Q3 2021 Interface Inc Earnings Call
Construction improvements with funds from the U S. Government's 2021 pandemic relief a program. These educational institutions also appreciate interfaces leadership position in sustainability every flooring product that goes out the door interfaces, either carbon neutral or carbon negative.
The health care market also continues to be strong for us, we're positioned well with the right portfolio mix across rubber LPT and carpet tile to suit a range of needs in that market.
Now, let's talk about the office market, we saw another quarter of growth as we have customers who are renovating their office in anticipation of their employees coming back to create more collaborative flexible workspaces. All of this activity is good for business change drives renovation work and renovation work drives commercial flooring purchases. Additionally, more and more public.
Private companies are making their own carbon reduction and sustainability goals, which uniquely positions us to serve their needs.
Our dealer strategy is also showing promise you might recall that we launched this initiative a few quarters ago to focus more closely on new and existing dealer relationships.
Our net promoter scores with this segment of our customer base are heading in the right direction and our open air products continue to be incredibly popular with them all and this is a win win for our dealer partners. Our end use customers and our company. We're very pleased with the progress we're seeing in this area of the business.
And now I'd like to share some incredible news with you about our European operations.
Globally, we are very proud of our accomplishments, so far and climate Takeback journey.
During this last quarter, we transitioned our European carpet tile backing from petroleum based Benjamin to SEAQUEST bio.
This means we stopped using petroleum based Benjamin on all of the carpet tile, we manufacture in Europe, replacing it with bio based materials and recycled fillers.
There was a celebration our planet Hollywood the last bitumen truck pulled up and then drove away because we knew that was the last pitchman truck we would ever need. This is a win for our planet for our customers and it's another important step forward on our climate take back journey. There are so many people to thank for this milestone and.
And I, particularly want to thank our European manufacturing team for our new manufacturing process.
Additionally interface has become the first foreign company to receive third party validation of our 2030 greenhouse gas reduction targets as science based.
These now validated science based targets commit interface to further reduce our scope one two and three emissions and alignment with our goal of becoming a carbon negative company by 2040.
Interface continues to lead the pack when it comes to our commitment to sustainability, our relentless focus on design innovation and sustainability continues to drive our leadership position in the industry and strengthens our foundation for future growth.
With that I'll turn it over to Bruce for the third quarter 2021 financial recap Bruce.
Thank you Dan and good morning, everyone third quarter sales totaled $312 7 million up 12, 2% from the prior year period with increases across all product lines organic growth, which excludes the impact of currency translation was up 11, 3%.
Sales in the Americas were up 23, 7% driven by a release of pent up demand in a strongly recovering commercial market.
And he'd AAA net sales were relatively flat as certain markets like Eastern Europe, China, Southeast Asia, and India faced new waves of Covid, resulting in government lockdowns.
Orders, however were up in both regions as America saw orders up 34% year over year, and <unk> orders were up 12% year over year.
Currency fluctuations had an approximately $1 9 million a positive impact on each reported third quarter net sales due to the strengthening of various foreign currencies against the U S. Dollar.
Third quarter adjusted gross profit margin was 34, 5%, which was a solid outcome in the face of the global supply chain crisis for our company and almost every other global company had to navigate through during the quarter.
Adjusted SG&A expense for the third quarter was $77 5 million compared to $75 5 million in the same quarter last year.
And as a percentage of net sales adjusted SG&A was 24, 8% this quarter compared to 27, 1% in the same period last year.
As Youll note, we are continuing to tighten up the company's cost structure, and we're paying particular attention to gaining greater efficiencies in our SG&A.
Third quarter adjusted operating income was $30 2 million up seven 4% compared to $28 1 million in the third quarter last year.
<unk> third quarter 2021, adjusted net income was $16 9 million or <unk> 29 per diluted share and adjusted EBITDA was $42 million for the quarter.
During the third quarter in line with our prior announcement, we recorded a $3 8 million restructuring charge related to closing of our manufacturing facility in Thailand, we.
We expect to start manufacturing at this facility in Q1 of 2022 and the project is expected to result in annualized savings of approximately $1 $7 million plus decreased complexity and increase the efficiency of our global manufacturing footprint.
Turning to our balance sheet and cash flows the company generated $28 9 million of cash from operations in the third quarter and $64 $1 million year to date liquidity at the end of the quarter was $391 million comprised of $93 million of cash and $298 million borrowing availability.
Inventory was up $9 million or three 7% year over year as we continue to be focused on managing working capital while meeting customer demand.
