Interface Inc. Q1 2023 Earnings Call
[music].
Okay.
Thank you for standing by my name is Bob and I'll be your conference operator today.
At this time I would like to welcome everyone to the Q1 2023 interface incorporated earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be in question and answer session. If.
If you'd like to ask a question. During this time simply press the star followed by the number one on your telephone.
You bet.
If you'd like to withdraw your question. Please press the star followed by the one again.
Thank you I will now hand, the call over to Christine Needles Corporate Communications you may begin your conference.
Good morning, and welcome to interfaces conference call regarding first quarter 2023 results hosted by 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.
We're looking statements include statements regarding the intent belief or current expectations of our management team as long 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 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 to the most comparable GAAP measures and explanations for their youth are contained in the company's earning 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 your.
Your participation 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 Yeah.
Thank you Christine and good morning, everyone before I move into the quarters results I want to update you on our progress with one interface.
As a reminder, we announced a multiyear strategy after a deep dive into the business with a focus on increasing value for our shareholders.
Plan to emerge from this process with more consistent growth in our core business expanded and sustainably higher gross margin and a far more globally Leverages all business.
To do that we will prioritize investment in our largest most profitable markets accelerate our leadership in design and innovation and better leverage our selling system by delivering strong global products and innovation.
We will continue to be committed to our mission to be the most sustainable company in the world across environmental design, social and economic aspects. This is our foundation on a path to get there I Wanna interface strategy focused on three main objectives.
First we are working to reduce the complexity of our business model by transitioning from regional to global portfolio management that will drive more global product collections and simplify the operations required to support them. We have already begun this work in the near term we are looking at investments in automation and other areas with quick payback over the <unk>.
Medium term, we are analyzing and optimizing our supply chain and global footprint to identify synergies and cost savings as we told you. We are recruiting a global chief supply chain officer to lead these efforts.
Second we are continuously working to improve our pricing and mix management.
Our efforts in the fastest growing most profitable categories and flooring today L V T. The floor rugs business and Nora rubber, which are all accretive to our core carpet tile business.
And the resilient category, we have the best L V T on the market and continue to gain share.
<unk> remains one of the fastest growing categories in floor care, commonly used in both corporate office and education are.
Floor rugs are the perfect complement to L. V T floor plate and we are seeing double digit growth of the floor brand in our commercial channel.
Nora is the leading rubber flooring brand in the world and we will continue to bring design into what has historically been a technical category.
I believe the end markets of health care life Science, and education has tremendous durability and expanding our focus on these markets remains a key priority.
Capital remains a core category and a critical component to our success.
We're the leading premium player in this category, we continued to deliver product and design innovation staying ahead of our customer demands.
Well the carpet tile category it doesn't have the tailwind as it once did interface will continue to gain share with new premium designs across a carbon neutral carbon negative products.
As well as efficiently design collection at compelling price points.
An example of the latter because our open air collection, which we further expanded in the U S. This quarter.
It has a compelling price point and we have designed it to run efficiently in our plant to meet our margin requirements.
To date. This collection is our fastest growing in history in terms of volume sold and we are building on the success here.
Third we are globalizing, our core functions to support our world class local selling team.
Our recently appointed Vice President of global marketing isn't uniting the local regional and corporate marketing teams into one global team versus separate teams across the globe.
We're doing the same with R&D design and innovation as well as our back office function.
This will drive efficiency eliminate redundancy and enable the team to deliver our best work. We're moving quickly on this front, though we recognize that the transformation that will take time.
Our new leadership team is in place and they are now working to build out their global team.
For the first time in several years, we're bringing our design leaders together for a global design summit to accelerate the transition from regional to global design platforms and quickly identify the designs in our pipeline with the biggest opportunities to drive global growth.
We will be launching our first global collection in several years in the back half of this year and are excited about the impact this will have on our business.
Similarly, our supply chain leaders came together to collaborate on our global productivity funnel and improvements in our manufacturing operations to enhance our margin performance.
