Interface Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 8 speakers on the call.

Operator

Good day, and welcome to the First Quarter 2024 Interface Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. And finally, I would like to advise all participants that this call is being recorded.

Operator

Thank you. I'd now like to welcome Christine Needles, Corporate Communications, to begin the conference. Christine, over to you.

Speaker 1

Good morning, and welcome to Interface's conference call regarding 1st quarter 2024 results, hosted by Laurel Hurd, CEO and Bruce Hausman, CFO. During today's conference call, any management comments regarding Interface's business, which are not historical information, are forward looking statements within the meaning of federal securities laws. Forward looking statements include statements regarding the intent, belief or current expectations of our management team, as well as the assumptions on which such statements are based. Any forward looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from any such statements, including risks and uncertainties described in our most recent annual report on Form 10 ks filed with the SEC. The company assumes no responsibility to update forward looking statements.

Speaker 1

Management's remarks during this call also refer to certain non GAAP measures, Reconciliations of the non GAAP measures to the most comparable GAAP measures and explanations for their use are contained in the company's earnings release and Form 8 ks furnished with the SEC today. Lastly, this call is being recorded and broadcasted for Interface. It contains copyrighted material and may not be rerecorded or broadcasting of it. After our prepared remarks, we will open up the call for questions. Now I will turn the call over to Laurel Hurd, CEO.

Speaker 2

Thank you, Christine, and good morning, everyone. To start our call, I want to thank the entire Interface team for a very strong quarter. Thanks to their efforts and the support of our customers and partners, we achieved robust performance in the Q1, fueled by comprehensive strength across the Americas. These strong results reinforce the fact that our 1 interface strategy is working and yielding tangible results. With that backdrop in mind, I'd like to take a few minutes to update you on our progress.

Speaker 2

As a reminder, our strategy is focused on reducing complexity, driving continuous improvement and globalizing our core functions to support our world class selling team. After a successful pilot in 2023, our territories throughout the U. S. Have transitioned to combine Nora and Interface selling team and we continue to see tremendous synergies between the 2. During the Q1, the 1 interface selling team drove strong order growth outpacing our expectations in a challenging macro environment.

Speaker 2

This collaborative and consolidated approach aligns incentives and maximizes coverage to win business together. Reducing complexity is a core tenant of our strategy. We are continuing to simplify how we work across the enterprise and around the globe in everything we do in every functional area and importantly in how we provide the best products and services in the industry to our customers. We are also on track with operational improvements in manufacturing, including investments in new automation and robotic solutions, which will drive improved margins. We're adding robotics to some of the more manual parts of our carpet tile manufacturing process in the U.

Speaker 2

S, which is better for our workforce in these hard to fill labor intensive roles. These robotic solutions will drive labor efficiencies and reduce raw material waste. We're in the preliminary stages of implementation, which will roll out in phases over the next 24 months. We're being prudent with our investments and as we see the desired results, we will continue to assess and invest in efficiency opportunities. Bruce and I recently visited our facilities in Germany, the Netherlands and Australia.

Speaker 2

In Germany, we witnessed firsthand our automation investments that work in our Nora Rubber manufacturing facility. By automating the rubber press and cutting processes, we enhance employee safety and increase production throughput. In Australia, we met with several customers across corporate office, education, hospitality and healthcare and also visited an event at our showroom where we showcased new products and interacted with over 80 customers. It was great to spend time in the field, seeing how our strategy and innovation are playing out. There's a lot of great work being done, leading to encouraging progress on the horizon.

Speaker 2

Earlier this month, Interface rolled out a fresh new brand attitude Made For More, which showcases the best of Interface and encompasses our belief that our flooring is made with purpose and without compromise meaning that our customers get beautiful design, quality, performance, innovation and sustainability with all of our products all the time. We don't ask our customers to sacrifice design for performance or quality for sustainability. We are the preferred partner for flooring and design projects because we provide high design, sustainability focused products across all of our brands and categories to our customers, which significantly differentiates us in the marketplace. We've introduced Made for More around the globe at the same time and it's another example of our 1 interface strategy in action. We look forward to Clerkin Well Design Week in May and NeoCon in June where we will showcase several exciting new product launches.

