Q3 2020 Interface Inc Earnings Call
I'd now like to hand, the conference over to your speaker today Christine needles. Thank you. Please go ahead.
Good morning, and welcome to interfaces conference call regarding third quarter 2020 results posted by Dan Hendrix, Chairman, and CEO, and Bruce Houseman, 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 federal securities laws forward.
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 posted 19 pandemic and those described in our SEC filings the.
The company assumes no responsibility to update forward looking statements.
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-K furnished with the FCC today.
Lastly, this call is being recorded and broadcasted for interface. It contains copyrighted material and may not be recorded or rebroadcast without interfaces expressed permission your participation on the call confirms your consent to the company's taping and broadcasting of it.
After our prepared remarks, we will open the call for questions now.
Now I'd like to turn the call over to Dan Hendrix, Chairman and CEO.
Good morning, and thank you for joining us today before we discuss financial results for the quarter. Let me first talk about the status of our business and what we're seeing in the marketplace.
Thank you to our interface team for your hard work this quarter as we continue to manage through COVID-19 pandemic and the ongoing impacts on our business. We remain focused on managing the things that we can control while continuing to invest in initiatives, specifically, our product innovation pipeline and selling system that will set us up for long term success.
Very proud of the team for providing best in class service levels, while ensuring the safety of our people.
Our net sales were down 20% in the third quarter versus last year I am encouraged by some early bright spots in the business.
Third quarter orders increased 11% sequentially compared to the second quarter potentially signaling stabilization, we saw modest sequential improvement across all product categories.
We're beginning to see modestly improving trends in Europe in particular, we're having a standout year in our normal rubber business in Germany.
And our business in China has returned to growth Australia seems to have a better handle on co at 19 and most of the world.
And more people are returning to the office in Asia Pacific will work from the home is less comment. This is a positive signal for us with half our revenues outside the United States we.
We maintain healthy adjusted gross margins of 37% in the third quarter, Despite a 31% decline in carpet tile production.
This reflects the strong capabilities of our supply chain and operations teams and the flexibility of our 70% variable manufacturing cost structure.
We remain committed to rightsizing the business to maintain our profitability when necessary, we have taken actions to realize $80 million of annual run rate cost reductions in response to the pandemic and anticipate full year 2020, adjusted SGN expense of approximately $310 million.
Overall, we have made progress expanding our product lines in 2016 carpet tile made up nearly a 100% of our revenue.
Today. It is only two thirds of our sales we've quickly grown our LDC business since launching in 2017.
And require rubber business in 2018, we believe rubber and LBG have doubled interfaces total addressable market for about $4 billion to approximately $9 billion and there is an opportunity for additional rates and the $10 billion commercial software coming market.
The ongoing conversion of broadloom to carpet tile.
To further strengthen our competitive position. We also continue to expand our market presence in end markets beyond the corporate office. This includes healthcare education life Sciences, hospitality retail consumer and multifamily where we compete on design innovation service price and sustainability in the past few years.
These efforts have resulted in major shifts in our revenue composition.
The commercial office market, which used to represent the majority of our revenue is now less than half our business. This diversification helps us to adapt during times of economic and market volatility.
In the current environment, we are capitalize on opportunities in hospitality, where hotels are renovating and remodeling.
Limited capacity and we see the same trends in healthcare and education, especially K through 12. In addition, the direct consumer ecommerce platform. Our four business is that an exceptionally strong year growing double digits.
With COVID-19 were seeing a change in design needs in schools and offices renovation and remodel compare to new construction make up about 80% of our commercial business and we expect to get traction accommodating redesigns that address social distancing measures as large companies and businesses begin to reopen.
Our products can help to address these challenges with design elements like pattern in shading to guide traffic direction zoning and other visual cues.
Ultimately companies still view office space as a necessity for culture and innovation as they say culture beat strategy every time, we anticipate demand to pick up in the coming quarters, and we believe there will be recovering office market in the second half of 2021. According to our recent Denzer study, 44% of employees prefer to be back.
In the office full time, while 44% for very hybrid office home arrangement. This bodes well for the comeback of the office market.
We're also increase our focus on the us commercial dealer discretionary market through value engineered product and increasing selling focus from our sales force.
Our objective is to take our fair share of this $2 billion market opportunity by focusing on the dealers and offering high design products at low to mid price points.
I'm also very excited to share an important milestone in our sustainability journey in October we rolled out our first carbon negative carpet tile measured cradle to date, we launched this new product as part of our latest global collection called embodied duty.
