Q2 2022 Interface Inc Earnings Call
globally, our backlog is at 19% year to date, which puts us in a position of strength as we enter the back half of 2022.
In the second quarter, we continue to execute on our diversification strategy, resulting in share gains in our key market segments. In the second quarter, we continue to execute on our diversification strategy, resulting in share gains in our key market segments.
Corporate office was up 17%, education was up 20%, and healthcare was up 13%.
Our strong results in the quarter underscore our established position as an industry leader in design and sustainability in the commercial flooring space. The team was thrilled to see an increase in participation at in-person events around the world, including Kirk and Well Design Week in London, Milan Design Week, and of course, NEACON. We were excited about the customer response to interface at NEACON, where our America's sales and marketing team showcase the host of new products across the full portfolio.
From the Beaumont Range Carpet Tile Collection and Fresco Valley LVT.
With Noramint Pado rubber flooring, we demonstrated our integrated flooring solutions with inspiring design and innovation.
We continue to receive recognition for our industry leading products and sustainability leadership. At NEACRON, we've become two thick awards, including the Health and Wellness category for our Desert Skate Collection and the Rising Star Award in the Manufacturing category. We also learned that Metropolis likes the award for Film Out Range. We also learned that Metropolis likes the award for Film Out Range.
On the sustainability side, we received the 2022 Judges Choice Award from Environment and Energy Leader for our carbon-negative carpet files and backing. We received the award for our carbon-negative carpet files and backing.
We achieve this through decades of research and development and because we're the first to commercially scale of types of innovation in our industry.
And we were once again recognized as a sustainability leader in the annual Globescan survey, among an impressive list of companies including Unilever, Patagonia, Ikea, and more.
Interface is the only company to maintain a spot on the sustained list for 26 years running and the only flooring company to have ever been recognized.
Our many successes this quarter are a testament to the power of our stories, our legacy, and our continued commitment to run our business in a way that creates a climate fit for life.
Overall, our second quarter results are strong and extremely proud of our global team for their tireless efforts to advance our position as an industry leader in sustainability and design. I would also like to thank our customers for the trust they place in us every day to deliver high performing, beautiful and innovative flooring solutions. And I would like to thank our customers for their support and support for our team. I would like to thank our customers for their for their
With that, I'll turn it over to Bruce to go through the financial. Bruce. I'll turn it over to Bruce. Bruce.
Thank you, Laurel, and good morning, everyone.
Second quarter net sales increased 17.6% to 347 million.
Organic sales growth, which excludes the impact of the current generation was 22.8%.
Net sales in the Americas were up 32 percent, driven by continued strength in the commercial market.
In E-Triple A, MetTails rep 1.2% and currency neutral MetTails rep 12.1%
Second quarter adjusted gross profit margin was 34.3%, a decrease of 315 basis points from the prior year period as we continued to see higher freight, labor, and raw material costs partially offset by higher pricing to our customers.
While we're not happy with the gross margins at this level over the long haul, we are proud of the team in mostly offsetting over 1,500 basis points of inflationary pressure that we saw in Q2.
We also anticipate continued inflationary pressure in the back half of 2022, which we will continue to work to offset with pricing and productivity.
For the past two years, we have focused on building earnings power by making structural changes to our S-GNA.
and we are seeing fruits of these efforts in the P&L. Adjusted SG&A expense for the second quarter was 80.4 million, or 23.2% of net sales, compared to 79.4 million, or 26.9% of net sales in the same period last year.
Second quarter adjusted operating income was 38.5 million up 24% versus adjusted operating income of 31.1 million in the second quarter last year.
This is a great result on strong net sales growth, excellent work by our sales team and our supply chain operators to mostly offset inflation that is at a 40-year high, and continued vigilant focus on SG&A management.
Fully diluted earnings per share was 28 cents, up 7.7 percent versus 26 cents in the second quarter last year.
And adjusted fully diluted earnings per share was 36 cents, up 20%, versus 30 cents in Q2 last year.
