Q3 2023 Interface Inc Earnings Call
I would now like to welcome Christine needles corporate communications to begin the call.
Dean over to you.
Good morning, and welcome to interfaces conference call regarding third quarter 'twenty twenty-three results posted 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.
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 their use 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 I want to start by thanking the interface team for their hard work in a dynamic environment.
Our results in the quarter reflects the resiliency of our global diversification strategy and effective execution in a relatively sluggish market.
Despite lower volumes in the quarter, we expanded our operating margin and delivered strong cash generation.
There were two primary factors that impacted our revenue growth in the third quarter, but we also expect to continue in the fourth quarter.
First the retail sector.
Had an outsized impact on our third quarter sales.
A good portion of our year over year decline, we don't often talk about the retail segment as it is about 4% of our year to date annual sale.
However, this sector has been pressured as you know and we have seen significant unplanned deferrals of store remodel projects due to the macroeconomic uncertainty these retailers are facing.
They're being cautious in their capital budgets pushing out projects and in some cases clothing location and we're feeling the impact of that.
Second while we have seen broad based resilience in a dynamic market, including several bright spots in their order rates have held up fairly well, we have started to see industry wide sluggishness begin to develop across our commercial market.
Turning to our segments in more detail. We saw notable strength in health care with billings up 13% in the quarter globally and up 21% in the Americas.
As the healthcare industry continues to evolve architects and designers are recognizing our right to win in this growing segment.
I recently spent time in the Midwest and visited three major health care system.
Theyre, making impressive investments to build new facilities as well as renovate their existing facilities.
Health care spaces are typically thought of as primarily sterile clean environments, which is incredibly important especially in the operating theatres.
Our customers are now also increasingly focused on creating environments to prioritize patient and caregiver wellbeing and serenity.
But these health care systems expand across the country and in some cases around the globe. Other spaces are designed become a representation of their brands.
Design matters more and more in this segment. In addition to performance and our brands have Nora rubber and interface flooring and the integrated system that we offer is truly resonating.
We also continue to see strong activity in education, both from K through 12 and higher education.
On a year to date basis education is up across most of our major markets and up 5% for the total company.
I also met with two of our important higher end customer as well in the Midwest sustainability matters to the customers.
Often we'll meet not only with the head of facilities or head of design, but also their head of sustainability.
Universities have made carbon commitment and they're drawn to interface because we have the lowest embodied carbon in the industry.
And their student care and hold them accountable to deliver on their commitments.
Often interfaces used as a case study and their university curriculum for our advancements in sustainability.
They use our products and the floors.
It also struck me how dynamic these higher ed customers, neither across classroom dorms and student Union, where they expect our <unk> and carpet.
So their lab and health centers, where Nora rubber it's a solution.
Again, it's our integrated system of flooring solutions that our customers truly appreciate it.
Corporate office remains relatively steady.
We see continued renovation with more and more companies modifying their spaces, because they bring people back to the office.
Americas Corporate office billings are up three 5% year to date, Australia is up two 4% with Europe fairly close to last year levels and continued softness in Asia.
Moving to orders well this was stable in the third quarter with consolidated currency neutral net orders roughly flat year over year.
Currency neutral orders in the Americas were down four 2% driven by softness in the retail sector. While E. AAA was up four 5%.
Long order growth and EMEA more than offset softness in Asia, and our backlog remains solid declining slightly in the third quarter, but up 8% since the beginning of the year.
Despite lower volumes in the quarter adjusted gross profit margin increased 217 basis points year over year, our team did an excellent job maintaining price and driving favorable mix.
Enabling us to capture the benefit of raw material price relief, despite lower fixed cost absorption.
We remain focused on SG&A control investing in customer facing activity design and innovation to drive long term growth coming out of this more challenging cycle, while driving efficiencies in all other areas of our business.
We also effectively managed our working capital and use our strong cash flow to reduce debt ahead of our expectations our balance sheet is in great shape.
Before I turn the call over to Bruce to go through the financial results.
Want to take a moment to talk about one interface and the progress we're making.
On October 10, we launched our past forward carpet tile collection, which is the first time, we launched a global collection at the same time around the world.
Forward draws on decades of iconic designs. It brings a vintage steel and retro charm to modern design thinking and celebrates our 50th anniversary with.
It's also a great example of the power of one interface and demonstrate our operational I think our new strategy across our global business.
I am confident we will continue to harness our talent across the globe to bring new products and designs to market faster and amplify our brand messaging consistently.
Overall, we continue to navigate the challenges in this dynamic market, we feel good about the way our brand and products continue to resonate with customers. We've come a long way as an organization over the last 50 years. As we look ahead, we will continue to honor our guiding principles by pushing the limits on design innovation and sustainability are leveraging the power of our global.