It's early days, but these are a few examples of the progress we're making to globalize the company.
We believe the one interface strategy will support our growth ambitions and ultimately create shareholder value by bringing the best of interface to bear.
Now, let's talk about the results for the first quarter.
Her face delivered currency neutral net sales up 5% year over year, driven by strength in the Americas, EMEA and Australia, partially offset by weakness in Asia.
We are investing in customer facing activities and innovation to drive our short and long term growth, while managing all other costs and focusing on productivity to improve our margin.
The team executed well, despite a challenging operating environment, including persistent input cost inflation.
Currency headwinds.
I continue to be impressed with their hard work and dedication to our customers.
During the quarter education, and corporate office market segment growth leaders.
We also saw growth across all product categories or customer leans into our diversified product portfolio using a mix of flooring to meet their unique design needs.
L. P. T category was up double digits in the quarter, driven by our differentiated offering with superior acoustic properties enhanced durability and the most recycled content in the industry interface continues to win in the marketplace and take share in this growing category.
Our gross margins this quarter are not where we need them to be.
And while we have been successful in capturing price to partially offset inflation, we're still working through extensive inventory on our balance sheet and inflation for raw materials remained a headwind in the first quarter.
We're starting to see signs of lower inflation and potentially some deflation in the future, but there will be a lot of people are these benefits flow into the P&L.
In addition production rates in Q1 last year were elevated because our plants were catching up to meet the post COVID-19 pent up demand.
The good news about where we stand right now with their supply chain has stabilized in terms of raw material and labor availability and we are meeting customer lead times back to normalized levels.
However, production levels were down year over year compared to last year's catch up environment, which adversely impacted fixed cost absorption in Q1 and is incorporated into our Q2 guide.
Looking at orders consolidated currency neutral orders were down two 2% compared to the prior year, which included Russia. The geography, we have since exited.
Excluding Russia consolidated orders were up one 2%.
Currency neutral orders in the Americas, and Australia were up six and 19% respectively.
EMEA was up 3%, excluding Russia, reflecting continued steady demand, but it's fairly broad based with the exception of Asia, which was down 50% on slow and soft post COVID-19 recovery.
We continue to see steady order flow. However, we are mindful of the tightening macro environment and we have a challenging Q2 comps as net sales were up 18% year over year in Q2 2022.
We have experienced increased traffic, but they trade events across Europe , and we're looking forward to neocon.
At Neocon, we will launch several exciting new carpet tile in L. V T offering and we look forward to sharing these new product launches with our customers and partners.
We have launched several exciting new products across our portfolio in Q1 and carpet tile, we launched our new third fifth collection to help our customers design for the third space trend alternative places where people work collaborate and reenergize.
This collection combines classic office design with a plush residential feel in the cozy a color palette.
We also expanded our very successful open air collection and watch connected ethos, featuring Biophilic designed more recycled yarn content and low embodied carbon.
On the resilient side, we unveiled our new northern grain L V T.
And we also launched nor upon can be which features a streamlined design at an attainable price point it withstands heavy foot traffic hides methods and absorbs sound, making it ideal across our target segments.
It's much more in the pipeline over the course of the year, including as I said earlier, our global collection launch planned for the second half.
Our differentiated product offering best in class sustainability story, and strong financial position continue to set us apart from others in the industry and set us up well for long term growth and with that I'll turn it over to Bruce.
Thank you Laurel and good morning, everyone.
First quarter net sales totaled $295 8 million, an increase of two 7% versus last year's first quarter.
FX neutral net sales growth year over year was up five 2%.
First quarter FX neutral net sales growth in the Americas was up 9% the nature boy was up 1% year over year.
We had strong FX neutral year over year growth in EMEA, and Australia, which was offset by Asia due to a soft post COVID-19 recovery in China.
First quarter adjusted gross profit margin was 33, 3% a decrease of 466 basis points from the prior year period, due to lower fixed cost absorption and higher raw material costs, partially offset by higher pricing.
