Q4 2022 Interface Inc Earnings Call
Greetings and welcome to the interface, Inc. Fourth quarter 2022 earnings conference call. Please.
Please note today's conference is being recorded.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask you a question at this time simply press the star followed by the number one on your telephone keypad.
I will now I'll turn the conference over to Christine Needles Corporate Communications Ms. Needles, you may begin.
Goodbye, Laurel Hurd, CEO and Bruce Hausmann 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 described in our most recent annual report on Form 10-K, and second quarter 2022 quarterly report on Form 10-Q filed with the SEC.
You should also consider any additional or updated information. We include under the heading risk factors in our subsequent quarterly and annual reports 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 non-GAAP measures to 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 broadcasted for interface. It contains copyrighted material and may not be rerecorded or rebroadcast without interfaces express permission.
The patient on the call confirms your consent to the company's taping and broadcasting of it.
After our prepared remarks, we will open up the call for questions now I will turn the call over to Laurel Hurd CEO .
Thank you Christine and good morning, everyone Interfaced delivered strong results in 2022, reflecting broad based strength across the business.
Currency neutral sales grew 13% and adjusted operating income increased 8%.
By the challenging operating environment with persistent input cost inflation and currency headwinds I'm really proud of the global teams hard work and execution in 2022, which allowed us to significantly offset these headwinds through pricing and efficiencies.
Interface continues to win in the marketplace, and we're making great progress on our diversification strategy on the product side remember that just a few years ago nearly a 100% of our sales were from carpet tile today corporate accounts for approximately 61% of our sales and delivered solid growth in 2022.
We had another record year for LPG, which reached $150 million in 2022 up 24% to last year's record high.
Rubber is also a core part of our resilient growth strategy and we continue to take share with our industry, leading nor our products.
On the market segmentation side, we saw growth across our priority market segments in 2020 to.
Notably education was up 13% and corporate office grew 9%.
Being sustained and elevated demand in the corporate office segment, the company's renovate their offices and create more collaborative workspaces for a post COVID-19 environment.
People are returning to the office and we're helping our customers build more interesting and useful spaces to compete for top talent and better reflects how teams work and collaborate today.
It also continues to be strong demand for our carbon neutral and carbon negative operator.
Orders in 2022 were up six 5% on a currency neutral basis compared to 2021 with the Americas up 6% and each AAA up 7% the.
The commercial market continues to be resilient and we've seen order momentum continue into 2023 and as I speak to you today, we do not see signs of softening in the business.
That said, we're realists about the potential economic headwinds that we may face as we move through 2023, if the macro environment deteriorate, we are well positioned to weather through it with a flexible cost structure strong balance sheet and a management team that has a proven history of managing through challenging economic times.
And I would say, it's our best days are ahead I've spent my first nine months out in the business meeting the team working directly with our customers and learning for many colleagues and partners across all functions and market.
It has reaffirmed my belief that we have so many strengths.
We are the leaders in sustainability and have incredible relationships with our customers. We have the best sales force designers products and brands in the market, we know how to navigate uncertainty and have a strong financial foundation. We also have a committed team that wants to win.
In practice, we operate regionally with different systems processes and organizational structures around the globe.
In order to reallocate investments to the most meaningful initiatives to drive our profitability and success.
Recently implemented structural changes that will create efficiencies and help prioritize where we place our investments while staying grounded in our mission to be the most sustainable company in the world across our environmental design, social and economic objectives.
In January I unveiled our new company strategy to our internal teams around the world. We are performing well, which is exactly the time to lean in to drive changes that can propel us to the next level and into the future.
Our new strategy will enable us to bring the best of interface to our customers.
To capitalize on our opportunities we will reset the operating model to one global company building strong global functions supporting our world class local sales team.
We will expand margins through global supply chain management and improved productivity.
We will accelerate new global products and designs to drive incremental growth.
And we will reallocate our investment to a big bets, including key high growth markets and drive profitable growth across our entire global business.
The new operating model went into effect on February one and includes a few changes in our executive leadership team.
Jim Province, formerly President of the Americas region now leads our global commercial efforts as Chief commercial officer in this new role Jim will focus on global sales and services as well as all customer support functions.