Speaker 2

Turning to our Q1 results. Net sales came in at the high end of our expectations driven by the Americas. We continue to see notable strength in education with billings up double digits. Our K-twelve business was particularly strong driven by increased demand for expanded Open Air collection. Expanding our offering of carpet tile designs at more accessible price points allows us to connect with our customers' needs, while ultimately driving increased carpet and LVT sales.

Speaker 2

Corporate office was down low single digits in the Q1, which we viewed as a positive outcome given the volatility in that segment. Our renovation business remains strong as the trends for people returning to office continues and we grew share in the U. S. Carpet tile market in the quarter. As expected, retail sales were soft in the Q1 due to ongoing headwinds in the sector.

Speaker 2

However, we are beginning to see increased demand and we expect stronger retail sales beginning in Q2, which is reflected in our updated guidance. While first quarter sales were down 2% year over year, adjusted gross profit margin increased by 5 28 basis points year over year. Our selling organization continues to successfully execute, holding price and driving favorable mix. Gross profit margin also benefited from raw material deflation in the quarter. Turning to orders.

Speaker 2

Total company orders were strong in the quarter, up 5% year over year. Orders were up 7% in the Americas and up 3% in EAAA. Strength in EMEA and Asia was partially offset by softer orders in Australia, which had tough comps. Our backlog was strong as we finished Q1, up 19% year to date. We remain focused on commercial productivity and aligning our sales teams to the fastest growing geographic markets and segments.

Speaker 2

Before I turn the call over to Bruce, I want to talk about a recent update to our sustainability strategy, which marks a pivotal point in our climate journey. Beginning in 2025, we will redirect investments from carbon offset purchases into initiatives that will both reduce our carbon footprint and accelerate our growth, including low carbon innovation and circular solutions. We have proven over the past 3 decades that we can significantly reduce our carbon footprint while growing our business, with our most recent figures showing an 82% reduction in our global carpet carbon footprint from when we started the journey back in 1996 to 2023. We remain committed to helping our customers achieve their sustainability goals and this change will enable us to continue to thoughtfully invest in differentiated innovation, accelerating development of more sustainable solutions that our customers will love. In summary, I'm pleased with our strong Q1 results and I'm more confident than ever that our strategy is working and yielding tangible results.

Speaker 2

With that, I will turn it over to Bruce to go through the financials. Bruce?

Speaker 3

Well, thank you, Laurel, and good morning, everyone. First quarter net sales totaled $289,700,000 a decrease of 2% versus the Q1 of 2023. 1st quarter FX neutral net sales in the Americas were up 0.5% year over year. We saw strength in education offset by softness in the retail sector, driven mostly by project deferrals. FX neutral net sales in EAAA were down 5.1% driven by a softer macro environment.

Speaker 3

1st quarter adjusted gross profit margin was 38.6%, an increase of 5 28 basis points from prior year's Q1, primarily due to strong execution from our selling organization to hold price, favorable product mix and raw material input cost deflation. Adjusted SG and A expenses were $86,200,000 in the Q1 compared to $83,200,000 in the Q1 of 2023. The increase was primarily due to inflation. 1st quarter adjusted operating income was $25,500,000 compared to adjusted operating income of $15,200,000 in the Q1 of 2023. The increase is due to higher gross profit margins in the quarter.

Speaker 3

First quarter adjusted EPS was $0.24 versus $0.07 in the Q1 of 2023. Adjusted EBITDA was $38,800,000 versus $26,300,000 in the Q1 of 2023. We generated $12,600,000 of cash from operating activities in the Q1 and liquidity totaled $388,000,000 which consisted of $90,000,000 of cash $298,000,000 of revolver capacity. In line with our capital allocation strategy, we repaid $24,800,000 of debt in the Q1, resulting in net debt or total debt minus cash on hand of $302,000,000 at the end of the quarter. Our leverage ratio was 1.7 times, calculated as net debt divided by LTM adjusted EBITDA.

