Q2 2023 Interface Inc Earnings Call
Hello, and welcome to the Q2 2023 interface, Inc. Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session and if he would like to ask a question. During this time simply press star one on your telephone keypad.
Now I'll turn the call over to Christine Needles. Please go ahead.
Christine Please go ahead.
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My apologies for the technical difficulties I will now turn the conference over to Christine Needles. Please go ahead.
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Good morning, and welcome to interfaces conference call regarding second quarter 2023 result.
Hosted by Laurel Hurd, CEO , and Bruce Hausmann, Vice President and CFO .
During today's conference call any management comments regarding interfaces business, which are not historical information are forward looking statements within the meaning of federal securities laws.
Forward looking statements include statements regarding the intent belief or current expectations of our management team as well as the assumptions on which such statements are based.
Any forward looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from any such statements, including risks and uncertainties 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 there you are contained in the company's earnings release and form 8-K furnished with the SEC today.
Lastly, this call is being recorded and broadcast it for interface. It contains copyrighted material and may not be rerecorded or rebroadcast without interfaces express permission.
Your participation on the call confirms your consent 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. Once again I want to thank the interface team for delivering a solid quarter. It was in line with our guidance and expectations on strong execution around the globe.
Currency neutral net sales were down 5% year over year, as we anticipated compared to a strong prior year comp that was up 23%.
Overall, given the ongoing macro challenges, we're pleased with Q2's net sales results and the steady customer demand that we saw throughout the quarter.
We are executing well on our segment diversification strategy to help insulate and strengthen even further from unpredictable market dynamics and the corporate office segment.
Education has grown to 18% of our global billings over the last 12 months.
It's a bit this trend to continue as the U S schools tap into remaining funds and 122 billion dollar American rescue plan legislation and tackled critical refurbishment and new construction projects across our primary geographies.
Education is seasonally stronger in Q2, so we'll provide a bit more detail on the segment and it was a bright spot for us. This quarter. We saw increased activity in sales in the quarter across several of our larger markets, including the U S U K and Germany. The school administrations invested in refurbishment and maintenance projects during summer break.
Driving global sales in this segment up 7% year over year on top of 20% growth last year for.
We're differentiated in education because of our reputation for high quality flooring overall product performance and the breadth of our services support and product warranties.
And especially in higher education, many customers have their own sustainability goals and seek out a low carbon footprint flooring to help achieve them.
In both K through 12, and higher Ed our products standup to the wear and tear of high traffic areas and provide design aesthetic for positive learning environment for students and teachers.
We effectively leverage our full product portfolio in this segment with broad use of both carpet tile and L V T as well as Nora rubber in key geographies such as Germany.
Q2 is also in our biggest interior design at the end of the year occurs Neocon, where we had our second largest attendance of showroom visitors in our history with attendance continues to rebuild to pre COVID-19 levels.
Invested in enhanced digital capabilities to improve the customer experience and showcase new interface design studio software that allows us to design the entire floor plate and shared the carbon impact of different flooring decisions with our customers. This is a true differentiator as more and more customers need to specify a lower carbon products and their.
And of course, we are focused on driving growth with new products at Neocon, we launched impactful new designs, including lock palm and woven gradient carpet tile collections and self complex L. V. T. We also previewed our new global collection launching later this year that features a modern take on designs of the past as we celebrate our 15th anniversary this year.
We are making meaningful progress in accelerating our new product development are key components of our strategy and believe these new products will help us drive market share gains in the back half.
Turning to orders, we continue to see steady order demand and enter Q3 with a strong backlog.
Solidago currency neutral orders in the second quarter were down 2% year over year on a strong prior year comp that was up 10%.
Orders were down 3% in the Americas flat in a AAA.
In EMEA orders were steady while strong growth in Australia helped offset continued thoughts post COVID-19 recovery in Asia.
We entered the back half of the year with a solid backlog that is up 13% since the beginning of the year we.
We feel good about the steady demand, we're seeing as customers continue to choose interface for their flooring solutions, while remaining cautious about the dynamic market conditions around the world.
Before I turn the call over to Bruce to discuss our financial results and outlook I wanted to provide a brief update on our one interface strategy, which is progressing as planned.
As a reminder, this is a multiyear effort focused on resetting our operating model to leverage the power of our entire company to accelerate growth and improve profits.
We are building strong global functions to support our world class local selling teams.
Expanding margins through global supply chain management, and improved productivity and accelerating new products and designs to drive incremental growth.
Earlier this year, we announced changes to our executive leadership team roles and responsibilities and I shared that we have created a new role chief supply chain officer to lead efforts on supply chain optimization and help us unlock expanded gross margin and.