Nigel standstill, formerly president of each AAA now serves as our chief innovation and sustainability officer, focusing on global product design and development R&D and technical sustainability.
And the web formerly vice President of marketing in the America now serves as our vice President of global marketing overseeing all brands marketing strategy and execution.
We are also actively recruiting for a chief supply chain officer, and we will have an update on this later in 2023.
These new roles round out our existing leadership team of Bruce Hausmann, CFO , David Associate General Counsel, Fred Mcdonald, Chief Human Resource Officer.
And Jay Olson, Chief Information Officer, I am confident that with this leadership team and our passionate people around the world, we are well positioned to win.
As we move into 2023, we're focused on better leveraging the strength of our global organization to drive profitable growth across the business. These changes will position us to capture the long term potential of our differentiated products innovative designs and premium brands.
With this new operating model, we will also be able to focus our investments where they will have the most impact in our must win markets segments and products.
And with that I'll turn it over to Bruce.
Thank you Laurel and good morning, everyone.
Fourth quarter net sales totaled $335 6 million a decrease of one 2% versus fourth quarter of 2021.
Sex neutral net sales growth in the fourth quarter was three 6% year over year, even as we lapped a strong fourth quarter last year that had 24% year over year growth.
Fourth quarter FX neutral net sales growth in the Americas was three 3% in Egypt believes FX neutral net sales growth was three 9% year over year.
Yes.
Fourth quarter adjusted gross profit margin was 33, 2% a decrease of 294 basis points from the prior year period.
Due mainly to higher raw material labor cost, partially offset by higher pricing.
Adjusted SG&A expenses were $79 4 million or 23, 7% of net sales in the fourth quarter of 2022.
Third to $81 6 million or 24% of net sales in the fourth quarter of 2021 fourth quarter 2022, adjusted operating income was $32 million down 22% versus adjusted operating income of $41 1 million in the fourth quarter of 2021.
Fourth quarter 2022, adjusted EPS was <unk> 31.
Versus <unk> 47 in the fourth quarter of 2021.
Adjusted EBITDA was $41 3 million in the fourth quarter of 2022 versus $52 8 million in the fourth quarter of 2021.
Looking at the full year 2022 results consolidated net sales totaled $1 3 billion up 8% compared to $1 2 billion in the prior year period.
FX neutral net sales growth year over year was very strong at 13% FX.
FX neutral net sales growth in the Americas was also very strong at 16, 1%.
In Egypt, <unk> FX neutral net sales growth was also very strong at nine 4% year over year.
Adjusted gross profit margin for 2022 was 34, 7% a decrease of 184 basis points from the prior year due to higher raw materials freight and labor costs, partially offset by higher pricing.
As we move into 2023 inflationary trends continue but at a lower rate than last year.
Ocean freight has come down materially.
We are anticipating single digit inflation in most of our raw materials versus the higher double digit inflation, we experienced in 2022.
We also had significant FX headwinds in 2022, which are easing as the U S. Dollar is weakening compared to key currencies.
Adjusted SG&A expenses for 2022 were $317 6 million or 24, 5% of net sales compared to $316 1 million or 26, 3% of net sales in 2021.
The 186 basis points of improvement reflect our continued progress in managing and optimizing SG&A.
Okay.
Adjusted operating income for 2022 totaled $132 4 million up eight 3% compared to the prior year for the full year 2022 adjusted earnings per share was $1 25 versus $1 23 and 2021.
In the fourth quarter, we recorded $5 1 million of charges related to the cyber security events that occurred in late November .
This included $4 $8 million and cost of goods sold primarily related to idle plant costs and approximately 300000 and SG&A expenses related to direct third party fees.
These costs are excluded from our adjusted operating income.
Permanently lost net sales from the events are estimated at approximately $8 million.
The team did a great job managing through this event, which temporarily impacted us for about a week of new AAA and two weeks in the U S.
As a result of our prior investments in cyber security and the quick response from our team there was minimal impact to our customers.
Also in the fourth quarter, we recorded noncash goodwill and intangible asset impairment charge of $36 2 million, primarily due to a decrease in the fair value versus carrying value as a result of the companys decreased market capitalization comparable company market multiples projected future cash flows.