Along with our new non vinyl bio based sciquest bio and sequenced bio ex Backings. These new Backings, our first non PVC product offers the United States, expanding our market opportunity with a growing customer base that prefer a non PVC option van body beauty styles are currently available in the United States.
We expect to launch them globally in 2021.
We are encouraged by early demand from our customers many of whom care about embody carbon in their build space and have made their own commitment to be carbon negative in the future. We firmly believe that the demand will only increase as more companies set carbon reduction targets.
And is a big step toward our commitment for interface to be carbon negative enterprise by 24.
With that I'd like to turn the call over to Bruce to discuss the financial results for the third quarter.
Thank you Dan and good morning, everyone.
As we close out the third quarter orders were down 21% compared to the prior year with orders down 25% in Americas, 16% in EMEA and 15% in Asia Pacific set said orders increased 11% over the second quarter potentially signal signaling stabilization in demand.
Net sales in the third quarter, 2020, or $279 million down 20% compared to the prior year period, but up 7% sequentially compared to Q2.
Declines in carpet tile were somewhat moderated by a lesser declines now beauty in rubber.
Sales in the Americas were down 29% with declines across all product categories in EMEA sales were down 17% in local currency and down 12% in us dollars again with declines across all product categories and sales in Asia Pacific were down 10% in local currency and they were down 8% in us dollars.
Declines in carpet tile were offset by solid performance in both LDC and rubber.
And our global market segments, we continued to see growth in living which includes student housing senior living and multi residential we also saw growth in public buildings and transportation in the quarter.
Third quarter adjusted gross profit margin was 37.2% and while this was down 270 basis points from the prior year period. It was still a very healthy outcome when carpet tile production was down 31% year over year.
This is a testament to our strong supply chain strong plant operators and our ability to flex our plants and cost structure with changes in demand.
Selling expenses were $88 million in the third quarter were 31.6% of net sales, while adjusted EPS DNA expenses were $75 million for 27.1% of net sales in the third quarter of 2020.
The company has implemented several cost reducing initiatives to line with reduced customer demand and anticipate full year 2020, adjusted SDMA expenses of approximately $310 million.
In the third quarter, we recorded $8 million of severance charges related to payments for our voluntary and involuntary separation program and we've benefited from approximately $3.5 million in various wage support and employee retention programs around the world.
We continue to realign the company's cost structure, while investing in innovation to keep the company strong and agile for the medium to long term.
For third quarter operating income was $16 million compared to operating income of $44 million in the prior year period and third quarter 2020, adjusted operating income was $28 million versus adjusted operating income of $46 million in the third quarter of last year.
We recorded net income of $6 million in the third quarter of 2020 per 10 cents per diluted share and third quarter 2020, adjusted net income was $17 million or 28 cents per diluted share and adjusted EBITDA was $37 million.
Please refer to our press release for reconciliations of GAAP to non-GAAP numbers.
Turning to our balance sheet and cash flows we generated $65 million in cash from operations and had $378 million in liquidity at the end of the quarter we.
We effectively controlled costs and closely managed our cash flow during this ongoing period of soften demand.
Inventory was down $18 million or 7% year over year, driven by a decline in carpet tile, notably finished goods inventory decreased 25% year over year.
Managing our working capital metrics continues to be a top priority.
We ended the quarter with $104 million of cash and repaid 43 million of debt during the quarter net debt per gross debt minus cash on hand was $482 million in the last 12 months of adjusted EBITDA was $162 million at the end of the third quarter, resulting in a leverage ratio of 2.9 times.
Net debt to adjusted EBITDA.
Interest expense was $5 million in the third quarter compared to $7 million in the third quarter of last year, and depreciation and amortization were $12 million in the quarter versus $11 million in the third quarter of last year.
Capital expenditures were $11 million in the third quarter compared to $19 million in the third quarter of last year and.
And we anticipate capital expenditures to be approximately $60 million for the full year 2020, and approximately $30 million for the full year 2021, as Weve moderated capital spending plans this year and plan to reduce them further next year.
While we are seeing indications of stabilization in our end markets. The high level of uncertainty created by the global Pandemics still remains as a result interface is not providing fiscal year 2020 guidance that said based on everything we know today. We anticipate Q4 2020, we will be similar to Q3 two.
Only 20 in terms of the year over year revenue decline and gross profit margins.
And now I'll turn the call back to Dan for concluding remarks. Thank you Bruce we are encouraged by some of the recent data points and trends we are seeing in our end markets and we believe that a broad portfolio coupled with a more focused segmentation strategy will bolster our share growth, we're committed to innovation and have a strong pipeline of exciting new products for 2021.
