, and thank you all for joining us for our quarterly conference call. We look forward to visiting with you again at the end of our third quarter. Thank you.

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