And an increase in the weighted average cost of capital due to rising interest rates and prevailing capital market conditions.
This is a noncash charge and keeping with pertinent accounting literature.
As we close out 2022, our balance sheet remains strong for.
For the fourth quarter interface generated $28 million of cash from operating activities for the year, we generated $43 million of cash from operating activities, which is lower than the prior year, primarily due to inventory inflation and cash collections that shifted from fiscal year 2022 for fiscal year 2023.
Due to timing of the November cyber events.
Liquidity at year end totaled $372 million, consisting of $97 6 million of cash and $274 million of revolver capacity net.
Net debt our total debt minus cash on hand was $422 6 million at the end of the fourth quarter and adjusted EBITDA for 2022 was $176 1 million and our net leverage ratio was two four times calculated as net debt divided by adjusted EBITDA.
We continue to have confidence in our strong balance sheet and our capital structure.
Capital expenditures were $18 4 million in 2022 compared to $28 1 million in 2021.
For the full year 2022, we repurchased $17 $2 million of interface common stock.
Accordance with our balanced capital allocation strategy, we remained.
Focused on paying down debt investing in the business, returning excess cash to our shareholders through dividend and opportunistic share repurchases.
Turning to our outlook, we entered 2023 with strong momentum that has continued thus far in the first quarter as Laurel mentioned demand for our products remains strong and our business remains strong. However, we are cautious about 2023, given the considerable macroeconomic uncertainty including ongoing inflation.
And rising interest rates.
It is difficult to predict the duration of the current economic conditions or their potential impact on our industry.
We're also anticipating that adjusted gross profit margin will remain at current levels in the first half.
As we continue to work through the inflationary inventory on our balance sheet, our return to a more normalized production and supply chain environment.
Interface has successfully managed through key challenging periods and industry recessions and we believe we are strongly positioned to navigate through any macroeconomic environment that comes our way in 2023.
As the company navigates through this uncertainty is anticipating for the first quarter of 2023 net sales of $290 million to $305 million.
Adjusted gross profit margin of approximately 34%.
Adjusted SG&A expenses of approximately $82 million.
Adjusted interest and other expenses of approximately $10 million.
Fully diluted weighted average share count of approximately $58 7 million shares and.
And for the full fiscal year of 2023 year over year net sales growth of 1% to 5%.
Adjusted gross profit margin of 35% adjusted SG&A expenses that are 25 to 25, 5% of net sales.
Interest and other expenses of approximately $36 million.
And adjusted effective tax rate for the full year of approximately 28, 5% and lastly capital expenditures of approximately $32 million.
By leveraging our strong financial foundation, our strong brands and our highly differentiated products. We are confident in our ability to deliver on our mission and with that I'll turn the call back to Laura for concluding remarks.
Thank you Bruce.
Overall, we had a strong year in 2022 and enter 2023 with positive momentum, we know where we need to focus to drive our success and we're implementing the right strategy to support our ambition.
Although macroeconomic uncertainty remains we will continue to take actions to position interface for long term sustainable success.
Our best days are ahead and with that I'll open it up for questions operator.
As a reminder, if you would like to ask a question simply press star one on your telephone keypad.
Your first question comes from the line of Kathryn Thompson with Thompson Research group.
Your line is open.
Hi, Thank you for taking my questions today.
Just two quick questions. One is just the strategic initiatives that you outlined today.
I appreciated the color you provided that in the prepared commentary.
A little bit deeper.
And in broad strokes, what changes do you or don't you see changing from either go to sales process or how you operate the company.
Differentiated between your major regions in which you operate, namely North America, Europe and Australia.
Yes, great. Thanks Catherine.
I'm excited about our new strategy and operating model I see so much opportunity to build on the strong foundation that we have.
And really to operate as one company to better leverage our scale. So a couple of the changes that we're making will reset the operating model to one global company.
Obviously supporting our local selling teams. So currently we have disaggregated resources around the globe. So we have an opportunity to have greater impact by focusing on strong global function. So that's one change that we'll make.