Consistent with our focus on de levering, we paid down $30 million of debt in the third quarter, and we paid down $49 million year to date, we are very pleased to be on track with our debt reduction goals.
Net debt our total debt minus cash on hand was $432 1 million at the end of the third quarter in the last 12 months of adjusted EBITDA were $153 9 million achieving a net leverage ratio of two eight times calculated as net debt divided by adjusted EBITDA.
This is a significant milestone for us as it brings to that metric back to pre pandemic levels.
Third quarter 2021 interest expense was $7 7 million, including a $1 8 million noncash charge related to our previously mentioned interest rate swaps that were discontinued in 2020.
And that compares to $5 4 million in the prior year period.
Capital expenditures were $5 3 million in the third quarter compared to $11 2 million in the third quarter of 2020 looking at the fourth quarter of 2021, we expect the global economic recovery to be ongoing as more and more people receive their COVID-19, vaccinations combined with a significant level of global supply chain disruption.
And in an inflationary environment that we believe will persist throughout the remainder of 2021 and likely into 2022.
We're continually monitoring the situation and as we look to finish 2021, we are anticipating net sales in the fourth quarter 2021 or $320 million to $330 million.
Adjusted gross profit percentage in the fourth quarter of 35, 5% to 36, 5%.
Adjusted SG&A expense for the full year of approximately $315 million to $319 million.
Interest and other expense for the full year of approximately $28 million.
The adjusted effective tax rate for the full year is anticipated to be approximately 26% and capital expenditures of approximately $30 million for the full year 2021.
Fully diluted share count at the end of the third quarter was $59 1 million shares and with that I'd like to hand, it back to Dan for concluding remarks. Thank you Bruce.
I again want to thank the entire interface team for a strong strong quarter and one that was still with significant milestones.
So hope everyone can see we continue to strengthen the company by broadening our product lines, increasing our leadership position in vertical segments like education, and health care, leading in design and of course, leading and sustainability. The positive momentum that we'd say the business is encouraging and despite the global supply chain issues to navigate through which are not unique to interface.
We remain very optimistic about the future.
With that I'll open it up for questions operator.
At this time, if you'd like to ask a question. Please press Star then the number one on your telephone keypad again to ask a question press star one on your telephone keypad.
First question comes from Kathryn Thompson of TRT.
Hey, Good morning. This is actually Brian Biros on for Catherine. Thank you for taking my questions I guess to start can you touch on how volume and price trended across the two segments in the quarter.
Sure Brian This is Bruce ASP and good morning.
A lot of the volume that you saw on the top line was more volume base. We had some pricing activity you might remember that we did some pricing activity in Q1, we did more pricing activity in Q2, and we're going to and we did more pricing activity in Q3, and we will do some more of the rest of this year.
Some of Thats coming on pricing on our products as well as we're adding some freight surcharges.
To offset the increased cost that we're seeing in the freightliner.
Maybe then.
E. AAA segment, I guess sales are flat, so I assume pricing was up so that implies volume down any.
Like magnitude of those two that you could share.
Yes that was most of the orders were up 12% in the AAA that was most of the reason why the billings were flat was mostly attributable to the new waves of Covid that we saw in eastern Europe, China, Southeast Asia and India.
And what we saw in each AAA in particular was we saw we had orders in hand, we had inventory ready to ship.
And the customer just couldnt couldnt accept the product because of the job site was either delayed due to COVID-19 lockdown or it was delayed due to the job site and eating other materials that were had supply chain issues that they needed to bring in first before they can bring in the flooring products, so actually on balance each of language.
<unk> had a very strong quarter.
And all of those orders will ship as soon as those job sites reopen up in those Covid lockdowns.
He's.
It was just really a timing thing between that between the quarters.
Got it.
Those lockdowns have they continued into Q4, how has that trended sequentially.
Yes, I mean I'm sure you're seeing the newspaper Russia. For example has had increased case counts in Germany has had increased case counts and so there's just there are different ways. For example in Q3, Malaysia had their borders closed entirely we couldnt ship any product in the Malaysia.
And so it just ebbs and flows and it goes week by week.
The good news is that we're getting the orders we're getting the business. We know we're taking share and it's just a matter of when the job sites can open and we can actually get the product to the customer to put down on the floor.
Got it.
And then maybe thinking a little bigger picture I guess into next year.
Well, how would you characterize the bid.
Bottlenecks currently.
Yes, maybe the biggest change sequentially from last quarter to this quarter and how those kind of play out into next year.
Yeah, I mean, I think the biggest thing thats on our mind for next year is.