Fragment Quoters adjusted the biddaio increased 13.4% to 49 million in the second quarter of 2022. Fragment Quoters adjusted the biddaio increased 13.4% to 49 million in the second quarter of 2022.
Turning toward balance sheet and cash flows, the company used 12.7 million of cash from operations in the first half of 2022. As a reminder, our customer's humility is to use cash in the first half of the year in January cash in the back half. Turning toward balance sheet and cash in the back half.
Liquidity at the end of the quarter remains strong at $345 million comprised of $92 million of cash and $253 million of borrowing capacity on our revolver.
Inventory was 318 million, up 23% year-over-year, are merely due to raw material inflation.
Our balance sheet remains strong. Net debt or total debt minus cash on hand was 453.7 million at the end of the second quarter. In the last 12 months of the Justin Debatat was 186.7 million. And our net leverage ratio was 2.4 times calculated as net debt to my neighbor, Justin Debatat.
We continue to have confidence in our strong balance sheet and our capital structure.
Capital expenditures were 4.3 million in the second quarter of 2022, compared to 6.9 million in the second quarter last year.
In May, we announced a new $100 million dollar share repurchase authorization.
During the second quarter, we repurchased approximately $5.6 million of interface comments stock.
Turning to our outlook, there continues to be significant macroeconomic and geopolitical uncertainty in the global economy.
Persistent inflation and rising interest rates present challenges to the business. While FX-related headwind negatively impacts the foreign currency denominated net sales to generate outside the US.
when we translate those sales into US dollars.
At the same time, these challenges are being partially offset by strong execution by our sales and manufacturing teams. Continued demand in the commercial market, including office, education, and healthcare, where we have a leadership position.
and a strong backlog as we move into the back half of the year.
As we sort through these factors and think about what to expect in the back half, we are anticipating the following.
So the third quarter of 2022, net sales of 325 to 345 million. To note, we are anticipating effects to decrease our year-over-year third quarter net sales growth rate by approximately 5%. By approximately 5%.
Adjust the gross profit margin of approximately 33.5% on persistent inflation.
Adjusted that June expenses of approximately a 3 million.
adjusted interest and other expenses of approximately $9 million.
an adjusted effective tax rate of approximately 28%.
and fully diluted, weird-ever chair count at the end of the third quarter of approximately 59.1 million chairs. Music
And for the full fiscal year 2022, we are anticipating net sales of $1.3 to $1.325 billion.
adjusted gross profit margin of approximately thirty four point five to thirty five percent
Adjusted SG&A expense is of approximately $326 million.
Adjusted interest and other expenses of approximately $32 million.
and adjusted the effect of tax rate of approximately 28%.
We diluted a weight-ever cheer count at the end of the year of approximately 59.2 million shares.
capital expenditures of approximately 30 million.
While we're continuing to see solid growth in the business, our second half net sales comp will not look as strong in the first half of 2022 as we'll have some very strong net sales results achieved in the second half of last year.
We will also continue to manage inflationary headwinds by engaging in ongoing selling price increases and executing productivity initiatives in our manufacturing facilities.
By leveraging our strong financial foundation and our brand, we are confident our expertise will allow us to continue to capitalize on growth opportunities and execute our value creation strategy.
And with that, I'd like to turn the call back to Laurel for concluding in next.
Thank you, Bruce, and thank you to everyone who contributed to our results for the second quarter of 2022. I'm just over 100 days in role, and even after this relatively short time with the company, I'm very confident we will continue to grow and gain market share with our outstanding design expertise, innovation, and our focus on sustainability. Let me share a few initial observations based on what I've learned in these first few months with Innerspace. As of December 1, 2020, the RecAuthorities Creation is at home in one of our approved
To understand our global supply chain and manufacturing capabilities, I did a deep dive into our carpetsile operations in Troop County, Georgia, and its Kirkland deal in the Netherlands.
I also spent time at our Nora's for Manufacturing Operations in Vineheim, Germany.