Should we.
We believe we are uniquely positioned to capitalize on growth opportunities as they arise and if market conditions improve which will help deliver profitable growth and return value to our shareholders.
With that I will turn it over to Bruce to go through the financials Bruce.
Thank you Laurel and good morning, everyone.
Third quarter net sales totaled $311 million, a decrease of five 1% versus last year's third quarter.
FX neutral net sales declined six 6% year over year compared to double digit growth in the same period last year.
That's a neutral net sales in the Americas were down eight 2% year over year compared to last year's double digit growth in the third quarter.
FX neutral net sales of <unk> were down four 3% and overall strength in health care was offset by softness in the retail sector driven by project deferrals as well general macro economic conditions.
Third quarter adjusted gross profit margin was 35, 9% an increase of 217 basis points from prior year's third quarter.
Primarily due to raw material cost deflation as well as higher pricing and favorable product mix.
Actually offset by lower fixed cost absorption.
As we move into Q4 of 2023, we anticipate continued year over year raw material deflation.
Adjusted SG&A expenses were $79 2 million flat compared to third quarter last year and a successful outcome given all the inflation, we've had to offset in SG&A through strong cost controls.
Third quarter adjusted operating income was $32 4 million up three 6% compared to adjusted operating income of $31 2 million in the third quarter last year.
The increase was due to higher gross profit margins in the quarter.
Third quarter adjusted EPS was <unk> 28 versus 30 in the third quarter last year.
Adjusted EBITDA was $43 7 million versus $42 9 million in the third quarter last year.
We generated $66 3 million of cash from operating activities in the third quarter liquidity was strong at the end of the quarter totalling $412 1 million, which consisted of $119 6 million of cash and $292 5 million of revolver capacity.
We repaid $36 million of debt in the quarter, resulting in net debt for total debt minus cash on hand of $324 8 million at the end of the third quarter.
The last 12 months of adjusted EBITDA totaled $151 1 million and our net leverage ratio dropped to two one times calculated as net debt divided by adjusted EBITDA.
We are very pleased with our focused efforts to pay down debt and continued strengthening of the balance sheet.
Capital expenditures were $5 9 million in the third quarter of 2023 compared to $4 2 million in 2022.
Moving to our outlook, we are focused on winning business, taking share paying down debt and disciplined cost management.
For the full year of 2023, we are anticipating the following.
Net sales of 124 5 billion to $1 $2 65 billion.
Adjusted gross profit margin of approximately 34, 4%.
Adjusted SG&A expenses of approximately $329 million.
Adjusted interest and other expenses of approximately $35 million.
The adjusted effective tax rate of approximately 29, 5%.
Fully diluted weighted average share count of approximately $58 3 million shares and capital expenditures of approximately $32 million.
Now I will turn the call back to Laura for concluding remarks.
Thank you Bruce our team executed well this quarter and our solid results are exemplary of our constant drive to volatile market conditions and uncertainty.
I am proud of our accomplishments so far and we remain focused on the execution of our disciplined strategies as we close out the year.
Thank you.
With that I'll open it up for questions operator.
And at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile any questions.
Again, if you'd like to ask a question. Please press star one on your telephone keypad now.
Our first question comes from the line of Kathryn Thompson with TRT. Please go ahead.
Hey, Good morning. This is actually Brian Biros on for Catherine. Thank you for taking my questions.
Maybe Brian can you just talk more broadly about the setup here into 2024.
I'm going to answer you.
Down a little bit he AAA segment, maybe reflecting up a little bit based on orders here, but Americas, maybe gone backwards a little bit.
So volumes mix Ross with better training better, yes, the internal initiatives going on that seem to be.
Adding some benefits there. So is there any thoughts on the 2020 for outlook and set up here would be helpful.
Yes, Thanks, Brian.
And as you know we will provide guidance on 24. When we report Q4 earnings then we're really watching everything as you are I would say that's our core markets are holding up really well I'm really pleased with our corporate performance globally year to date were down just over a point corporately and with all the headlines are reading about office, we're really holding up.
Well in that market health care and education continued to do well the retail segment.
Was oh.
A change for us this quarter and I'll talk just a minute about that in our revenue in the quarter was down 5%, we were down 4% from retail.
And so.
So that's something that we're watching as we continue to watch the dynamic market.
Got it helpful and then maybe it's an anomaly.
Can you just give us an update on your strategy there I know you've been sourcing.
Out of South Korea historically.
Some competitors are making adjustments to LPG production setups.
Taylor's youre seeing various trends and pricing pressure on the low end as customers trade down I'm, just kind of more <unk>.
Higher end product overall.
In the current environment here, how youre thinking about your LPG strategy it'd be interesting to hear.
Yes, that's it's a great question and.