As we're thinking about inflation and we're thinking about price increases and we're being very assertive with our price increases around passing the inflationary costs that we're seeing on to our customers because we have to.
And we're going to certainly see we saw that in Q3, we will certainly see that in Q4 as you saw from our guide and I think that we may see some of that in the first half of next year as well I'm sure you heard the fed talk this week about.
Short term inflation that some of the stuff should normalize.
In 2022, but it's a question of timing.
We don't know if that's going to be Q1, Q2, or Q3, and so we're just navigating through it we're making sure that things like for example, freight surcharges are things that we can do now and that we can change later and so if the freight cost either.
And into next year.
Yes, one of the biggest things that we're fighting as labor isolate in the United States and we're trying to hire a lot of people and I'll, let Bryan facility.
Yes.
And that's not news.
But labor and I guess do you think that gap.
Any better at all in the 22 or just yes.
We're starting to hire people and yes.
We are starting to hire people.
We're trying to hire 100 people in the branch.
Good luck I'll pass along thanks.
Thank you Brian.
Your next question comes from the line of Keith Hughes of truths.
Thank you.
On the on the fourth quarter revenue guidance.
How do you think thats going to break out between the two regions.
In terms of the contribution to growth.
Yes, I think it will be fairly evenly mixed Keith. Thank both both regions are really well positioned to have strong growth in Q4, and frankly strong growth into the next year. Yes. We have we have backlog record highs in both regions is excellent it's true.
And talking about early next year some of the raw material inflation.
Not really we're talking about supply chain disruption do you think thats going to continue.
Early parts of 2002.
I think from yarn is our biggest raw material input.
Im hoping that peaks.
And im hoping freight actually picks as well container charges have gone up significantly as you know.
I'm, hoping that.
That peaks in the first quarter.
We've had inflation.
So obviously have you had any.
Issues getting materials across the world some of the main main.
Main ingredients, it's Michael Garvin.
Keith you know we've been really fortunate in that regard. The short answer is no. We had no production issues due to not having the raw materials that we needed to create products, which is great and I just it's a shout out to our operators they've really been looking ahead, and making sure that they navigate through to get the to get them of draws that they need.
The big bottleneck and we mentioned this to Brian on the Earth.
Earlier questions is really been labor in our U S manufacturing facilities, where we have quite a few open jobs that we'd like to fill that would increase our capacity.
Okay final question on <unk>, you know a lot of port congestion and obviously did you Miss sale.
<unk> sales in the quarter.
Due to not being able to get it off the shelf.
Now we had a we had a pretty good inventory position going into it and we have been very fortunate in our supply chain.
That's a great example, where we've been striking the balance of making sure we invest in the right amount of working capital to make sure that we have enough product on hand to meet customer demand.
Okay. Thank you.
Cool.
Your next question comes from Samuel Darkish Fr and Jay.
Hey, Dan Bruce Good morning, how are you Hey, Sam good.
A couple of questions one a clarification question.
When.
As you see your inputs and labor constraints today, when do you imagine that your price cost will turn neutral.
Based on the pricing actions that you've already announced and what have you. What's the timing of the <unk>. When do you expect to get price cost neutrality.
My sense is Q2.
We're trying we're chasing raw material input costs.
I am hoping that the peaking as I just said in Q2, if we can.
Actually see some kind of.
At least flattening of raw material price increases in freight than in Q2, we should get it.
Got it and then.
Bruce can you quantify what the.
Pricing rollover effect on sales would be.
For 'twenty two sales over 21 sales since you've been raising prices as the year progresses, obviously, that's going to be a favorable rollover what how much growth would you get next year from that pricing rollover.
As an interesting question Sam.
We're working through our <unk> right now.
Around pricing and how much of that will flow through to next year it should be meaningful.
Because of all the pricing activity that we're doing here in the back half.
We should get some pretty good flow.
Yes, Sam usually when we have price increases like this inflationary people actually tend to go down market on that.
So you don't really see the growth in the top line because they are actually changing the mix.
It's really hard to quantify what that would be.
Do you anticipate that mix degradation occurring now, though I would think that you have a somewhat or at least more in elastic.
Demand backdrop.
Leased activity backdrop of normal no or maybe I'm wrong.
Yes, well we.
Introduced open area, which is the dealer product program Thats at a lower price same margin, but lower price and we're seeing a lot of growth on that so it's really hard to figure out what kind of price increase will impact sales next year.
Yes.
Got it and my last question. Thanks.
Thanks for bearing with me so.
The SG&A.
In <unk> and <unk> versus your original expectations.
