Q2 2021 Interface Inc Earnings Call

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Good day and thank you for standing by welcome to the second quarter 2021 interface incorporated earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to answer.

Western during the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Christine Needles Corporate Communications you may begin your conference.

Good morning, and welcome to interfaces conference call regarding second quarter 2021 rebel hosted by Dan Hendrix, Chairman, and CEO, and Bruce Hausmann, 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 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 COVID-19 pandemic and those described in our most recent annual report on form 10-K filed with the SEC.

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 for the most comparable GAAP measures and explanations for their youth are contained in the company's earnings release and form 8-K furnished with the SEC today.

Lastly, this call is being recorded and broadcast it for interface. It contains copyrighted material and may not be rerecorded or rebroadcast without interfaces express permission your participation on the call confirms your consent for the Companys taping and broadcasting of it.

After our prepared remarks, we will open up the call for questions now I'd like to turn the call over to Dan Hendrix, Chairman and CEO.

Thank you Christine good morning, and thank you for joining our call today once again I want to thank the interface team for helping us deliver another quarter of strong results in the second quarter. We saw continued improvement in economic activity.

As states parts of Europe, and parts of Asia Pacific, particularly China, and Australia, The Big story for US our orders came roaring back in the second quarter, Yes, you heard it right Roaring back in the second quarter up 38 per cent compared to the prior year period net up 21% sequentially, we're seeing our order momentum pick up globally.

For the Americas up 35% in each of buoy up 43% as a result order backlog was up 20% compared to the prior year and up $63 million or 39% since the beginning of the year. We saw strong signs of recovery in the Americas and parts of Europe and parts of Asia Pacific, but the ongoing pandemic continues to present.

Challenges in our business as we manage against rising Covid cases, rolling Lockdowns labor shortages inflation and supply chain challenges.

These issues are not unique to interface, but they impacted our ability to get product out the door and ultimately our gross profit in the quarter.

As we look to our market verticals activity in the office market has picked up in recent weeks more and more companies have announced their plans to return to the office.

Many of our customers are talking about flexible and hybrid policies and interfaces in a great position to capitalize on those.

Things are moving ahead with remodel and renovation projects that were previously put on hold while the recent increase in Delta Varian cases may slightly delay, we turn to the office plans, we're continuing to see signs that as a matter of when not if people return to the office.

In the U S. K through 12 education was another bright spot the federal stimulus plan is leading to a surge in new projects with many schools upgrading their flooring choices in the process. We're also seeing broad based strength across the market verticals, such as healthcare and transportation.

The dealer discretionary market continues to gain traction with excitement around open air products and <unk> and are for business continues to growth.

And for our Cradle to gate carbon negative backing continues to build in the marketplace. This non PVC option creates additional opportunity for us, particularly with our global end user customers day.

<unk> is continuing to recognize us for our carbon Tech innovations. We were featured in the New York Times magazine as 1 of the few commercialized products from the market that used carbon as it resource our carbon negative carpet tile backing and products are increasingly showing up in our product specifications.

And we continue to see robust interest for many of our global customers that have made public carbon reduction commitments.

Finally, we're gearing up for Neocon, which is back in Chicago in person October.

Share several new products. This year, we have a new carpet tile collection that includes organic linear and angular designs is there.

Fresh perspective on Biophilic design, which continues to drive commercial design trends across our vertical markets.

As I said before we have strong pipeline of new products rolling out this year across carbon so that'll be true and rubber.

With that I'll turn it over to Bruce for the second quarter 2021 financial recap Bruce.

Thank you Dan and good morning, everyone second quarter sales totaled $295 million up 13, 6% from the prior year period on broad based increases across all product categories organic sales, which exclude the impact of currency translation were up 8.5% sales in the Americas were up 3.

6%, primarily driven by increases in <unk> and <unk> sales were up 27, 6% with strength across all product categories.

Currency fluctuations had an approximately $12 million positive impact on <unk> second quarter, 2021 sales as compared to the prior year period.

Second quarter adjusted gross profit margin was 37, 5% slightly behind expectations due to raw material shortages higher labor costs on a tight labor market and higher freight costs.

Our continued focus on strong cost controls resulted in adjusted SG&A expense of $79.4 million compared to $71.1 million in the prior year as a percentage of net sales adjusted SG&A was 26, 9%, marking the continued progress we've made to reduce SG&A as a percentage of net sales.

