Q2 2020 Interface Inc Earnings Call
Twentytwenty interface Inc. earnings conference call.
At this time all participants are in the listen only mode. After the speaker's remarks, there will be a question and answer session. Just a question Jamie the session you will need to press star one on your telephone I would now like to turn the conference over to your speaker today, Chris to needle corporate Communications. Please go ahead.
Good morning, and welcome to interfaces conference call regarding second quarter, 2020 result, hosted by Dan Hendrix, Chairman, and CEO, and Bruce Hausman, Vice President and CFO.
During today's conference call any management comments regarding interfaces business, which are not historical information are forward looking statements within the meaning of the Securities Act of 1933 as amended and a Securities Exchange Act of 1934 as amended by the private Securities Litigation Reform Act of 1995.
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 associated with the ongoing Kobe 19, pandemic, including interruptions to our manufacturing operations and reduced demand for our products.
Economic conditions in the commercial interiors industry and risks related to lawsuits investigations and similar legal proceedings that we are subject to from time to time as well as the risks and uncertainties discussed under the heading risk factors and item one a day of the company's annual report on form 10-K for the fiscal year ended December.
Were 29 2019, and our subsequent quarterly report on form 10-Q for the period ended April 520, 20, which have been filed with the securities and exchange commissions.
We direct all listeners to those documents.
The company assumes no responsibility to update or revise forward looking statements made during this call and cautions listeners not to place undue reliance on any such forward looking statements.
Management's remarks during this call also refer to certain non-GAAP measures. The most comparable GAAP measures as well as a reconciliation of the non-GAAP measures to the most comparable GAAP measures is contained in the company's earning release and form 8-K furnished with the FCC today, which explains why interface believes presentation of these non-GAAP measures provides useful information.
[music] investors as well as any additional material purposes for which interface uses these non-GAAP measures each of which can be accessed and the investor Relations section of the company's website www dot interface Dot com.
Lastly, this call is being recorded and broadcasted for interface. It contains copyrighted material and may not be recorded or rebroadcast without interfaces express permission.
Your participation on the call confirms your consent to the company's taping and broadcasting of it.
Now I'd like to turn the call over to Dan Hendrix, Chairman and CEO.
Good morning, Thank you for joining us on the call hope that everyone is strings safe and well as anticipated our sales in the second quarter were significantly impacted by the ongoing global pandemic.
Down 27% in Q2 versus last year.
That being said I'm proud of the James agility across the globe in our Swift action to reduce spending and parts that cash flow, while still positioning us to be the leader in our space over the medium and long term.
We've been able to whole gross margins at a healthy level to reduce SGN expenses to deliver adjusted operating income of $27 million in the second quarter, we generated strong cash flow from operations of $48 million in the quarter ending the quarter with 331 million of liquidity. We also recently amended our.
City.
To provide enhanced financial covenant flexibility through the end of Q1 2022.
We maintain our sales organization, they continue to invest and product innovation to drive share gains and long term growth.
We remain steadfastly committed to our purpose and climate mission and our track to deliver our first ever carbon negative carpet tile this year.
Before I share more about our innovation sales initiatives, let me first turn the call over to Bruce to discuss our second quarter results in more detail Bruce.
Thank you Dan and good morning, everyone.
Before I get into details of Q2, I want to provide some insight into what we're seeing so far in Q3 as we continue to navigate through the impacts of Cobot 19, and what is having on our business as mentioned in last quarter's call. The more severe the lockdown the more severe we see a decline in revenue along.
There are few bright spots geographically, where certain countries appear to have gained greater control of the virus and the associated economic activities more stabilized.
The overall pressure on sales and orders is continuing as we enter in the third quarter.
The Lockdowns of course are occurring around the globe that we're seeing this in our order trends for the month of April orders were down 32% year over year for the month of May orders were down 35% and for the month of June orders were down 29% for.
So the good news isn't the decline has stabilized, but we're also not seeing attorney that puts us back into positive year over year growth territory.
As we enter Q3 for the month of July orders were down 24% and the trend continues to be fairly broad based the orders were down 28% at Americas, 23% in EMEA and 14% in Asia Pac. We anticipate this order trends will put pressure on sales and operating income in Q.
Q3, similar to the weighted in Q2.
With that context in mind Theres more detail about the Q2 results net sales in Q2 2020 were down 27% versus the prior year period.
Sales in our Americas business declined to 28% in the second quarter. The steepest declines were concentrated in carpet tile with resilient flooring largely flat during the quarter.
EMEA sales were down 23% in local currency and down 25% in us dollars.