Can you be a bit more specific in terms of where that came from how much of that was discretionary versus may be structural.
And what a realistic SG&A.
Footprint looks like next year, if we assume kind of mid single digit growth.
Yes.
No. We're just continuing to take a hard look at the cost structure of the company globally and we've been doing a lot of work around spans and layers looking at the for example, the number of direct reports that each manager director has to her or him and also looking at where work is done whether it's done locally or regionally or.
In corporate and where.
Trying to make sure that we get the mix right so that we.
So we meet customer demands while also being the most efficient.
So we can be globally and leveraging our SG&A.
We're just this is an area that I just want to emphasize we are really proud of the management team that we've done great work and great strides at bringing our SG&A as a percentage of revenue down and it continues to be a real focus for us regarding the guide for next year. So we will when we release, our Q4 earnings we will be able to provide more.
Guidance around all of our metrics quite frankly, some revenue growth, our GP and our SG&A run rates and our tax rate.
But for now I think that you can.
Sort of think about a lot of the reductions that we're making are permanent reductions to the cost structure that that flow through yes one.
One of the things that we're focused on Sam is getting into 26%.
So the $80 million run rate do you think is a workable number.
Over the near to intermediate term.
Yes, we're focused more on SG&A as a percentage of revenue says between the next <unk>.
<unk> call. It 18 months, we're focused on getting it down to 26% overtime so were lower.
Thank you. Thank you both.
Your next question comes from David Macgregor of Longbow Research.
Yes, good morning, everyone.
I Wonder if I could just start off by asking you to remind us on your fiber costs your yarn costs, what percentage of recycled versus Virgin fiber.
<unk> got a very high percentage of recycled fiber, but could you just remind us on the proportions.
Yes, it's about half David.
Yes.
Okay.
And what's happening with recycled fiber costs.
That is going up less than Virgin for sure.
A lot less so.
So is that fairly would it be fair to characterize it as relatively stable or.
Well, if we should maybe just not hit it yet.
Inflation inflation in yarn actually is labor and freight as well and now energy.
Manufacturing in Europe.
So the input costs were pretty stable.
Process costs or not.
Okay.
Yeah.
Maybe just a couple of the sort of qualitative points you made on the on your <unk>.
Prepared remarks, you talked about the European SEAQUEST bio product congratulations on that and so I know that's a big milestone in the industry.
And how differentiated are you on that are unique in that sense or are there any of your competitors that have also left the bitumen behind to move onto a biobank product.
We're very unique in that I would say that <unk> has a bio based product as well in Europe. That's one of our biggest competitors there, but we're very unique in that one.
One of the unique things that every product that goes out the door now as a bio based product. So the bitumen has gone away entirely on every carpet tile that goes out the door and our manufacturing plant, which is which is a huge accomplishment <unk> not at that place correct, Alright, alright and is the market in your spec writing as the market really spec ing that product now is it.
Pretty hard into that or is this something where you think you're just out in front and that will have future benefit.
Starting to show up in specs.
Yes, particularly in the United States.
Well congratulations on that progress.
With regard to the dealer market initiative here in United States can you just you talked about the fact that you're seeing strength in case.
K through 12, and health care, but I've always thought that dealer market as being maybe more of an office market, but maybe you could just help us understand just what the growth drivers are behind your share growth there.
And are you, adding number of dealers is there sort of yes, we are.
That's helping us.
It's pretty it's pretty simple David we're focused on the dealer.
We're acting like the customer now and not like they are an enemy.
We're having a lot of success in that market and the dealers are very segmented by the way.
And what's perhaps.
They focus on health care education, and the office market right.
Alright.
Alright.
Is it still largely on the office market.
At this point.
That's half of our business.
Within the dealer channel.
Now, it's segmented everybody has installed product dealers install it.
Okay, maybe I can follow up with you offline on that.
Okay, and then just you talked about earlier on about the demand recovery Youre seeing commercial market recovery occurring.
I guess, how much of the growth in the in the backlog numbers are in the order growth numbers you cited here would be related to.
The dealer market versus.
Youre a spec business.
That's really hard to actually quantify that because 80% of our business goes through the dealer market.
We just know we're focused on the dealer and we're winning discretionary business out of the winter.
But to quantify it would be very difficult.
Okay, all right gentlemen, thank you very much.
Yes.
Sure.
At this time there are no further questions I will now turn the conference over to Dan Hendrix for closing remarks.
Well, thank you for listening to our call and I am just going to say it go Braves talk.
Talk to you next quarter.
Yes.
This concludes today's conference call you may now disconnect.