Overall, I was struck by the nimbleness of our global supply chain and how well the team has been navigating the challenges that have come our way. I'll continue to visit each of our manufacturing sites over the coming months, including the trips to Mid-Saw Australia in a few weeks.
It's important that I get out into the business to meet our team and see our operations in action.
I've also spent time with our designers on the product and innovation front. Their latest designs across carpet tiles, LBT, and rubber truly work as an integrated system that allows us to deliver beautiful spaces to our customers. It's critical for us to continue to amplify our commitment to design and innovation. It's core to who we are and key to accelerating our growth in the marketplace.
I also work closely with global leaders and with their teams to gain a deeper understanding of our sustainability leadership. Our people are so proud that Interface has been the pioneer in sustainability for more than two decades, culminating in our introductions of carbon neutral and carbon-negative products.ennial
Our commitment to push the boundaries of sustainability is in the bones of our business. You can feel it everywhere along with an incredible sense of pride and purpose.
Finally, I spent time with our sales leaders around the world and witnessed our strong customer relationship and intense focus on designing beautiful, positive spaces for them. More and more companies are encouraging their teams to return to the office and turning to interface the system and redesigning collaborative spaces....
Helping our customers meet their carbon objectives has never been more urgent.
It's very clear to me that Interface defines best-in-class leadership in design, sustainability, and innovation, and there's so much to build on for our future.
Additionally, we actually see some tailwinds that will help us.
First, there is a significant amount of government spending that has been approved but not deployed into the education market where we have significant strengths. We also know that employers have been working to entice their employees back into the office with beautiful spaces renovated to support increased collaboration and hybrid work, which almost always means fresh carpet and paint. We believe that a potential recession may need a shift to more of an employer's market, which will give them the ability to get their employees back into the office.
to remind everyone in order to ask a question press star then the number one on your telephone keypad. Your first question comes from a line of Catherine Thompson from Thompson Research Group. Your line is open.
Take a morning, this is actually Brian Byros on for Katherine. Thank you for taking my questions.
There's the start on the full year guide adjustment. Is that all effects impact or is there anything else embedded in the updates? The update is on the full year guide adjustment.
Hey Brian , this is Bruce Osman. Good morning.
The biggest impact on the change in the full year guide is really FX. And that's the largest thing that changed as we think about how we move through the quarter. The business continues to perform very, very well. The fuel activity is very robust.
And, you know, we're entering the second half with a very strong backlog. So it's really truly effects is the biggest differential. The first quarter versus the last quarter. The first quarter versus the last quarter.
Okay, yeah, I figured that was the case. Can you talk about monthly trends or kind of just the exit rate from the quarter? We've seen other companies have
accelerated momentum through the quarter and then others saw a pretty sharp drop near the end. So just curious what you guys are seeing, how you would characterize it.
Hi, Brian . This is Bruce again. We had a really strong June , so we saw no deceleration in the business. And really if you'd think about how the quarter sort of moved, it was strong throughout. And we're continuing to see strength in the business as we enter into Q3.
I think last one for me right now just.
Are you seeing any impact from higher inflation and higher interest rates on projects going on in the market? Is it anything being delayed or scaled down or people choosing different products? Is it anything being delayed or scaled down or people choosing different products?
Any impact there? Do you guys are hearing?
Hi Brian , it's Bruce again.
We have not seen any slowdown from interest rates rising. And in order we seen, I know the commercial activity, again, remains very robust. The one thing that has changed now versus say six months ago is I think you might remember, we were listening to the Fed about that inflation would be temporary. And we have not seen inflationary, you know, Wayne.
We've seen the inflationary pressure going into the back half here. So we're still dealing with that. The good news is that with our premium brand, we're able to get a lot of price and our customers are accepting our price increases. But as we move into the back half, we're continuing to fight inflationary headwinds and that's built into our guide.
Thank you. Come on.
Your next question comes from a line of David McGregor from Longbow Research. Your line is open.
Good morning, everyone.
I wonder if you could talk about the negative price cost. Bruce, just in responding to the last question, you were talking about premium brands and your ability to raise prices. Give us some sense of timing in terms of when does price cost flip positive for you.