Similar to our Americas business, the carpet tile business was down significantly and resilient flooring was largely flat.
Sales in Asia Pacific were down 31% in local currency, but were down 33% in us dollars sales in the region were down significantly in April and May but improved sequentially in June phases heavier declines were somewhat moderated by less significant declines in Australia.
With our global market segments, we're seeing growth and living which includes student housing senior living and multi residential transportation hospitality and education.
We continue to be encouraged by the outstanding work of our supply chain and manufacturing teams and the relative stability of our gross margins. Despite continued production declines.
Second quarter gross profit margin was 37.5% down a 190 basis points versus second quarter gross profit margin last year and adjusted gross profit margin was 38% a decrease of 170 basis points compared to adjusted gross profit margin last year.
As to the expenses were 80 million in the second quarter or 30.9% of sales while adjusted SDMA expenses were 71 million per 27.4% of sales in the second quarter. We recorded 6.2 million of onetime charges related to severance payments for our voluntary and involuntary separation programs plus.
Exit costs related to closure of the three remaining floored brick and mortar design centers as we continue to shift that business toward online distribution were continues to gain traction and grow.
We also recorded $2.6 million of asset impairment charges and wrote off 4.2 million of damaged yarn as a result of a fire at a leased storage facility.
At the time of the fire safety protocols were followed and no one was injured.
It's also important to note that invest United The company benefited approximately 4 million from various wage supports an employee retention programs around the world as well as temporary furloughs in the Americas and Asia Pacific.
As we think about arrest DNA run rate, we anticipate SDMA of approximately $80 million per quarter for the remainder of 2020 with total year adjusted SDMA expenses of approximately 320 million this fiscal year.
In Q3 in Q4, we're not anticipating as much government sponsored wage relief and other temporary pickup several realized in Q2, which is why we're anticipating a sequential increase in SGN a run rate from Q2 to Q3.
Second quarter operating income was 17 million compared with $43 million in Q2 last year. Adjusted operating income was 27 million versus versus adjusted operating income of 44 million in the second quarter of last year.
We recorded net income of $5 million in the second quarter or eight cents per diluted share adjusted net income was $16 million or 27 cents per diluted share in Q2.
And adjusted EBITDA was $38 million in the second quarter. Please refer to our press release for reconciliations of our GAAP to non-GAAP measures.
Turning to our balance sheet, we continue to vigilantly manage cash that maintain healthy liquidity.
As previously announced we recently amended our syndicated credit facility, providing for enhanced financial covenant flexibility through the end of Q1 2022.
Net debt or gross debt minus cash on hand was 528 million and the latest 12 months adjusted EBITDA was $181 million at the end of Q2, resulting in leverage ratio of 2.9 times calculated as net debt divided by adjusted EBITDA.
Interest expense was 5 million in the second quarter compared to 7 million in Q2 of last year and depreciation and amortization was 10 million in the quarter versus 11 million in Q2 of last year.
Capital expenditures were $13 million in the second quarter compared to 15 million in the second quarter of last year, and we anticipate 45 to 50 million of capital expenditures for the full year 2020, including planned investments and backing and testing technologies in the Americas with that I'll turn the call back over to Dan Dan.
Thanks, Bruce as I mentioned earlier, we have exciting product innovations in the works and remain focused on driving growth in our business our carbon negative comments hours a huge went for the environment that will also expand our market opportunity in carpet tile within new non PVC and bio based backing offering.
We also recently announced that interface LBG products now includes 39% pre consumer recycled content.
Demonstrating our commitment to applying our sustainability expertise to the resilient flooring category.
We most recently previewed our new open air carpet talk collection, which pairs classic patterns and neutral colors to offer more options for larger footprint spaces and is developed to fit any budget.
At the ICANN virtual events. This year, we won the 2020 hip award in the hospitality flooring category for our guest rooms product.
And our product designer carry day, one of the manufacturing leader category.
Beyond product, we are actively developing key markets and channels expanding our overall market opportunity.
We continue to see significant opportunity in non office segments, Nora increase our presence in healthcare education and transportation and we believe there is a great opportunity to expand in these markets and develop a more meaningful presence and other key segments.
We are helping our customers adapt to their spaces for the current working environment by illustrating how our foreign can help create boundaries ore zones port physical distancing and prop movement through a variety of spaces, and we're partnering with architects and designers to develop flooring solutions that meet future built space.
Design needs our floor brand has a proven omni channel approach with a successful online presence, they're highly effective synergy program with our commercial business capitalizing on the resi Mercil design trends, we are expanding our presence in the dealer direct market increasing access to the underdeveloped area of our customer base, particularly in the.