Speaker 3

We remain focused on paying down debt, which continues to strengthen our balance sheet and positions us to capitalize on future growth opportunities as they arise. Capital expenditures were $4,000,000 in the Q1 of 2024 compared to $5,700,000 in the Q1 of 2023. And as we look to 2024, while the macroeconomic environment remains dynamic, we continue to be encouraged by improving trends. We are increasing our full year net sales estimate and we continue to expect gross profit margin expansion this year. As Laurel mentioned earlier, we now expect higher retail segment sales, which generally have lower gross profit margins compared to our more premium product offerings.

Speaker 3

This sequential change in mix is reflected in our adjusted gross profit margin guide. And with that backdrop in mind, we have updated our full year 2024 guidance and we are anticipating the following. For Q2 of fiscal 2024, net sales of $335,000,000 to $345,000,000 adjusted gross profit margin of approximately 34.5 percent adjusted SG and A expenses of approximately $86,000,000 adjusted interest and other expenses of approximately 8,000,000 dollars fully diluted weighted average share count of approximately 58,800,000 shares and for the full year of 2024, net sales of $1,290,000,000 to $1,310,000,000 adjusted gross profit margin of approximately 35.5 percent to 36 percent adjusted SG and A expenses of approximately 26% of net sales adjusted interest and other expenses of approximately $30,000,000 and adjusted effective tax rate for the full year of approximately 28% and capital expenditures of approximately 42,000,000 dollars Now I'll turn the call back to Laurel for concluding remarks.

Speaker 2

Thank you, Bruce. Interface delivered a strong start to 2024. Despite the dynamic global market, we continue to see positive trends in our business. We remain focused on executing our strategy and driving sustainable growth to increase value for our shareholders. With that, I'll open it up to questions.

Speaker 2

Operator?

Operator

And your first question comes from the line of Kathryn Thompson from Thompson Research Group. Your line is open.

Speaker 4

Hi. Thank you for your commentary today. A couple of different things. First, let me just discuss the balance of price versus volumes in the quarter. Any color that you can give in terms of volumes and price with carpet tile and other major categories would be great.

Speaker 4

And then also against the backdrop, very solid growth in backlogs. Any color that you can give on mix there would be great byproduct category? Thank you.

Speaker 2

Maybe I'll take your second one, Catherine. This is Laurel. If we look at our order growth, we feel really good about where we sit, Really strong quarter in order growth. And it's we're showing growth in all categories, so across carpet tile, a little bit stronger growth in LVT and Rubber, but carpet tile also showing growth, which we were really excited about.

Speaker 5

And then I'd just say you asked a little bit about the mix of price versus volume in the quarter, Catherine. So price was up around 2%, volume was down around 4%, percent and that's where you see the negative 2% on the P and L and that's all in across all product categories globally.

Speaker 4

Okay, great. And then, I know you gave some commentary about margins, just really the upper end down slightly given the mix going forward. But against that backdrop, you did have some good solid performance this quarter in margins because of various tailwinds, including better raw materials. Maybe talk a little bit more about what to expect ex mix in terms of the puts and takes for gross margins as we look into 2024?

Speaker 5

Yes, sure. And just to clarify, we actually brought the high end of our gross margins up compared to our prior guide. So I just wanted to make sure that was noted.

Speaker 6

Yes, yes, by 20 basis points, yes.

Speaker 5

Exactly. The thing I want the thing that we also wanted to flag is that I'm sure you noticed sequentially from Q1 to Q2 the gross margins will go down. Most of that is due to the mix. So here's the good news. We're raising our revenue $30,000,000 which is fantastic.

Speaker 5

It's just that our best estimate is that, that will probably come in at a slightly lower gross profit margin than our more premium products. So we're really happy with the volume. It's carpet volume, which is also at a slightly lower gross margin than rubber and LVT for us. So we're happy for the volume and we're pleased to be able to take in the revenue up. It's just the note in our guide is that it is at a slightly lower gross margin than what we saw in Q1.

Speaker 2

And Catherine, I'll just jump in too on carpet. As Bruce mentioned, the strength we're seeing there compared to the industry, we're really encouraged by. So our Q1 billings in corporate in the Americas were pretty strong compared to the industry. So we're feeling good about that.

Speaker 4

Perfect. Thanks. I'll jump back in the queue.

Operator

Your next question comes from the line of David MacGregor from Longbow Research. Your line is open.