We will also reallocate our investments towards our biggest bets. So looking really at the profitability of our markets. You know the U S is our largest and most profitable market and that'll be the first choice for investment and our top priority as we reallocate those investments.
Fuel growth in the U S.
We have many other countries across Europe , and Asia that really matter, Germany, Australia, two very important markets for us.
<unk> profitable growth, but we're going to continue to prioritize and follow the money. So we will have strong global functions in local selling teams and prioritize our investments.
Okay.
If you were to just once again broad bucket what does.
Presumably some of our top line focused.
Others are more.
Margin, both gross margin SG&A focused.
Okay.
This strategy.
There is a greater focus in terms of those buckets as we think about long term profitability and also just any changes from.
Free cash generation.
Sure. So I'll start with that then I can break you can either ask question.
So we're really focused on profitable growth in our priority markets the U.
Again, we'll be the biggest priority there.
<unk> also focused on margin expansion through global supply chain management, and improved productivity I'll be adding a chief supply chain officer, we have really good work happening in all of our sites across the globe, but we have an opportunity to do is really leverage that knowledge and the actions of each site to attack and drive productivity globally. So that will be a focus for us our goal there is to <unk>.
Our margins back up to pre Covid levels 38, 5%.
And then we will also focus on efficiencies from an SG&A perspective, again investing in our big priority markets.
And continuing to take cost out of some of our other markets with an ambition to get our SG&A down to 23% overtime 23, it will be a transition year with that as we are as we're putting the operating model into effect.
Okay.
Catherine I completely agree with everything in the World just said I liked how you divide that up between topline leverage and margin leverage.
We're going to continue leveraging our local selling system and our and our local selling teams on the ground. We just have such deep relationships with our customers and with our A&D community in our local markets, which is obviously one of our key competitive advantages.
But if you think about the margin side and then again, how you're differentiated that we're going to be utilizing shared resources to leverage and expand margins. So that we can.
We can.
Essentially use the same people process and systems around the globe and in order to drive margin expansion and a really standardized way.
Okay, Great and just final cleanup question business may be more for you just in terms of inventory.
Companies are.
It had been.
Youre, a little bit different because you don't carry inventory, but nonetheless.
There is some amount you have to manage it particularly in terms of just raw materials.
Where are you now in terms of the cost price and heavy mostly to kind of that higher cost inventory each system. Thank you.
Okay, Great question, Catherine I'm glad you're asking for a double click down on inventory because when you look at that Ron number on the balance sheet, it's hard to understand it let.
Let me give you a couple of stats.
Our units are flat year over year, which is good we've done a great job at managing the quantity of inventory we have the biggest year over year increase that you see is really inflation and so we do have inflationary inventory that we will that will be flowing through the income statement in the <unk>.
First half and that is incorporated into our guide.
The other piece of that I would add around color around inventory is that we've been really focused on business continuity and making certain that our plants always have everything they need to meet customer demands and so if you if you if.
If you double click down on our inventory.
9%.
Our arms, our raw materials are actually up 29% year over year and that has been a very very purposeful initiative to make certain that we have everything we need.
Obviously as the.
The supply global supply chain gets into a greater equilibrium and into a more stabilized state we will ease off of that and we will get into a more normalized environment around how many raws, we keep on hand in order to ensure business continuity.
Okay, great. Thank you very much.
Your next question comes from the line of Keith Hughes with treatments.
Thank you a couple of questions on the fourth quarter.
Can you talk about what was that.
The price whether they contribute to the organic growth moment.
Hey, Keith Good morning, this is Bruce.
In our fourth quarter, if you kind of double click down on the growth components. We mostly grew on price volume was flat year over year in the fourth quarter.
And if im guessing youre going to ask you about next year, we think that.
Yeah, that's right I know youre going there.
Yes.
Do you think about next year.
Thank you can.
We don't know for sure, but I would think about it in terms of sort of a 70 30 mix probably 70% based on price, 30% based on volume we've got a nice wrap around.
The impact coming where we've.
Put pricing into the market and we will get the wraparound impact of that as we go into 2023.
Okay, Great and then the first quarter.
There's another margin year over year gross margin step back is that still cost well over price or there other contributions.
Hey, Keith.
What I was referring to with Catherine it's the inflationary inventory.