Adjusted SG&A expenses were $83 2 million or 28, 1% of net sales in the first quarter compared to $78 6 million or 27, 3% of net sales in the first quarter last year.
The increase was due to higher selling costs and inflation.
First quarter adjusted operating income was 15 $22 million down 50% versus adjusted operating income of $30 6 million in the first quarter last year.
The decrease was primarily due to lower gross profit margins are lower fixed cost absorption and inflationary raw material costs, partially offset by higher pricing.
In the first quarter of this year raw material inflation was up 9% year over year and that was coming off of a 27% year over year increase in raw material costs in Q1 last year.
Year over year net sales growth came from price.
Carpets and rubber volumes were slightly down year over year, and there'll be tea volumes were modestly up.
First quarter adjusted EPS was seven.
Or is it 28 cents in the first quarter last year.
Adjusted EBITDA was $26 3 million this year versus $42 9 million in the first quarter last year.
We generated $29 6 million of cash from operations.
At quarter end totaled $390 million, consisting of $101 million of cash and $289 million of revolver capacity.
We repaid $19 million of debt in the quarter, resulting in net debt for total debt minus cash on hand of $399 8 million at the end of the first quarter.
Last 12 months of adjusted EBITDA was $159 5 million.
Leverage ratio was two five times calculated as net debt divided by adjusted EBITDA.
Our required principal and interest payments on all outstanding debt or approximately $9 $8 million per quarter.
With our strong balance sheet and strong cash generation.
Plan to continue paying down debt is our top capital allocation priority.
Capital expenditures were $5 7 million in the first quarter of 2023 2 billion to $4 8 million in 2022.
Moving to our outlook interface is well positioned to navigate through continued macroeconomic uncertainty in 2023.
<unk> has successfully managed through challenging periods in the past.
We remain cautious given continued pressures through ongoing inflation and rising interest rates and as a result.
Our full year 2023 guidance and now anticipate the following.
For the second quarter of 2023, net sales of $325 million to $345 million.
As a reminder, we have challenging comps in Q2 net sales were up 18% year over year in Q2 last year.
Comps get easier in the back half of 2023 of net sales were up 2% year over year in the back half of 2022.
We are also anticipating adjusted gross profit margin of approximately 33%.
Adjusted SG&A expenses of $85 million to $86 million.
Adjusted interest and other expenses of approximately $10 million and fully diluted weighted average share count of approximately $58 2 million shares.
For the full fiscal year of 2023, we are anticipating year over year net sales growth of zero to 3%.
Adjusted gross profit margin of 33% to 34%.
Adjusted SG&A expenses that are 25 to 25, 5% it dovetails.
Adjusted interest and other expenses of approximately $36 million.
Adjusted effective tax rate for the full year of approximately 30% and.
And capital expenditures of approximately $32 million.
We are confident in our growth strategy, our market leadership position and our ability to enhance value for our shareholders.
With that I'll turn the call back to loral for concluding remarks.
Thank you Bruce I want to thank our team for their continued efforts and our customers for their ongoing support I look forward to building on our momentum and executing on our strategy to position interface for sustainable growth and enhance value for our shareholders. Thank you.
Yeah.
Ladies and gentlemen at this time I would like to remind everyone in order to ask a question. Please press the star followed by the number one on your telephone keypad.
Well pause for just a moment to compile the Q&A roster.
Okay.
Our first question comes from the line of Kathryn Thompson from Thompson Research Group. Please go ahead with your question.
Hi, Thank you for taking my questions today.
Appreciate the color you gave in the prepared commentary on the outlook and just a follow up clarification on the adjustment in guidance.
To what extent in the factors are at play with just the quarter and what happened in Q1.
Any change in opinion you've had.
The remainder of 'twenty three that may be different than what you outlined in Q4.
Hey, Catherine.
I'll take that so I think we started off the year really bullish from an order perspective.