Speaker 6

Yes. Good morning and congratulations on the results. Strong quarter.

Speaker 2

Thanks, David.

Speaker 6

I guess lots of questions, but let me just pick up on the observation in the reflection of some of the initiatives that you've undertaken in the one interface where you're really focusing on the attachment sale of the LVT and the rubber product to a tile order?

Speaker 2

Yes, I think it's that. So what we're seeing and it's early days yet. So we kicked off the 1 interface selling team in the U. S. On January 1.

Speaker 2

And what we're seeing now is actually we had a bunch of our sales leaders in this week and we were talking about the order momentum and trying to put our finger on it because honestly it's a tough market out there and we feel good that we're gaining share and as you said we're seeing more attachment across rubber and LVT. It's early days. So we're encouraged where the momentum of holding each other accountable to deliver growth in a single market regardless of what product family is really starting to take hold. But we're encouraged. I don't think we expected to see it so soon.

Speaker 2

So more to come.

Speaker 6

And I mean, how much more visibility do you have on that? It seems as though this is probably early innings if this is kind of a structural change in terms of how you go to market. Do you respond to that by adding more resources in your sales organization and just trying to take that new basket of product or that new mix of product to the market?

Speaker 2

Yes, it's a great question. So it takes a while. We've got a specified sales team and it takes them a while to actually build their momentum. And we added 7, almost 8, I think it is, new sellers in Nora that's really amplifying that growth. What we're finding right now is in addition to potentially looking at we'll learn as we go.

Speaker 2

And if we need to add more resources to fuel the growth, we'll definitely do that. We're also looking at some of our supporting functions that this momentum is having on our business. We do some design services for our customers. It's a great indicator of how strong our order momentum is when our internal design services start getting pressured. So we're looking at some supporting functions to make sure that we're there to serve the growth.

Speaker 6

I wanted to ask you as well about the lower costs that you achieved in the quarter. And how much of that would be a reflection of just market pricing versus some of the improvements you've made and the investments you've made in your procurement function?

Speaker 2

Yes. I think it's probably both. So we're seeing some of the investments roll through. We talked about Bruce and I were out in Weinheim, Germany looking at our Nora facility and we made some investments there in automation. And seeing that flow through is starting to have a nice impact.

Speaker 2

But I think that's early days too. So a lot of those investments are just laying in. The investments we're making in LaGrange were ramping up, but we can only get so many machines so quickly. So some of that will take time over the next 24 months. So I think that's another one that's in early innings honestly.

Speaker 6

Yes. It sounds that way. And then I wanted to ask you about your balance sheet. You're down to 1.7 times. Boy, the whole discussion around the Interface balance sheet has really evolved over the last couple of years and you've done a great job of deleveraging.

Speaker 6

I guess, what do you do now with that? Do you start looking more seriously at developing an acquisition funnel? Or just talk about Bruce mentioned in his comments that it creates opportunity. I guess I just want you to drill a little further on that, how you're thinking?

Speaker 2

Yes. I think as you said, I'm really I'm proud of the team for how aggressively we've gone after the debt. It helps us give us a lot of options going forward. And I think we're really assessing our number one investment. We'll continue to pay down debt, but our number one investment will be internally things that we can do to service our business growth, which we're finding more and more of those.

Speaker 2

But it does give us options to pick our head up and see what's out there. I think right now we're really focused on the here and now and we think we've got a lot to invest in with respect to innovation and automation going forward.

Speaker 6

Okay, great. Congratulations on all the progress.

Speaker 2

Thanks, David.

Operator

And your next question comes from the line of Alex Paris from Barrington Research. Your line is open.

Speaker 7

Good morning, Laurel and Bruce. Congratulations on the strong quarter.

Speaker 2

Thank you.

Speaker 7

A lot of good questions so far. I got a couple being sort of newer to the story. I just want to understand a little bit more of the dynamics of the gross margin, an area of focus clearly, and it continues to benefit from favorable mix in price and input cost deflation. So starting in reverse order, input cost deflation, just catch me up to today, how long have we been benefiting from that? And will it continue or it has it been largely anniversaried at this point?