You'll appreciate this just the flow between raw materials going into manufacturing and then actually hitting the cost of goods sold line. It's the flow we had double digit inflation that we incurred in our raws in 2022.
The good news is that has eased now we're anticipating single digit inflation in 2023, and if you put all of that into the mix again. This is.
For our guide.
No.
What youre seeing there as youll see youre seeing that inflationary inventory flow through the cost to cost of goods sold line in the first half.
Okay, and I guess question for Lora, you talked about SG&A of 23% long term goal.
We've made a lot of nice progress on SCS.
Over the last couple of years.
Your words stepping back why are you stepping back in 2003, what are the what are the drivers for that and we will 24 begin to move down under the plan.
Yes, it's a great question.
We are stepping back I will say that we will.
Now we will modify with the market as we have shown great discipline in SG&A as you said over the past couple of years really watching our dollars. We are wanting to make sure we make some investments for growth as we continue to fuel the growth, particularly in the U S market.
And driving innovation one of the focuses that we have is new <unk>.
Accelerating our product development and innovation, we are preparing for neocon now got a lot of new innovation hitting the market and we want to make sure we invest for the long term at the same time as I said as we put the operating model into effect 'twenty three it will be a transition year and we do expect 2004 to step back down.
Yes, Keith I will just add Laura mentioned, there is no loss of focus on G&A guaranteed.
We appreciate all of your feedback around the progress we've made there I can guarantee you. This management team around the world is focused on every single SG&A dollars every single SG&A initiative, and making certain that we don't spend any dollar that's not needed to fuel growth. We've got good SG&A to feel growth, we've got that SG&A that so called.
<unk> by the way people like me and finance are the so-called that SG&A, but we're doing everything we can to manage it very very effectively.
Okay and actually one more if you allow me for Laurel you had talked about.
With us in more of your dollars on the higher margin the Americas business, which is a good bit higher margin.
What does that signal for the other regions they've been margin Underperformers for a long time does that signal a strategic change or is there a consideration of the strategic change to maybe not all of it.
Which parts of the.
Medium term.
Yes, that's a great question as well and I'd say, we've been really scrutinizing, the P&L country by country and as Bruce said our strategy right now is to focus on the profitable market Theres certainly more outside of the U S.
That continued to be very profitable for us, but we want to leverage our global scale and have shared resources, helping support some of those markets to improve their profitability.
Yes, Keith I will just add Laura mentioned, we're going to be differentially investing our next dollar in those higher margin markets, where we can get the best return and then we're going to be I'll, just reiterate what Laura said, we're going to be taking these shared resources. So that we can leverage margin expand.
And in the other areas of the company, where they can use shared resources to help improve their margins.
Okay. Thank you.
Your next question comes from the line of David Macgregor with Longbow.
Research.
Hey, good morning, everyone.
I guess I just wanted to.
Clear on kind of the cadence you're thinking about with respect to the <unk>.
Performance targets under the new strategy you characterize 23 is a transition year and then there were some comments around SG&A into 2024.
The numbers you shared with us.
The 38, 5% gross margin in the 23% SG&A.
Are those numbers achievable in 2024 or how are you thinking about.
The timing on this.
Yes, great Great question I. Appreciate it is look this is a.
Our longer term approach over the next I'd say three years I don't think we will get there in 2000 and for there's so much uncertainty on 23, right now which is why we're hesitant to put a pin in exactly what year that will happen, we expect to make significant progress in 'twenty four.
It will probably take us another year.
David I agree with everything Laurel said, it's interesting we're trying to strike the balance of we've got the pedal down to make sure that we expand the margin profile of the corporation at the same time, we didn't.
Folks like you do a really really good job at scrutinizing and criticizing the numbers given the macroeconomic conditions and we're also very aware that it is a fact that global.
Economic policy is tightening around the world and so while we're going to do is we're going to continue tightening up the margin structure of the company, while controlling everything that we can control, while also being really well aware of what's going on in the macro environment and we were trying to be realists as we navigate through 2023 and as we take the company forward.
Two to grow the top line and to expand the margins.
Alright.
If you think about sort of interface and how the company has evolved initially from a carpet modular carpet tile company you added LPT then there was the Nora acquisition.