In January and February our orders were really strong they've remained steady in March and April but has softened a bit we're still seeing really continued demand. We've got a tough Q2 comp and certainly the market dynamics have gotten a bit more.
A bit more challenging since we last spoke.
So we've just moderated our guidance in the back half, we do have growth plans for the back half.
And that's partially because our comps get much gets much softer we look at March and April to be fair. They were our highest order intake weeks last year throughout the months of March and April . So there are toughest order comps as well and we're continuing to navigate through that we're continuing I would also say to see.
Strong demand in <unk>.
Health care and education.
And excuse me.
And we're also seeing continued trends for <unk>.
Class a office space. So that continues to be strong and also the regional migration in the U S. As you know is continuing I was in Dallas, a couple of weeks ago and the activity. There is just really exciting.
And if.
If you were to look at some of just the moderating and PS.
That you described.
Are there any end markets or geographies or even.
A product type that youre seeing with that with changes in trend.
Moderation I think.
Yeah, I think I think the one challenge that we spoke to in the prepared remarks is China.
We are seeing a lot of project delays in China, We've got a pretty good pipeline, but that certainly has been challenging for us.
The Australia remains really strong so that continues we see continued growth there.
And I would say again, our <unk> business, our Nora rubber business are very very strong our floor carpet tile business is strong and we've had really good success with our open air platform as we mentioned, which is still at a very premium price point, but a bit more moderate.
Which has been taken off like Crazy.
Okay.
No it can be.
A hot button to push on.
Knowledge that in advance, but just a conversation we've had with.
Many types of companies and broadly in the construction industrial value chain that have a global footprint. We have run across some that are just deciding not to do business in China, just because it's not become.
It's less predictable.
It's not profitable and variety of factors, both public and private companies.
What are your thoughts in terms of more specifically.
Your footprint and long term view on in China.
Yes, it's a great question Catherine and certainly.
It is something that we continue to look at.
R R.
Our business has been in that market for a long time and our business. There has been steady for a long time right now it looks like a lot of projects delays versus a significant trend change, but I'd say everything's on the table. So we're continuing to consider all the alternatives.
Kathryn This is Bruce I agree with you with Laurel mentioned I would just add we have a really strong government business in China, which serves as extremely well with particularly with the neuro business.
And so that's something that we have a strong foothold in which is which is great for us.
It's profitable business, but also helps us with our fixed cost absorption in our plants.
And it's just is there a longer selling cycles to be fair and some of those.
When oral mentioned about project delays, that's where we're really seeing it in these really large government projects. So.
So for the long haul, we view that as a really good business and the other area, where China is strategic for us is with our strategic accounts.
That is an area, where our customers look to they wanted us to have a presence in order to serve them with the same products as they are able to get and are in the U S market.
Okay, great. Thank you very much.
Yeah.
Thank you. Our next question comes from the line of Mr. David Macgregor with Longbow Research. Please go ahead with your question.
Yeah.
Yes, good morning.
Thanks for taking the questions.
Let's maybe start by just getting your assessment of.
How disruptive is one interface to two results right now I realize you're shaking your organization. This is big.
The big Chore too.
Consolidated on a global basis like this.
But it also can be a distraction, obviously and so I'm just trying to sort of.
Here that thought with sort of the published results given assessment from you.
How disruptive that might ultimately be and how long that would last.
Yes, David Thats, a great question.
I would I would say certainly we're making changes and we believe that's the right thing to do for the long term health of the company the.
The company has been wired historically as very regional organization. So it will take some time, it's not just a flip of the leadership team where we are.
Changing how we innovate how we build our brands around the world.
Really to better leverage our global scale and drive efficiencies for the long term. So there is a fair point there is a lot of change right now what were not touching our really our local selling teams. So the folks on the street in the market. They are out there every day driving for results.
I would say in the in the heart of the business right now theres not a lot of disruption, but we're making some change that we believe long term will really bring the best of interface to life.
<unk> is just assessing quantitatively.