Yeah, is it in early 23 or just how do we think about that? I noticed the implied fourth quarter gross margin in the guide continues to look like where we are now. So I'm assuming here that maybe it's not in the next couple of quarters, but could you speak to that, please? Yeah, good morning, David. No, we're getting closer on, if you think about pricing, getting a parity with inflation, we're getting a lot closer on that front. We continue to activate pricing in the marketplace.
I think that in the back half, we're gonna see a lot of what we saw in the first half regarding inflation and regarding the differential of pricing versus inflation to parity. And then as we move into next year, obviously the Fed is taking a lot of action to try to rein inflation in. And it's one of our top three things that we're keeping a close eye on is we're looking for that to crest and then start waning, which obviously make a big difference on business.
And then secondly, just the E-triple A-orders of 1.7% on a currency neutral basis. The E-triple A-orders of 1.7% on a currency neutral basis.
Can you speak to how incoming daily orders were tracking at the end of the quarter specifically with respect to the E-triple A and how that might be looking in July as it's trying any signs of improvement. I guess what are you assuming for growth for this segment in your full year guys? I guess what are you assuming for growth for this segment in your full year guys?
Yeah, thanks David. Again, this is Bruce. You know the softness that we saw in EAAA in the order rate of 2% was really related to China. And it was those extraordinary COVID related lockdowns that we saw in Q2. For example, you might recall Shanghai was locked down with over 25 million people. Now we believe that business did not go away. We believe that business was just deferred, but it certainly affected the order rate. We're anticipating a strong back half for EAAA.
Construction activity remains robust. The orders exceeded billings in the quarter. The one thing that we are dealing with, to be fair, is that there are delays on the job sites, which can delay installation of our products. And that's not new news. That's just more of the same that we've been working through. But the commercial activity is strong in Europe and as well as in Asia. And as we enter the back half of the strong backlog, we're very optimistic about our EAAA region.
Good, I'll pass it along. Thanks very much, Chris.
Your next question comes from a line of Keith Hughes from Truist Securities. Your line is open.
Some question on gross margin. I hear which thing earlier, the implied diets does have gross margin. It does have gross margin.
The list in the second half on pre-loat. Are you assuming, are you factoring in more pleasant cases others coming in and what the impact would be particularly in the fourth quarter?
Hi Keith, this is Bruce. We are factoring in additional price increases. We're also factoring in persistent inflation.
We don't see, by the way, you're probably thinking, what does this mean for the long haul? We don't see any reason why we can't get back to the pre-COVID levels. We're just sort of working through, you know, inflation at a 40-year high. And we're working through, obviously, you know, the way that this process works, is you buy the raw materials at a very high price, it goes into work, the process becomes finished goods, and then eventually flushes through to the P&L. So you're seeing that cycle. And what we haven't seen is we have not seen inflation go down.
to what we saw in the first half.
Okay, and just building back on the order rates, you talked about China being a problem in the quarter for obvious reasons. In the second half of the year, what's the outlook for Europe ? Or is the weakening there given all the situation in Europe ?
You know, the way that we think about the numbers specifically for Europe is...
high single digits plus, you know, some in local currency, we should see mid single digits. So on the P&L, it'll be mid single digits plus, probably about a 5% haircut due to inflation. I'm sorry, not inflation, due to FX card me, that we're seeing, as you know, the euro and the US dollars around parity. And so when we translate those euro based sales in the US dollars, it's about a 5% haircut that we're seeing right now.
So we're anticipating a good strong quarter in Europe , again, because commercial activity is robust. What we're dealing with is obviously the FX related to headwinds.
Okay, thank you.
And there are no further questions at this time. I'll turn the call back over to Laurel Hart for some final closing comments. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
Thanks everyone. I just want to close by thanking all of our Interface Associates around the world for your continued effort. Thank our customers for their ongoing support as well as all of you. I look forward to working with you going forward.
This concludes today's conference call. Thank you for your participation. You may now disconnect.
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