Think about this new strategy, how do you think about your product portfolio right now or are you contemplating within this maybe not initially but at some point further into the program.
Adding other product categories and expanding the portfolio or are you satisfied with these three categories. You have now and maybe talk a little bit about the portfolio.
Yes, it's a great question.
Of the portfolio that we have right now we've done a really nice job as he said expanding <unk>, we're seeing some great success with.
Selling the combination of carpet tile and <unk>.
Customers right now, especially in the office market are really looking to add flexibility to their space are not quite sure what their spaces are going to look like over time and carpet tile is a great solution to add that flexibility to their space in combination with <unk>.
And then our nor rubber business as you said is fantastic it's been a great way to diversify our portfolio.
And really growing nicely and the health care.
So we like what we have today those.
Carpet tile Lv and rubber our three core pillars of our growth long term, but we'll continue to look for opportunities as we move forward.
Okay.
Under this new strategy, just talk about sort of the longer term Capex plan here.
You've kind of been tracking around the $30 million level, you went through the whole Lagrange.
Project there for a few years.
It came up the other side $18 million last year, it seems like it probably bounce down on the maintenance level.
How capital intensive is this are you contemplating at some point.
As you execute the strategy having too.
Address capacity.
And make bigger investments.
David.
Price or guide or our Capex guide for the year is $32 million.
We are in really really nice shape around not having to invest in additional.
I would say incremental capex above maintenance.
For the foreseeable future as you mentioned, we've done some big investments in our plants and so the chapter that we're in is we're going to optimize and leverage those investments that we've made in the past, which is a great position to be in and.
I think if I were to put.
Put a number in our model sort of long term, we generally think about maintenance capex being around two 5% to 3% of net sales.
Which is pretty close to our guide and we think that being on this maintenance Capex program for the for the foreseeable future is going to be able to help us achieve our strategy and hit our goals.
Okay and can you talk about.
Expected cash conversion.
In 2003.
Three I guess working capital being the bigger variable in there and yes, and just you mentioned.
And in passing I think Bruce you made the comment that.
As you think about that you'd want to repay debt becomes a priority within your capital allocation.
My recollection is that your desks largely term debt.
Are you talking about debt repayment.
And what the options might be for you there.
Yes, great question.
I will start by saying, we do have a balanced capital allocation strategy. However, our number one objective is to pay down debt and that's where we're mostly focused especially as we enter into 2023, followed closely behind to that is obviously investing in the business and one and Thats and Thats the 32.
$1 million I, just mentioned of Capex, and obviously, making sure that we fund initiatives of the business.
<unk> needs to be funded with in order to achieve its growth and again, that's all baked into our guide.
We.
If you think about cash I think that theres going to be some.
Our cash flow should be a lot stronger in 2023 than it was in 2022, and there's two things that kind of that impacted it in 2022, one was that we had inflationary inventory and again that was about 30 by $33 million.
The inventory balance.
That's sitting on the balance sheet at the end of the year was all inflationary. So that was a onetime use of working capital going from 2021% to 2022. The other thing that's kind of interesting I'm not sure. If you heard this in our prepared remarks was that we had that cyber event in November .
And so some of our billings in November shifted into December which meant some of our cash collections shifted from 2022 to 2023. So all of that is good news for cash flow in 2023, and all of that will help us in 2023 from a cash perspective.
And what is achievable in terms of debt repayment.
Talk about sort of high level terms, but I wonder if I could push you to be a little more specific about your goals there.
Yes.
I think that our lever we think about it in terms of net leverage ratio.
We would like our net leverage ratio to we like it when it starts in the low twos.
In an environment like this where we like the idea of getting at just below two is well two times net leverage and that's really how we think about that number less about the raw number of it and more about what is our net leverage ratio is going to be as a corporation.
Okay, great. Thanks, very much for taking my questions.
Thank you.
There are no further questions at this time I will now turn the call back over to Laura <unk> for closing remarks.
Great. Thank you and thanks to everyone for listening thanks to all of our associates around the world for all of their work every day and thanks to all of our customers for their continued support.
This concludes today's call you may now disconnect.
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