Second quarter adjusted operating income was $31.1 million versus $27.5 million in the second quarter last year.

Second quarter 2021, adjusted net income was $17.6 million for <unk> 30 per diluted share and adjusted EBITDA was $43.2 million for the quarter.

Please refer to our press release for reconciliation of GAAP to non-GAAP measures.

Turning to our balance sheet and cash flows the company generated $10.3 million of cash from operations in the second quarter of 2021 and $35 million year to date.

Liquidity at the end of the quarter was $401 million comprised of approximately $102 million of cash and $298 million of borrowing availability.

Inventory was down $6 million for 2% year over year and finished goods carpet inventory was down 5%, we paid down $6.5 million of debt in the second quarter net.

Net debt our total debt minus cash on hand was $454.2 million at the end of the second quarter.

Last 12 months of adjusted EBITDA were $148.8 million at the end of the second quarter, resulting in a net leverage ratio of 3.1 times calculated as net debt divided by adjusted EBITDA.

We continue to be committed to paying down debt and delevering the balance sheet and we continue to demonstrate progress in this area.

Second quarter 2021 interest expense was $6.2 million compared to 5 million in the prior year period.

Capital expenditures were $6.9 million in the second quarter compared to $13.5 million in the second quarter of 2020 and looking at the third quarter of 2021. We expect continued recovery is vaccinations expand globally offset by some continued spread of the virus and its variance, particularly for those who are not fully vaccinated, which is likely to continue.

Creating a variety of government mandated restrictions in a number of our markets around the world.

We're also anticipating fairly significant raw material cost increases in the back half of 2021 as well as challenges in filling open positions in our U S manufacturing facilities and other potential supply chain disruptions.

The company continues to monitor the situation. It is anticipating net sales in the third quarter 2021 of $310 million to $320 million adjusted gross profit percentage in the second half of 36% to 37%.

Adjusted SG&A expense for the full year of approximately $325 million with the remaining portion spread fairly evenly across the third and fourth quarters.

Interest and other expense for the full year of approximately $31 million. The adjusted effective tax rate for the full year is anticipated to be approximately 27% and capital expenditures of approximately $30 million for the full year of 2021 for.

Fully diluted share count at the end of the second quarter was $59.1 million shares and with that I'd like to turn the call back to Dan for concluding remarks. Thank you. Bruce we are very encouraged by the positive momentum, we're seeing across the business, including steadily rising orders and sales.

Still in the early stages, the rollout of our carbon negative product line is going exceedingly well. It gives us optimism for continued improved performance in the second half of the year.

Our sellers tell me how thrilled they are to be returning to in person meetings once again.

Joined several of these live meetings and has reminded me how well we can showcase the superior design and quality that interface is known for.

At the same time, we are monitoring that delta variant situation closely the health and safety of our people is a top priority I want to thank the interface team for continuing to deliver for our customers for closely managing our expenses and for driving our strategy and mission forward with that I'll open it up for questions operator.

As a reminder to ask a question you will need to press star 1 on your telephone do we draw. Your question press the pound key please stand by while we compile the <unk> roster.

Your first question comes from Keith Hughes with tourists. Your line is open.

Thank you you're welcome encouraging news day on your comments on the quarters coming back.

I guess the question is the orders Youre seeing are they more short cycle renovation jobs.

Or longer term construction, if you could characterize what that anyway.

Yeah, Keith I'd say, it's both actually there are some new construction, particularly on the west coast that we're looking at.

But as you know renovations as 80% of our business. So most of it's probably renovation work.

Okay.

In the quarter, we have a lot more growth.

Non U S business for that segment.

I guess as you look at your orders are those flaring more towards U S or outside the U S in terms of its growth.

I would say that while it's VIX for sure I'd say the European certain markets are really improving.

Summed up like the U K.

But in the U S momentum is really strong and it continues to be strong.

Okay and final question just on cash flow.

Is debt reduction still the primary goal of cash flow and maybe as part of that when do you expect to get back to the dividend about other uses.

But Keith as Bruce Hausmann good morning.

Yes debt reduction is still our number 1 capital allocation priority.

And as you can see we're just continuing to pay down debt and delever the balance sheet, which is fantastic.

Once we get below us once we get below 2 and a half.

Maybe we'll take a look at the dividend again, we still have a pretty good down the fairway dividend, it's something that we'll reevaluate once we get the leverage ratio, where we'd like it to be yes, I would say, we will look at dividends in 2022 for sure.