I'm pleased to share that Bill Blackerby joined US This week filling this important role and my leadership team.
Bill brings more than 25 years of experience, leading and managing highly successful team across complex international supply chain manufacturing and distribution operations.
Bill will leverage has extensive global experience to accelerate our productivity initiatives and increase agility across our global supply chain organization.
Our executive leadership now in place and confident in our team's ability to better leverage the strength of our entire organization to drive improved margins and profitable growth across the business I'm excited for the future of interface and the opportunities that lie ahead with that I'll turn it over to Bruce to go through the financials Bruce Thank.
Thank you Laurel and good morning, everyone.
Second quarter net sales totaled $329 6 million a decrease of four 9% versus last year's strong second quarter, which was up 23%.
The FX neutral net sales declined four 7% year over year net.
Net sales in the Americas were down 3% year over year on a very strong prior year comp that was up 32%.
<unk> net sales were down 8% on a prior year comp that was up 12%.
On an FX neutral basis, EMEA was down 5% Asia was down 31% in Australia was up 4% year over year.
Given the challenging year over year comps, we were pleased with Q2's net sales results and the steady customer demand that we saw throughout the quarter.
Second quarter adjusted gross profit margin was 33, 9%.
It was stronger than our guide of 33%, but a decrease of 39 basis points from the prior year period due to lower fixed cost absorption, partially offset by higher pricing and favorable product mix.
For the first time in many quarters, we saw deflation in our raw material purchases and the overall rates, we pay for Q2 as raw material purchases decreased 2% year over year.
That compares to 9% year over year inflation that we incurred in Q1 as raw material purchases.
As we move into the second half of 2023, we expect further year over year raw material deflation.
Adjusted SG&A expenses were $83 9 million or 25, 5% of net sales in the second quarter.
Fair to $84 million or 23, 2% of net sales in the second quarter of last year.
The increase was primarily due to inflation.
Second quarter adjusted operating income was $27 9 million down 28% versus adjusted operating income of $38 5 million in the second quarter of last year.
The decrease was mostly due to lower net sales volume.
Second quarter adjusted EPS was <unk> 25.
Versus 36 in the second quarter last year.
Adjusted EBITDA was $39 $8 million this year versus $49 million in the second quarter last year.
We generated $18 $3 million of cash from operations in the second quarter and liquidity was strong at quarter end totaling $384 million, which consisted of 93 million of cash and $291 million of revolver capacity.
We repaid $25 9 million of debt in the quarter, resulting in net debt for total debt minus cash on hand of $382 6 million at the end of the second quarter.
The last 12 months of adjusted EBITDA totaled $153 million and our net leverage ratio was two five times calculated as net debt divided by adjusted EBITDA.
Our required principal and interest payments on all outstanding debt averaged approximately $10 million per quarter with a strong balance sheet and our strong cash generation. We plan to continue paying down debt is a top capital allocation priority.
Capital expenditures were $5 6 million in the second quarter of 2023 compared to $4 3 million in 2022.
We look at our outlook, we remain cautiously optimistic about the back half of the year.
We have calibrated our net sales guidance to accommodate our first half actuals and the ongoing slow post COVID-19 recovery in Asia, while increasing our gross profit outlook based on the improving supply chain environment.
With that we're now anticipating the following for.
For the third quarter of 2023, net sales of $320 million to $330 million.
Adjusted gross profit margin of approximately 35, 5%.
Adjusted SG&A expenses of approximately $84 million.
Adjusted interest and other expenses of approximately $10 million.
Adjusted effective tax rate of approximately 31%.
Fully diluted weighted average share count of approximately $58 2 million shares.
For the full fiscal year of 2023, we are also anticipating net sales of one point to 85 billion to $1 310 billion.
Adjusted gross profit margin of 34 to 34, 5%.
Adjusted SG&A expenses of approximately $336 million.
Adjusted interest and other expenses of approximately $37 million.
The adjusted effective tax rate of approximately 29%.
And capital expenditures of approximately $32 million.
As we move into the second half of the year, we remain focused on our growth strategy and our capital allocation priorities. We are encouraged by the steady demand, we're seeing from customers and an improving supply chain environment, which builds momentum to enhance value for our shareholders with that I will turn the call back to loral for concluding remarks.
Thank you Bruce as we look ahead, we expect a strong second half with continued market share gains and strong cash generation.
Continue to be impressed with our team's expertise and capabilities to execute our strategy as we position interface for growth and drive value for our shareholders.
We look forward to sharing our ongoing progress on our next call. Thank you.
Thank you if you have a question. Please press star one on your telephone keypad to withdraw your question simply press Star one again.
Your first question comes from the line of Kathryn Thompson.