We will continue to right size the organization to meet demand and focus on strong liquidity and cash flow generation most.
Most notably interface will continue to be successful resilient and agile during these changing times as we always have them. Thank you to the entire interface team around the world for your resilience and dedication to our company and our customers your health and safety remain our top priority and we truly value your hard work and commitment I am.
Well the way our company is navigating this challenging year with COVID-19. Thank.
Thank you also to our customers and shareholders for your continued support we remain focused on keeping our business strong and well positioned for long term success.
With that I'll open it up for questions operator.
At this time, we'd like to take any questions. You may have to ask a question. Please press star one by by the number one on your telephone keypad.
First question comes from Kathryn Thompson with Thompson Research Group Your line is open.
Hey, good morning, it's actually Brian on for Kathryn. Thank you for taking my questions.
I wanted to start.
The outlook for Q4 and kind of.
Bridge the gap between the two statements of.
Q3 orders were up 11% sequentially, but Q4 is you track similar to Q3, and I guess sort of thoughts if orders are up a little bit more then maybe Q4 would be a little bit more but it sounds like should be down to a similar accidental Q3 is the I guess, how do we bridge the gap between those two.
Yeah. Good morning, Brian its Bruce Ausman. So the way we're thinking about Q4 based on everything we know today is that if you think about year over year top line growth. It will be really similar to what we saw in Q3.
And we think about gross profit margins were thinking that there will be very similar to what we saw in Q3.
And if we think about full year SDMA it'll be about $310 million approximately for the full year and of course, we are three quarters bank. So far so you can pretty much back into the Q4 number.
And so.
The good news is that we are seeing stabilization in the business.
The good news is that orders sequentially are up but based on all the puts and takes of the numbers that's kind of how we how our best estimate of where Q4 will probably come out.
Okay.
And then I guess around the gross margins in the quarter.
Now to 70 basis points I think I was a little more than Q2 is down I guess, what are the drivers for that in the quarter and it seems like.
Volume production should have been a little higher in Q3.
Hopefully were seeing some lower input costs from the.
Lower input costs that were in the first half of 2020 kind of flowing through the income statement in the back half of the year. So I guess, how do we think about the puts and takes for the margin performance in the quarter.
Yeah. Good morning, Brian. This is Bruce assessment again, so in Q2, our production was down about 36% in Q3 was down about 31% in Q4 were anticipating a similar level. There are as you mentioned there are a lot of puts and takes in that we felt.
Really good about where the gross margins landed for the quarter.
Based on.
Great operators, and our plants, great supply chain organization, and a strong ability to manage costs, we're not necessarily seeing this.
This is not an inflationary environment from an input inflation standpoint, but it's not necessarily a heavy deflationary environment, either so you kind of bake in all those factors and and again.
Where the GP landed we we thought it was a great outcome and we're anticipating a similar outcome for Q4, yes, and we and we continue to bring down finished goods inventory as well, yes, that's a really good point on nothing that view.
I heard that point the finished goods inventory was down 25%.
Which is it which is so we continue to be very focused on our working capital.
Got it thank you.
Your next question is from Keith Hughes Suntrust Securities. Your line is open.
Thank you.
Given some of the shifts in the market you talked about towards soft surface from carpet picture, you're addressing and given the downturn with.
Perfect I'll now are you looking to permanently take from profit chalk capacity out.
Given this production rate you discussed earlier.
Not right now we're not we continue to look at capacity in Asia.
We have a lot of capacity there and we're going to we want to we want to capture the China market and we have a plan in China that services, the Chinese market and our Thailand plant services the rest of Asia.
And we have an Australian plants. So we're not looking to take it out today, but we will continue to look at it and flexible as demand ebbs and flows.
Okay, and you had discussed $80 million run rate of cost savings can you talk about how much of that will be realized in 20 and how much in 21.
Key 2000, I was wondering if you're going to ask that question, we're still working through our LPU or our annual operating plan process.
And where were going department by Department line by line and grinding through all the numbers.
And so we don't have.
Any forward guidance on that number for this call, but we will provide that on our next call.
And but I would just say that we're going to continue managing the.
Cost structure of the business in line with our current demand.
And I am sure Youve noticed our SGN a is way down year over year, and I think that we're doing a good job of controlling that line and making sure that thats in alignment with our with our with our current topline.
Is it fair to say the majority of what we've seen in 21.
Ido, there will be some things that will happen in 21 like for example merit increases.