The impact in other words incremental expansion.
You can name the revenue impact from.
Various initiatives.
Yeah.
No.
Yeah.
From a from a long term perspective, we think it will help us to drive obviously accelerated growth sustainable growth.
From a from a cost standpoint, there is some short term.
Short term hits on that in in year cost savings is only about 5 million Bucks. So it's not a it's not a massive.
Number this year and truly will come from as we continue to.
Globalize the business over time, and it's not just a cost cutting exercise, we really do believe we can bring more products better designs more consistent marketing and that'll drive more growth long term.
Great.
China.
Yeah go ahead.
I was just going to add.
Laura.
Part of one interface is all about is about operational efficiencies and that's what that's what we're driving here and nimbleness and quicker decision, making which ultimately serves the customer better.
So while there are some.
Laurel mentioned there are some nominal cost opportunities inside of one interface. It really is also about serving the customer better.
And serving the customer in a in a standardized way around the globe. So that we can meet their needs and we can serve them where they are.
Alright.
Just wanted to ask you about China.
3% drop in orders is obviously a big number.
How much of that is sort of the environment as you referenced and how much of that might just be.
Sure.
Follow on from some of the changes that you're making in that part of the world.
Yes, I think.
About half of our business there is as Bruce stated as our newer rubber business, which is really project delays.
Government government funding things like airports high speed rail that we believe will be consistent but are delayed and the other half is is our corporate office business, which a lot of that as Bruce said as our global customers and we've seen delays from them as well.
And some of the work that they've been doing to in their office environment.
Okay and then finally from me on the guidance revision around gross margins is there any way to talk at least qualitatively about U S versus rest of world.
Hum.
Albert factory into that region.
Yes, David.
We're really seeing the dynamics that are going on with gross margins are pretty broad based globally.
And then in to overly simplify a fairly complicated topic. It really is two things it's persistent inflation.
And then it is lower volumes, which are driving less fixed cost absorption in our plants, which is I know you know this but it's not unique to us.
If that is an industry wide phenomenon.
That we are fairing better than the rest of the industry and our volumes were only down mid single digits, which and so all of our growth as we mentioned in our prepared remarks came through price.
But even with price being basically at parity with inflation, we still.
We had some margin erosion as a result of inflation and then the rest of the erosion came from fixed cost absorption and and it wasn't unique in any particular area. It was it was something that we saw basically in all of our locations.
Got it.
Thanks, very much good luck.
Okay.
Thank you our final question of the day comes from the line of Keith Hughes from <unk> Securities. Please go ahead with your question.
Thank you and the second quarter guidance.
<unk> do you expect from currency and what influence from price.
So Keith on the top line.
Hang on one second I look forward to top line number for it.
Okay.
The top line year over year, we don't from a translation standpoint, we don't think that currency is going to have a large effect in <unk>.
Q2.
It did in Q1.
On the topic.
Translation costs about $7 million on the top.
Asked us about.
$1 million on the bottom, but that if currencies stay where they are today and don't move and that will that sort of normalizes in Q2, where it's about flat on the top and flat on the bottom from a currency standpoint, and then if currencies again stay where they are today it actually would be a helper in the back half.
It will help us on the top and it would help us on the bottom year over year.
Okay, what about price for the second quarter.
Are you asking if we're going to increase prices or decrease prices I just wanted to make sure I understood. The question.
Yes, sure just on the guide how much how much how much pricing do you expect.
Most of our most of our growth that we're forecasting in Q2 is coming from price.
Okay. The midpoint what have you down.
A couple of points, so I guess that OMB and youre expecting a pretty weak number in the second quarter or is that reading that correctly.
We are expecting volume to be down year over year in Q2 like we saw in Q1 at similar levels.
Okay sure.
And then.
You kind of forecasting growth.
With the guidance in the second half of the year is that again more price or do you expect units to turn positive.
It will be a lot of the growth will come from price. We're thinking then that units will be slightly down in the back half the biggest.