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Thompson Research group your line is open.
Hey, good morning, everyone. This is actually Brian Biros on for Catherine. Thank you for taking my questions.
To start on the gross profit outlook for the full year I believe it was lowered last quarter and then looked at it was raised this quarter. So can you just touch further on kind of the moving pieces, there kind of remind us what initially brought it down.
What's changed to raise it back up again, thank you.
Hey, Brian Good morning. This is Bruce Hausmann, well I'm just delighted to tell you that we're finally seeing a more stable supply chain environment, and an improving supply chain environment. When we entered the year. There is still a lot of uncertainty around where inflation and where raw material supply was going to go as we entered in.
<unk> entered into 2023.
And then as we entered into Q2 there were.
It started to stabilize some more but you might remember that raw materials were up 9% year over year.
Last quarter, Alright, I'm, sorry in Q1, and then in Q2, we just continued to Steve we'll see more stabilization and for the first time in many many quarters now we're seeing deflation in our raw materials, where raw materials were down 2% year over year. So basically this is just sort of updating our guide and our visibility.
As things continue to improve as we move through the year.
So it sounds like its mostly the raw materials movement is the main driver alright.
Raw materials is a big is a big piece of it. We're also continuing to initiate and see effects of art.
Our productivity initiatives.
Now to be fair that is offset by some buy less fixed cost absorption. So there are some puts and takes in the number.
Got it and then maybe just can you also touch on if you're seeing any pricing pressure or kind of just increased competition across the business in this kind of lower growth environment here on the one hand, it's going to be.
Becoming increasingly competitive out there.
You also have premium products that might be seeing better trends than the lower end products that probably see a lot more price pressure. So just interested to hear what you guys are seeing out there.
Yes, Brian I'll take that as floral.
Say that we're pretty pleased that our pricing is holding up in the market. When we look at the U S market as an example.
We believe we gained share in the quarter. So we feel good about that as well as year to date and as you said our premium products continue to sell well and we're launching more and more new products not only at the premium end, but also a more approachable price points. So we continue to capture jobs across the spectrum, but we're seeing price hold up pretty well, it's competitive out there for sure we're not losing.
Job.
We're pleased with the progress that we're seeing right now.
Thanks, I'll pass it along.
Your next question comes from the line of David Macgregor with Longbow Research. Your line is open.
Yes, good morning, everyone.
And.
This quarter actually I mean, given where you guys thought you would be this quarter results actually.
Well so congratulations there.
Can you update us on one interface, just where are you on this further.
<unk> inflection points in terms of the visible results. He was programs that you should anticipate in the second half or does that maybe.
More than 2024.
No.
Do you think you're making maybe a little more progress than you thought you would where on the other hand, maybe.
Lagging a little bit behind that.
As much as much.
As you can I'm wondering if this would be a big help thank you.
Yeah, that's great. Thanks for the question David look I think we're making really good progress I'd say, we're tracking as planned I'm pleased as we announced that we now have our chief supply chain officer in place, who is going to help us a lot continue to enhance our gross margins.
I feel really good about that builds a great addition to the team he joined US on Monday. He spent his first day found in Lagrange with the team there and really digging in and so I think that will start to see having meaningful impact as he really works with the team to drive our productivity initiatives.
Cited about that we also I would say we're focused on more new products faster with more meaningful impact in the market across the globe.
So the things, we're tracking our speed to market and the impact of our new products.
So I think youre going to continue to see that I'd say, we're just getting started there, but I feel really good about the early progress in that front and then from a marketing perspective, our global marketing leadership team has been finalized and the team was actually in town. This week working through.
Both capabilities, where we're really building, we talked about our digital capabilities, which were strengthening and pushing that around the world. While at the same time being really efficient. So we have more impact with more efficiency from our marketing initiatives. So I think we'll see really sequential improvement as we continue to balance.
Investing for growth in our strongest most profitable markets number one being the U S and we're continuing to invest there on the selling side, while we really drive for efficiencies on the backend.
And with respect to the question of the visibility to you Rowan.
Cadence of that visibility how should we be thinking about this I mean, I realize you provide guidance for the balance of the year here, but just.
Just thinking about this.
Maybe on a slightly longer term.
Profile.
When do we really see the inflection.
I think youll see.
I would I would call it sequential improvement both in gross margin progress up and SG&A leverage down. So we will see improvement as we continue to move forward I don't expect to see a big.
A big Bang inflection again, we're being really thoughtful as we monitor our investments and pushed some on the selling side up in the U S. While at the same time we.
Do we really moderate the backend of the business.
It'll be it'll you'd think about it is sequential progress and improvement while we're driving growth so continuing to drive growth on the top line, while we improve the margins both.