United States UK in Australia.
Our immediate focus is on the safety of our employees and their families and protecting the financial position and cash flows of our company.
We remain confident in the opportunities ahead and remain grounded in our core purpose and sustainability mission.
We had the best selling system in the industry and are focused on growth and a sustainable way.
Thank you to the interface team for your hard work during these challenging times. Thank you to the frontline manufacturing employees, who continue their hard work and our plant Jamaican deliver our products.
Thank you to ourselves teens percent closely connected with our customers are working constantly to identify and execute on new opportunities every day.
Thank you all of our team members across the globe for their commitment whether you're working on the factory floor from home or in the field.
Your health and safety and that of your families remains our key priority.
Thank you also to our customers and shareholders, who continued support interface I remain confident that we have what it takes emerge from this global pandemic as a stronger and more resilient company with that I'll open it up for questions operator.
Thank you at this time, if you like to ask the question Press Star one on your telephone to which I have question has stepped on T. again ask the question Press Star one please wait probably compiled a question.
[laughter].
And your first question comes on line of catching Thompson with Thompson Research Group. Please go ahead.
Hi, Thank you for taking my questions today.
And appreciate the color you gave end to end the prepared commentary.
I would appreciate just getting picking a little bit deeper and clarifying differences by end market and region and taken up what types of projects are advancing slowing or perhaps halted and near term.
Thank you.
Yeah.
It's a mixed bag around the world the honest with you.
We're seeing European markets some of them starting to recover.
In the theme to the whole thing is we're display seeds seen some stabilization.
Around the world.
The the office market has hit the hardest.
Other segments are actually performed pretty well.
Half our businesses office of half of its non office and were pretty segment and so we're we're going to focus on education healthcare.
And they offers as well and we're also going to go.
Down a little bit in price points to go after the dealer market, particularly in three regions.
So its stabilizing and what we're going to take advantage of and go. After I think we are the best selling system in the world.
And we're just going to go after business and so.
Okay.
Thank you.
Are you seeing any meaningful changes to shipping rates given to production oil prices are there any changes in shipping rates just do also to changes in global demand trends.
Yeah, I you know.
From a freight standpoint, we haven't seen any big freight reductions I guess oil some small standpoint, we don't make money on freight. So we will have an impact on freight Bruce if you have any data on that the Bruce good morning, and we are we are seeing a deflationary environment. So we're sure back half with our input costs.
As you know freight is not a big component of our input costs, but the rest of the stuff, we'll get some pickup in the back half yes. It did you get the pickup next year as well right. So 90% of our raw material inputs are oil base. So yes, we will system benefit from the yep.
Okay, and then signed a question for today that so many companies are.
And.
Have you make major adjustments that have had internal a positive impact on margins at least in the near term.
What structural changes do you anticipate not going away, even with an improvement in volumes.
And which ones do you think will transition back to kind of quote unquote normal.
Well not kept the were rightsizing this business to demand and we're going to focus on products within the focus on innovation or selling system.
And we're going to we're going to rightsize the business to what we see out there are stabilizing.
Today around 25%.
We would fit the bottom and we're going to go back the other way.
So we're going to rightsize us DNA to meet demand.
Catherine This is Bruce.
This is of course is that if you think about our manufacturing environment, it's about 30% fixed 70% variable, which gives us a lot of flexibility around the globe to flex our cost structure and I just want to give a shout out to our manufacturing teams and the fantastic job they did throughout the quarter navigating through.
But you know our production was down and we've got finished goods inventory down $30 million.
Throughout the quarter. So you may notice, our inventory was down $8 million and so some of that with some raw materials that we brought in but the team just did a great job navigating through the environment and really flexing through with the variable cost structure of the business yeah like our I like our margin profile has a gross profit on.
We've done a great job managing the.
Great. Thank you very much.
And your next question comes on line as David Mack Gregor with Longbow Research. Please go ahead.
Yes, good morning, everyone, Oh, maybe just pick up on that last point, you talked about being pleased with the gross margin profile could you. Just really you can bridge that 190 or 170 basis points for us I'm sure a lot of it is just productivity associated with lower volume, but just wondering price and anything else that might be in there.
Well I will tell you that having production down 37% and only having a 170 basis points segregation in margin.
That shows you that the.
Margin profiles is pretty variable, we were able to meet demand with that so sure I think that's kind of said well first in the future that margin profile and our manufacturing folks and Bruce said it had done a great job in adjusting to the production levels, Yeah, and David I'd, just add has boosted our selling organization has done a great job at.