We'll come back for example, bonuses all sort of get reset.
Based on new targets and things like that so thats all the math that we're working through and the furloughs and the furloughs that come back we had a number of furloughs. We also had some wage support programs this year.
Principally in Europe, where theyre government sponsored programs that we get reimbursed.
And we're just not sure if those will be recurring next year.
Syed.
A country by country government government equipment Bank government has to approve those so we have taken out some permanent structural costs as well we have.
That's part of $80 million Ashland, correct, Yep Yep Yep Okay.
And I guess, just any kind of update for us on the CEO search where you stand on that front.
We're looking at doing that next next year.
For a tough time to do a CEO search and this pandemic. So we're looking to kick it off next year.
Okay all right. Thank you.
Your next question is from David Macgregor with Longbow Research. Your line is open.
Yes, good morning, everyone.
Thanks, David Hey, Good morning, I, just want to go back to the first question that was asked about the discrepancy between the two observation on the order book and then the thought the fourth Q working will look a lot like to review I guess the building in orders just happening a little further out in the order book is it and and I guess the question I wanted to ask on this point is.
Are you are you seeing any slowdown in the number of push outs in provisions and deferrals.
Is that what is giving you some sense of encouragement when you talk about the improving order patterns or maybe you could just elaborate a little further on.
But we're not seeing that we're not seeing cancellations, but we are seeing delays David in the order book and actually I Wonder book exit I think has run a little bit.
And so we just don't know what the fourth quarter to the next year is going to look like there was a pandemic and even the second wave of the pandemic.
So we're we're thinking that we're sweeps stabilize where we are at us that's down 20% today.
Hopefully, we will see the office market come back, but we're not just sitting on the office market, we're actually going after a lot of other opportunities and trying to go after the healthcare market with our other business.
Got to go after this dealer business that we've talked about on the last call. David So we're trying to take share out there as well.
Okay.
And then I wanted to come back and ask you about the viewer discretionary business because.
Kind of a new business for you I think business and.
Just trying to understand how we should think about that with regard to the cash flow for 2021.
Through your Capex is going to be down pretty sharply.
Hey, you know what would your thoughts are in terms of maintenance Capex These days, but.
My guess is as you build a discretionary discretionary business is probably a bit of a burden to working capital. So could you just talk about how we should think about 21 and I realize you haven't provided 21 guidance, yet, but just conceptually how should we think about the moving pieces directionally in the cash flow models for next year, well, let me let me see if I can answer it for the Capex maintenance were around 30 million.
Dollars next year in Capex, and we're going to hold it to that line, we're really focused on paying down debt.
As far as that that is the US business. We're focused on on this on the dealer business.
90% of our business goes through the dealer.
But we specify almost all of our business and we hold the spec and we pull it through the dealer but.
But the dealer has discretionary businesses. They also control and Weve really never focused on that discretionary piece of the market with those dealers.
Because we've always focused on the end user and indeed community. So we're going to pivot.
And really focus on the daily show, some love wood products and with technology and with our salespeople actually call on when treated like a customer.
So how should we think about that in terms of just the inventory build that's required.
That theres not an inventory build on that at all.
David This is Bryan we don't anticipate any sort of meaningful incur.
The increase to working capital to go and capture that piece of the market. There is there is going to be some new product development around the mid to low end pricing that goes after that they have a market right.
But it won't be inventory.
Related right so.
So it is going to be somewhat of it to the extent you're successful. This is going to be a little bit of a headwind to gross margin. So just for next year.
Well engineered will engineer the product could go after that market, we have pretty healthy margins in there.
Okay and.
Then finally for me just how should I think about it.
Thanks, you paid down a little bit of a quarter, how should I think both de leveraging goals for the next 12 to 18 months.
Well my goal is to be under two I've always been under two is my goal and we're going to take all our available cash to pay down debt.
I'll quickly can you get to that are there.
Two years, I think I'm looking at I'm looking at Mike I see her FFO, but two years to three for sure yes, our number one capital allocation.
Policy, David just to pay down debt first and as we mentioned we're going to have decreased capex materially next year.
Which will free up a lot of additional free cash both in order to do that okay.
Okay, great. Thanks, very much guys.
Sure.
As a reminder, if you'd like to ask a question. Please press star followed the number.
One on your telephone.
Todd.
We have no further questions I turn the call back.
Presenters for closing remarks.
Well, thank you for listening to our third quarter call and I'm looking forward to talking about the fourth quarter call and please everybody be safe. Thank you.
This concludes today's conference call you may now disconnect.
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