Gross profit up in SG&A down.
Okay, great. Thanks for that and good luck with things here.
Within the.
The order backlog right now the order book can you just talk about what Youre seeing near term since just shifting patterns within the U S orders.
Are you seeing growth in the low carbon I would expect versus maybe some negative movement to elsewhere in the product mix. If you could just talk about what youre seeing there.
Yeah, maybe I'll, maybe I'll step back and talk a little bit about.
Our billings year to date and in the quarter because theres. Some really good news in there that I can unpack a little bit and then we can shift to orders.
So.
If I look at our corporate office, right, which is obviously a big piece of our business and we look year to date about market were actually up in the Americas were up in Australia were flat in Europe and were down in Asia. So we comment on Asia being continue to being challenged which as <unk> heard on.
The economic softness in China continues.
So that's one thing I would say corporate office is pretty encouraging we're not naive to the macro environments, we're staying close to it and we're cautious about that in the back half, but year to date, we feel pretty good it's holding up well.
And then if we look at.
Gives me carpet tiles.
Our carpet tiles in the quarter, our billings were down mid single digits globally low single digits in the Americas, but year to date, our billings in carpet tile in the Americas are roughly flat in dollars. So again, we were pleased some of our largest end user segments in corporate office as well as incorporate area and a carpet tile.
Is that the categories are holding up pretty well for us.
And then when we look at orders going forward orders in the Americas last year were up 17%. So we had a tough comp in orders.
We've got steady demand in the Americas, and its about where we expected it to be.
If I look at Asia. That's one market, we have continued to struggle with but a little color on the orders a year of our first quarter. Our orders we shared we're down about 50% year over year and this quarter. They are down about eight 5%. So we're seeing the order rates still tough, but better certainly than the trend was previously.
Just taking longer for us to convert those orders to billings as we're continuing to see project delays in the market. So that's an area that we continue to see some delays and we've.
We're being cautious in the back half there.
Okay.
Yes, good progress last question from me Bruce.
You talked about raw materials up 9% in the first quarter then down.
In the second quarter is there any way you can help us with the modeling.
Second half why we should be thinking about the cadence into <unk>.
Yes, Raimo raw materials, specifically, David is that what youre asking about.
Yes, yes.
The way that we're thinking about it obviously, there's a lot of moving pieces, we think.
Raw materials will be down mid single digits in Q3 year on year.
And similar kinds of similar kind of zone in Q4.
So we think that that will help us in the back half and obviously that helps us as we move into 2024.
Okay. Thanks, everyone.
Thanks, David.
Your next question comes from the line of Keith Hughes of Truest. Your line is open.
Thank you how much were units down in the second quarter.
So Keith.
<unk> were down roughly 10% to the second quarter year over year and of course, our pricing was up roughly 5% and Thats what got us to the what you see in the P&L of a negative 5% growth.
Right. So your guidance for the second half implies revenue growth low single digit revenue growth for the half.
What kind of unit what.
What do you expect in units.
In that number.
Yes, we are anticipating mid single digits being down from a volume perspective in the back half and then pricing will be up and then that leaves us. If you look at sort of the midpoint of our guide is I'll leave us roughly flattish in the back half.
Right.
And I guess my question as we look by geography.
Who has been the leaders in that number who have been the laggards.
Specifically unit.
Around price volume, yes, Americas, it's been actually.
Has been stronger around units for example, if you look at Americas volume was down 7% only.
Versus in the rest of the world. It was down roughly 15%. So we're seeing the volume decline has been more.
It has been more prominent outside the U S. While Americas has been stronger.
Okay.
I assume youre going to start lapping some price increases from last year, Let me ask it this way when do you think you'll lap youre less move in price in response to the raw material inflation.
So it kind of its feathers in is the answer because we did pricing throughout the year last year and so we are getting the wraparound effect of that for sure in the first half of this year and we will get some of that in the back half.
But.
Keith.
As we look at all of our various markets.
Or are there, where we need to continue taking price. We will continue taking price and there are there will there will be opportunities to do some of that in certain markets in the back half.
Okay.
Okay, great. Thank you very much.
Thanks Keith.
There are no further questions at this time I will turn the call to Laurel Hurd.
Great. Thank you and thanks for the questions and your engagement. This morning before we ended the call I wanted to thank the entire interface team for their continued dedication and effort and I also want to congratulate the team for being recognized as one of times 100, most influential companies for our carbon neutral carbon negative carpet tiles. It's another example of the strength of our <unk>.
The inability leadership driving differentiation in the market.
That was exciting news and with that I just want to thank you all for listening and have a great day.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.
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