Holding price yeah for sure but for sure and so between.
The.
Holding price with the of what our product demand through innovation and through design and our leadership position has done really well.
Accompanied with our manufacturing environment that has a large variable component to it right.
And so I guess.
You mentioned deflation in the second half, how would deflation and raw materials and production inputs have impacted the second quarter gross margins.
We are the pit we did have a pickup in the second quarter. It wasn't a large one.
On input costs, because as you can imagine we buy the in we buy the raw materials and then we manufacture that goes into inventory that would eventually flows through now [laughter], we'll see more of the pickup in the back half of their pricing is.
Quarter in places on all yarn inputs yep adjusted per quarter.
I'm sure. If you if you don't you cut it on me.
So from a one of our big assault raw material inputs is yarn and our supply contracts adjust quarterly to pricing. So we'll see a bigger impact in second half got it and then I guess secondly, you mentioned going after the dealer market and pursuing lower price point are you.
Are you taking equal products in the market like equal weight product to the market with lower price point are you going.
To lower price point, lower weight product and ER and then just talking about you know.
The different cost of service or the different cost is going to market with a dealer versus the spec market.
Well you know that though.
We.
Have our product space and category 1234 and five.
The dealer markets a category two product, which we price that we manufactured to fit that market to keep our Martin.
So it's not a different system would go into from a product standpoint, we're just going to have more category two products.
We're going to use our existing selling organization to sell them that marketing focus on the dealer.
It is basically traded there like a customer going after that business.
Okay. So.
You're not taking like for like product down market. You are you just can't emphasize a lower weight product within your line structure threat right all right that's good.
That's what I had thanks very much good luck great. Thank you.
And your next question comes on the line that keep huge with true. Please go ahead.
Thank you I think you'd said the prepared comments resilient flooring was flat in the quarter or is that correct.
We see a resilient has been was relatively flat.
So there is heavier pressure on the carpet tile and well resilient hung in there pretty strongly.
And so within that resilient, how the Nora compare with the LTC goods.
You know nor has been our strongest category Nora has held in amazingly strongly throughout the entire pandemic and and has been has done extremely well and in certain pockets within or a business you would never know that the covered 19 pandemic has even happening, but yeah I would I would say.
No. It is a big bright spot for us and I think the second half is going to be pretty good for nor.
Well I was doing so much better than particularly corporate it because it's not it's focused on health care, which obviously in education, which both of those are doing very well and transportation. So they're segmented differently from the office.
So I think about your comment there was up in the quarter.
<unk>.
Sure.
Yep.
Okay.
Yeah, No yesterday spending you talked about 4 million of government supportive.
Oh, the 71 million your reported one other costs are going to become about because we go into the third.
Got it.
Yeah.
Yeah. So Keith this is Bruce as soon as you pointed out it was a combination of furloughs and then the government supported programs that gave us a pickup in Q2.
And we don't anticipate of that as most of that in Q3 and of course is sales volume changes we have additional variable assuming they cost that come back and then I would just sort of say, there's just no general seasonality around <unk> marketing and promotional programs. Yeah. Yeah. I'd also say, we're going to introduce our oh than that.
For the products.
And by the beauty in the third quarter, and we're going to make a big splashed with that so we're going to invest in this backing system definitely it's going to give us a big advantage.
Are you looking at capacity reductions particular carpet, though given how we said businesses.
Well I think it's stabilized so we were down 37% of production. So I think we're going to look at I hope our capacity will go back up to smoke get some leverage there yeah can have Peter Keith one of the beauty was as a whole business that we're saying we're seeing it right on the income statement is the flexibility the manufacturing environment to flex up and down.
As well as the.
The geographic presence that we have having manufacturing on four continents really helps us from a competitive standpoint right now we're open for business around the world Yep.
Okay. Thank you.
Thank you again, if you like to ask the question Press Star one on your telephone and your next question comes from minus seven route Darkatsh with Raymond James. Please go ahead.
Good morning, Dan Good morning, Bruce how are you.
Hi, damn good how are you.
Well. Thank you I hope Oh view in your families are doing well and staying safe as well.
Few questions, if I might have the sales down 27% in the quarter or give a sense of what volumes were versus pricing like for like indoor mix.
Do so Sam this is Bruce it was mostly volume nose down price yeah price fell yeah.
So put price was essentially flat year on year, yes, yes. It was.
Okay and then.
I know I don't want to hold you to take guidance per se, but would there be a reason to think why gross margins wouldn't hang in there. It's a 38% range over the next couple of quarters or so and what are the puts and takes there as we as we.