Speaker 5

Great question, Alex. And actually for being new to the story, I think you're very strongly up to speed. In the current quarter, if you think about our gross margin expansion, about a third of that came from price, a third of that came from raw material deflation and a third of that came from mix. And we have benefited from raw material deflation over the last few quarters. What we're seeing right now is really pretty to be fair, a ton of puts and takes, but pretty steady raw material pricing right now with the exception of a little bit of pressure on freight.

Speaker 5

And our best estimate is that the year over year pickups on raw materials will come to a close in the back half of this year.

Speaker 7

Great. That's helpful. And then let the other 2, let's talk about mix in price. You say a third comes from price. Those are price increases and they're durable.

Speaker 7

You don't usually take them back once they're put into place.

Speaker 2

Yes, I can comment on that, Alex, just to give a little bit of context, especially in the U. S. Where we have an incentivized selling organization. Those guys really do a nice job putting price out and holding price. So to your point, we don't often we won't take prices down.

Speaker 2

And in the U. S, which is our largest market, they're really incented to hold them. So they're fighting every day for it. It's a tough market, but proud of the progress.

Speaker 7

Great. And then lastly, on this line of questioning, the mix, it's clear that LVT and Rubber have higher gross margins than tile. How about by market segment, corporate office, education, healthcare, government, etcetera, retail?

Speaker 5

It's a mix of customers across all those segments. Clearly, healthcare and education come at stronger gross margins than, say, retail does. But to be fair, we also have very strong margins in our corporate office business. So it varies by mix, it varies by segment, it varies by customer, it varies by geography. So there are a lot of different puts and takes.

Speaker 5

I think the headline is that everything that we sell comes in at gross margins that we like. And so but if you were to stack rank them, I think you're aware of this, Alex. Rubber is the strongest gross margins followed by LVT followed by carpet.

Speaker 2

And then just to add on that as well, our margins in the U. S. Are stronger. So that helps too when we mix up in the U. S.

Speaker 7

Great. Super helpful. And then kind of continuing down the line of the new guys' stupid questions because I have the license to

Speaker 6

do that at this point.

Speaker 7

Order growth of 5.1%, very encouraging. You talked a little bit about it in the prepared comments and you were questioned about it already. Here's a fundamental question. How quickly do orders turn into revenue at Interface?

Speaker 5

There is a big range. The average is sort of 12 to 13 ish weeks. However, some stuff goes out same day and then some stuff doesn't go out for a few quarters. So when you peel into the data, there's a huge range, but if you were to average it out, it's about it's around 12 ish weeks.

Speaker 2

And I'll just comment to our I think Bruce already said this, but our orders in April continue with the same trends. So we're feeling good about the order strength in April.

Speaker 7

Excellent. And then retail, so retail is going to be is a contributor to the increase in net sales guidance as I heard. Is the recovery in retail faster than you had expected? I realize that put some pressure on revenue. Even though it's a small segment, put some pressure on revenue in the second half.

Speaker 7

And you expected that to continue through the first half?

Speaker 2

Yes, I'll take that and then Bruce you can jump in on it. So Bruce, as you said, our retail business is small. We don't talk about it a lot. It's about 4% of total business. So it's not a huge segment.

Speaker 2

But in the back half of last year, we had some significant pullbacks that impacted our revenue. And we weren't sure when they were going to come back. We didn't lose the business, but some retailers made a decision to not refresh their stores. And that has we're pleasantly we're pleased, I would say, that those stores need to get refreshed eventually and we're starting to see that come through, which is what will start impacting us in Q2.

Speaker 5

Yes. I would just add, I mean, I'll reiterate what Laurel said. It was project deferrals instead of lost business, which we knew we were going to get that business. The question was timing. So and we're starting to see it come back.

Speaker 7

So from a timing perspective, is it coming back a little sooner than expected? Again, I expected to see pressure on that front during both the first and the second quarters, but it sounds like it's coming back a bit in the

Speaker 6

second quarter.

Speaker 2

Yes. It is. It's coming back a bit in the second quarter sooner than expected. And then our current view is that it will also be there in Q3. So it is sooner you're right.

Speaker 7

Okay, great. Good news. And then last question, again from my ignorance. There was a $400,000 charge for a cyber event. I wasn't aware of that.