Biggest difference between the first half and the back half as the comps.
The back half, we're comping, a 2% growth rate versus the first half where we're comping.
A double digit increase year over year last year.
But what were your units last year I mean, it was just a lot of price coming in last year. I think you start off some pretty strong units in the first quarter I'm not sure what they did the rest of the year 'twenty two.
Our units.
Sorry can you ask that question again, I am not sure if I understood. It so what kind of unit growth that you see in 2002.
In 2022 units were relatively flat year over year.
It changed in the first half they were up in the back half they were relatively flat.
And so and of course, what we're seeing now is we're seeing units being slightly down mid single digits.
Okay and I guess also you had talked about.
Weaker orders in May and April .
March and April I know you got a tough comp as you had said what kind of what kind of order rate on that stock comp what kind of order what kind of order percentages are you seeing year over year.
So if you look at where we landed at the end of Q1.
I'm going to give you a bunch of different numbers to help you get some context on this.
So if you look if you look at total company our hour.
FX neutral orders were down two 2%.
And if you look at that remember that includes the Russia business that we exited but if you exclude Russia. Our orders were up one 2% FX neutral total company.
Now you double click down and that there is a lot of different pieces.
Actually our Americas orders were up nicely up about 6% our our.
EMEA orders were up nicely around 3%, excluding Russia. The biggest challenge that we have as our orders were down in Asia and they were down about 50%. So we think that while we saw in Q1 around delayed projects in Asia, principally in China is going to continue through Q2 based on the best information that we have.
And that's all built into our guide.
Okay, and I assume that the numbers you just gave me March April numbers were below that in terms of in terms of.
Order rates.
Is that correct.
April .
I wanted to the dollars that are flowing in a fairly steady.
But the year over year growth rates are not as are more challenged because we had such strong order growth rates in March and April . So we have really tough comps from an order standpoint in March and April but to be but I wanted to be one of the I want to make sure im communicating effectively the order flow is steady from a dollar standpoint, it's just really tough comp.
Okay, Alright, that's it for me thank you very much.
Yes.
So ashwin how are you.
I apologize if you have a follow up question from David Macgregor from Longbow Research. Please go ahead with your question.
And just one more for me thanks for taking the follow up could.
Could you help us with.
Expectations around working capital for.
For the year I'm, just trying to round out the cash flow model here, you gave us the capex number but.
Yes, and I guess, we can.
Quite an EBITDA number, but how are we thinking about the balance sheet.
Yes.
Thank you for asking because we're very focused on working capital.
We think that.
I think you saw some nice.
Have some nice progress around inventory in Q1.
Year over year, it was down 2%.
While our revenue was up FX neutral 5%.
Was a good outcome and we're going to continue to be.
Managing our inventory and making certain that our inventories stay at the right level.
And you also probably saw that we generated a lot of cash around accounts receivable were very focused on making certain that we collect the cash. So I think that this will be a good year from a for us from a working capital standpoint.
Certainly Q1 was very strong.
Thank the rest of the year will be as strong as Q1, but I think but we believe that working capital we're focused on increasing our turns and making sure their inventory stays in line with our growth rates and making sure that our accounts receivables managed effectively so again.
I think it will be a good cash flow year.
Do you have a conversion rate in mind is there a number that you can share.
Not something that we necessarily publish David I think.
<unk>.
But.
I think it'll be in line with with.
As you know last year was now where we wanted it to be from a cash flow standpoint, but I think if you look back in the years prior to that I think it should be similar if not a little bit better given.
Given the focus that we have on it.
Thanks Bruce.
Okay.
There are no further questions at this time I will now turn the call back over to Laurel for closing remarks.
Great. Thank you everyone I appreciate the questions I appreciate you listening today and I just want to thank all of our associates and our customers for their continued support and their hard work.
Yes.
Thank you that does conclude the conference call today, you may now disconnect your lines.
Yeah.
Okay.
Yeah.