Okay, Alright, congratulations thanks, guys.

Thank you.

Your next question comes from David Macgregor with Longbow Research.

Your line is open.

And Bruce.

Yeah.

Yes.

Congratulations on the order recovery.

<unk>, which has just said that's very encouraging.

I guess I wanted to ask about gross margins and see if you could just talk about the puts and takes.

And.

You had called out raw material inflation and labor free I guess these are things we're hearing a lot about these days, but.

Can you talk about the extent to which.

Youre, succeeding or maybe not succeeding with the pass through on that inflation is that a function of maybe the way some of the specified contracts are structured or do you have escalators in there just trying to think through how this.

These puts and takes play out into the second half for the year in 2022.

Hey, David This is Bruce Hausmann to Great question, we've done a couple of price increases in the first half of the year and as you know historically, we're very successful at passing price increases onto our customers as our cost increase.

In the back half, we are anticipating some double digit price increases around the arn.

We're probably not going to be able to pass all of that onto our customers.

And we're also obviously there is as you know freight is higher and were also seeing some.

Higher overtime in our plan, which is sort of a class a problem as the <unk>.

Orders are coming in so strong so I think we're in we're in obviously really good shape from the first half for the year, we think it's going to be.

The GP will be a little pinched in the in the back half, which is why we guided to being 36% to 37%.

But then.

We also.

Again once again.

For our Differentiators for this design innovation or sustainability.

Have not taken our eye off the ball around chief volume that we think that our GP will be will be strong and we're going to continue focusing on increasing GP through price increases and productivity.

Can you talk about what <unk> might look like in that order backlog.

So.

I'm sorry.

From a pressures you've just talked about I guess, but I'm just thinking from the order book I would say that the order backlog. Obviously, we didn't have the big price increases in the first half day or that will happen soon in the second half for year.

So the backlog does have basically.

Profile that would give us the right for gross margins, but we have raw material price increases we have to deal with.

So raise prices on the second half of the year.

That's offset some alright, okay that sounds good.

Maybe just.

And when you talk about any progress you're seeing there.

Thinking in the dealer channel initiatives, you've been pushing pretty hard on.

Share gains there.

Yeah, I would say, we're having a lot of success in the dealer channel to open our product its price for the dealers as 1 of our hottest products we've ever introduced.

So I expect that we're going to continue to see growth from the dealer market and it's a big focus with our selling organization as well and product.

And from an inventory standpoint, I know inventories pretty tight everywhere. These days.

Building a dealer channel would presume.

Financial investment in inventory.

The conflict there and how are you doing with that I would say that the dealer or dealer program really is to make the order it's not inventory program at all.

Okay. Okay.

And then just an update on your LPT in your rubber.

Yeah.

Sort of attachment rates in these orders that you're getting.

Are you seeing increasing penetration per LPT and rubber and the order backlog.

David This is Bruce the answer is short answer is yes.

Our carpet business in our rubber I'm, sorry, our carpet business in our <unk> business for both up double digits in our rubber business was up high single digits.

So we are continuing to see momentum across all product lines, which is great and you might remember that the rubber business actually was very resilient through the pandemic and so we're just really pleased for that all product lines are firing on all cylinders.

And.

We're seeing orders come in with.

Single Lv key orders as well as combined orders around <unk>, plus carpet and we're seeing a lot of good cross selling.

In the health care space with carpet and rubber orders coming in simultaneously, yes, David I would say that we are actually taking share and how we see our LDC businesses is better than the market growth for sure.

Great. Thanks, very much guys.

Thanks.

Your next question comes from Sam and their costs with Raymond James Your line is open.

Good morning, Dan Good morning, Bruce how are you.

Sam how are you Buddy.

Well thank you.

So just to follow up on David's question, maybe a little more specificity. So of the low was at 8.5% organic sales growth in the second quarter ballpark, how much of that was price year on year.

Yes.

Sam This is Bruce is probably maybe 1 third price and maybe 2 thirds volume.

And then so the second half incremental price.

That you are.

Looking for can you help us quantify that or put a range on that and what youre looking for incrementally in the back half versus what you have now.

The volume is really strong which is which is fantastic.

So it's hard to I don't necessarily know that we've broken out our guide around price versus volume.