Look I look at our models prospectively, Yeah. Sam This is Bruce So you know, we think and that's why we probably provides a little bit of insight into what we're seeing so far into Q3, we think that.
Q3 will look a lot like Q2 based on the data that we have and so that's why we wanted to provide the order rates and where they're at at the end of July and you know we just moved continued to navigate through this flagstar variable cost structure similar to the way. We did in Q2 will have a little bit more SGN, a we think.
Question, a run rate is around 80 million a quarter and so if you think about the topline it'll probably be fairly in line with where we're seeing orders quarter to date, we believe.
GP will be we think similar to Q2 and SDMA will be any 80 ish million range.
Two more quick questions if I could the commentary around finished goods inventory in production was very helpful. Thank you I'm, just making sure I understand how to reconcile the finished goods data with the production. So is finished goods are down 30 million I think if my math holds.
It's roughly 15%.
Down both sequentially and year on year with what you're saying production was down 37, what's the difference between the finished goods being down 15, the production being down 37, what am I missing in the.
In the reconciliation there.
Yeah. So Sam this is Bruce a kind of help you with the math and started to see it could you just get the top level numbers. So total inventory as you know it was down 8 million. If you double click down on that finished goods were down 30 million and that was 24%.
So we did a really nice job at managing finished goods inventory.
And the reason why a total inventories only down eight is because we actually bought some raw materials.
Because we wanted to make sure that we had.
Supply chain continuity through the coven 19 environment. So we did pre purchase some raw materials to ensure that we could meet customer demands and that we would have the materials that we need to do the manufacturing that we need to the we didnt.
So we didn't get the product and customer when they want it.
So then prospectively when we're looking at second half cash flows I say free cash flow was essentially a push in the first half.
What do you anticipate for for cash flows in the back half.
Yes, and we're going to continue so yeah, we generally we had a really really strong.
Cash flow performance in Q2, generating 48 million of cash from operations and 35 million to free cash flow and we anticipate a good strong cash flow into back half as well, we're very focused on working capital.
And of course degenerative business will all normally does generate cash in the back half.
So we believe that will be will certainly be very positive from an operating standpoint around cash flow and we define free cash flows operating cash minus capex. We will also be positive for the year around free cash flow the company generating a lot of cash and we're really pleased with all of our liquidity metrics.
Very helpful. Thank you. Thank you both gentlemen.
Thanks Sam.
And your next question comes online as David Macgregor with Longbow Research. Please go ahead.
Yeah. Thanks for taking the follow up I guess I just wanted to go back and maybe commit the question Keith was asking from a slightly different angles and I mean, you've got these very large negative comps here in the carpet tile, but your resilience flat to up.
And so I guess I just wanted understand what's happening in the marketplace and now you are responding to it or.
Is there a big change here in terms of the percentage of your business its specified versus maybe getting early start on that dealer business that you had discussed earlier or are the specified contracts just really shifting to kind of 100% resilient are much higher percentage of resilient people are really just backing away from.
Specking in carpet tile into these projects and just trying to get an understanding why that was such a disparity between those two categories.
Well, David I think that the office market is really been hit the hardest with a and that that's where our protocol business plays a big way Israel.
Right right at the office commercial office market is down and we're down what a commercial office Park I.
I don't think theres been a big shift different.
There was no you took profit so I think it's the office market that's.
Created problems for us.
Talking about the non office market. The other 50% if you would in terms of what you're seeing there.
In terms of the question I, just asked I guess.
Different what we're seeing education actually then pretty good hospitality believe it or not there is continuing to build the hotels out.
Health care has been really good for us from that.
Well I understand that what I'm trying to get out is the difference between carpet tile in the resilient.
I appreciate the commentary on the health of the category, but just trying to get a sense of what's happening in that mix.
Well I think the resilient is still growing only teams going faster than carpet tile for sure.
But I still think carpet tile has a place in the office market and.
David This is Bruce this might help we don't see the mix shifting in those segments. We just see those segments being a little more heavily weighted towards <unk> million product.
And which is helping us in this environment and that's why it comes out environment like this when offices down so much and those those segments are growing of course, our mix shifts more towards the resilient size of the picture right coming into this year, what would office of what would office of represented as a percentage of your resilient business.
[noise] offices [laughter] I don't think we have that data actually yeah.
Okay, Alright, thanks, guys.
Hi, Thank you David.
And there are no further question at this time I will turn the call back over to their presenters for closing remarks.
Well. Thank you for listening to the call I'm hope to talk to you next quarter as well and please be safe in this environment.
Thank you.
This concludes todays conference call you may now disconnect.
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