Speaker 7

When did that occur? Is that behind the company now or do you expect more expenses in that regard?

Speaker 5

Yes. So Alex, that was actually a credit. We had an insurance claim related to our 2022 cyber event. And those for we incurred some hard costs and so we actually got insurance recovery on that. And so what you're seeing on the GAAP and on GAAP adjustment schedule is actually a pickup.

Speaker 7

Got you. All right. I missed that. So thank you very much. I appreciate the additional color and I'll talk to you on our follow-up call.

Speaker 7

Thanks.

Speaker 6

Cool. Thank you. Thanks, Al.

Operator

Your next question comes from the line of David MacGregor from Longbow Research. Your line is open.

Speaker 6

Yes. Just a follow-up. Thanks for taking the follow-up. It seems like we've got a few minutes here. I just wanted to get you to comment on the observation in the press release that you're talking about the drivers of the gross margin, I believe, and you're referring to synergies from globalization of core functions.

Speaker 6

And so I guess we've talked a little bit about some of the things you've done in terms of sales resources and spec writers, but I just thought I'd get you to comment on anything maybe that we haven't talked about that you feel is worth noting. And then maybe factors that you've been working on that really haven't come into play yet in the numbers, but you would expect to have a more beneficial impact and become more visible in the second half?

Speaker 2

Yes. Thanks for the follow-up. I appreciate it. It's stuff we love to talk about. So we have we talked a lot about the selling combined teams in the Americas.

Speaker 2

We're doing a ton of work honestly across every function. So a couple of examples, our marketing organization, which used to be very regional and even country level, we have one marketing team that's driving initiatives around the world. So we launched our Made for More brand campaign, which hit which is great exciting. You'll see it on our website and social media. That's an example.

Speaker 2

That's speed to market, one voice for the brand that goes and hits the globe all at one time, so really efficient. Another example that I think is yet to be seen, we'll start to see signs of it at Kirkland Well and at NeoCon is we've globalized our design function. And that doesn't mean every product is a global product because there's certainly regional nuances. But we're looking at it from a global point of view to have we have one design team. They sit in different places around the world, but there's one team really putting our best efforts against our biggest opportunities.

Speaker 2

So we've got some exciting new product launches that we'll showcase at NeoCon. That's another example. And then the third I'd say as you know we hired a Chief Supply Chain Officer and we're globalizing that function as well. There's so much opportunity as Bruce and I looked at, we went to see the facilities in Australia, in Germany and the Netherlands. And there's just so much learning that's happening and sharing and everyone's on the same team driving great results, helping each other to see how efficiently, we can learn from each other.

Speaker 2

And there's really good best practices that are coming

Speaker 6

through some of the investments

Speaker 2

that we're making in LaGrange. That's where the that's where the beauty is. We do it efficiently. We do it once and we scale it. So there's a lot more to come from that perspective.

Speaker 2

It's good work so far.

Speaker 6

Did you find that as you're building out this capability with the One Team, One Dream global scale opportunity, are you finding that you're getting a better audience or you're maybe getting a little more traction with larger global accounts as opposed to maybe smaller, more fragmented accounts?

Speaker 2

Yes. It's interesting. There are a couple of examples of that, whether in Australia, we met with a large global account and some of it is that we're as you say, we're approaching it beyond one flooring solution. There's more than that. There's another example in a major retailer that we met with.

Speaker 2

It's really looking at a multi floor solution. And again, we'd shown up a little bit differently in the past and we're now coming with one voice. So I think you're right, we're getting a higher level audience and we're also much more coordinated and making more impact as we do meet with our customers. And they're enjoying it. They don't have to work with separate teams, right?

Speaker 2

We show up with one voice and we know their needs as well.

Speaker 6

Great. Congratulations on the progress. Thank you.

Speaker 2

Great. Thanks, David.

Operator

There are no further questions at this time. So let's turn the call back over to Laurel Head.

Speaker 2

Well, thank you so much. I appreciate you all listening today. And want to again thank the team for all the work that they're doing and the great progress, great start to the year. And we look forward to updating everyone next quarter.

Powered by Quartr
Earnings Conference Call
Interface Q1 2024
00:00 / 00:00