But in the other way that we think about it is that we're going to definitely be increasing prices in the back half again to offset the cost increases that we're seeing in our raw materials and freight.

And so.

Im not sure that we necessarily are breaking it out price versus volume around the around the guide, but we'll be definitely doing price increases in the back half as well as having a lot of volume coming through because as you can see our order rate is up quite a bit.

Can we infer basically is similar.

Low mid single.

Price action in the back half as you saw in the front half on a year on year is that a fair.

Way to think about it when you. Thank you for.

Got it already.

That's probably the best proxy that we have right now.

We have our whole issue right now is we can't make all of the orders we have we're constrained by what we can make in the answer to that.

And that was my next question and that is.

I'm guessing, it's not a hard capacity issue.

Based on.

The industry structure and what have you it's more of a crude capacity is what I'm guessing based on your overtime.

Comments.

Whats the prospect.

In Georgia and elsewhere.

Up additional labor get trained and.

I think that's for folks trained and.

At book.

We're actively trying to hire a lot of people on the ground you got that 1 right.

Ram.

We don't have constraints anywhere else in the world except for the U S.

Awesome.

Got it.

The strength Youre talking and labor constraints not hard capacity constraint.

Yes labor got it yes.

Then.

The SG&A.

Was a pleasant surprise in the second quarter. It looks like it's looking to step up sequentially in the third and fourth quarter.

Remind us why that is I know you mentioned near Com, but that's not that's not going to be 5 million Bucks I wouldn't think so help me understand what the step up this.

It's 2 things 1 is we're actually entertaining customers again and that may not happen with the variance delta coming back. So most all of it is turning and then its commission increases in the United States as we ramp up sales.

That's it.

Got it and then my last question you just talked about it what are you seeing in Asia.

David Thailand, Australia, what have you.

We're thoughtful to Australia, and China, Yes.

Yes, Australia, and China are really strong for us today.

<unk> is the 1 market where we are.

Obviously, the lockdown still today so the Indian market is 1 that's still under a lot of pressure.

Very helpful. Thank you gentlemen have a great weekend.

Thanks, Matt.

Our next question comes from Kathryn Thompson with Thompson Research Your line is open.

Alright, Thank you for taking my questions today.

Terms of the orders could you give color in terms of.

Different types of products is there a change in the mix of types of products and then also could you give color in terms of the end markets.

And distinguish between the U S Europe and other markets for rest of the world. Thank you.

Yes, I would say the mix is very similar hasnt spend we do have the open air product that I alluded to which is the dealer product, which is the fastest take up I've seen in any product we've ever introduced.

But the 1 the 1 other bright spots for us it really is education K through 12 is really significantly more active today because of the stimulus money.

And they're upgrading their facilities are actually going to <unk>. So I would say K through 12 as markets corporate is obviously starting to come that we did really well in health care.

And those markets are what's driving it for that.

Now would you say that's the same in Europe.

I would say Europe is more corporate office than anything.

In Europe.

Okay. Kathryn this is Bruce the other Europe is strong is around transportation.

True.

2 as well.

Our rubber business is really geared for transportation.

Yes.

Okay.

When you look for in terms of.

SG&A and managing that and made some progress sequentially on a percentage basis.

What's the bogey for that when you look.

For the 6 quarters out.

26%.

That's the new bogey.

We're shooting for as a company.

And what are some of the levers to get to that 26% well first of all its topline growth moving to grow into our SG&A and it's holding insulting sort of where we are for the.

Okay. Okay.

And as far as margins go down.

Lots of different interest rates have been able to successfully from net.

<unk> you are.

Little bit different in that it's.

So much more on a project by project basis.

Sometimes even you can have inflationary pressures that happen even after the owner has happened in pricing is actually what's happened what type of escalators do you have in order to manage some of the sharper unexpected shifts in.

And pricing.

While our backlog is probably 8 weeks and we don't have any escalators on our backlog and so as you said, it's just every project's negotiated going forward.

Okay alright, thank you.

Thank you.

There are no further question at this time I will hand, the call back for the company.

Well, thank you for listening to our call and hopefully we will have a great third quarter.

Weekend. Thank you.

Thank you. This concludes today's conference call. Thank you for your participating you may now disconnect.

For me.

Okay.

Yes.

Okay.

Okay.

Net.

Okay.

Non-GAAP.

Okay.

Okay.

Free.

Daniel.

Bruce.

Yes.