Obviously, we do source or <unk>, and we've got a great partner and.
Our business has held up really well in L. V. T. We were up double digits for the quarter and <unk> continuing to see.
Growth, we're expecting that that.
Very effectively with our carpet so we're not seeing any slowdown there and we're pleased with the progress that we've that we've got in obesity.
Okay. Thank you pass it along.
Thanks, Brian.
Yeah.
Our next question comes from the line of David Macgregor with Longbow Research. Please go ahead.
Yes, good morning, everyone.
I wanted to just start off by.
Asking you about the global launch and just what are the lessons that you've learned from that.
And then I would like you to maybe talk a little bit if you could about how that impacted operating expense and the overall margin performance in the quarter and how we should think about that because as we head into 2024, I'm guessing you've got more global launches coming.
Just from a modeling standpoint, how we should be approaching that.
Yeah, Great question.
So path forward I would say that it was an unbelievable.
It's an unbelievable launch I don't know if you've seen some of the marketing and the brand initiatives, but it's really.
It's really been a successful launch in the market to do that in the same day around the world that wasn't in our plans at the beginning of the year the team pulled that off in a six month window.
I'm really impressed I think what it taught me is the speed and the agility that we can work as one team.
And when we're all aligned together, we can really bring great. Thanks to life.
I think youll see more of that for sure going forward I'm very excited about the progress that we're making in one interface and how that's going to enable us to bring really strong brand messages to life to strengthen our brand around the world and honor.
Honestly, the new designs that were working on that you'll see over the next couple of quarters will be if some of the best work Ive seen.
I'm really excited and as you said.
Driving efficiencies that way because we're launching all together around the world.
We're seeing some good margin progress and being really efficient with our spend so I am pleased so far.
So beneficial to operating expense leverage.
Yes.
Okay.
Yes.
Also I'm.
I'm sorry go ahead.
No go ahead.
No. Okay. I also wanted to ask you about your comment to the commercial markets were turning more sluggish.
In general.
I think thats, probably the general sense amongst most people, but could you elaborate a little further injures maybe offer up some specifics in terms of what youre seeing in terms of forward visibility in terms of the order flow.
In terms of competitive behavior.
If you could elaborate a little further a little more granularity would be helpful.
Yeah of course.
And again I feel I feel like a sluggish is the right word we're seeing a lot of our markets are holding up well, but we're really watching some of the project delays and things pushing out a bit and watching order rates.
Primarily a corporate office, but again, it's it's I would say sluggish not not a dramatic trend changed the big trend change for US is the retail segment.
And then Bruce will elaborate on that at all sure I mean, David I would just say that we're really putting the pedal down on our diversification strategy. So while office is hanging in there stronger than I think any of us had anticipated quite frankly.
We're putting the pedal down on education health care, which is doing extremely well.
What hurt us the most this quarter as Laurel mentioned was the retail sector, which to be fair is only 4% of our revenue, but it did have an outsized impact on Q3's results.
And we're just watching the macro indicators as you said, we're seeing some of the headlines I think were being cautious looking into Q4 to make sure we're not naive to the market conditions.
I mean, one of the things that striking as youre talking to retail or <unk>.
He is down five in Ford's out which related to retail, but it's only 4% of your total.
Mix.
Lynn.
Yes, it really got off the year I guess my question would be more with respect to 2024.
What's the opportunity to accelerate progress on health care and education, maybe no any forward visibility you have into that as an offset to further.
The challenges in retail and office.
Yeah.
First I'd say on retail I will say that.
It was substantially one customer in the U S. So.
And it's a bit more widespread and we've seen some softness in Europe as well, but you know as retailers have had challenges they've postponed a lot of their planned remodeling efforts. The good news is those floors do get worn and the stores will get remodeled.
So we do think that that will come back we've won the business. We feel good about that it's a matter of when that will hit so I just wanted to hit.
That's a really good point that oracle's, making we haven't lost that business, we haven't lost that customer or is it really just a deferral in year, we think that that business will come back because those stores will need to be refurbished.
And then we continue to see strength.
Excuse me and Andy.
Health care and education and again as the examples in the prepared remarks, we really are selling systems are nor our business is doing incredibly well and we continue to focus more and more on the health care segment with nor with our newer brands and we're adding feet on the street in the U S to continue to accelerate that growth and push our diversification strategy.
We're also finding that product doing well in.
Data centers and labs, which are also growing as well as airports. So we're focusing to continue to push our diversification beyond just health care and education.
And David I would just add there is just so much pent up spend still coming around education.
There is still a lot of federal money that has has been approved but has not been the shovels haven't been to the ground yet so a lot of that spend is still to come.
And we are incredibly well positioned to get that business, particularly with our sustainability.
Story, and our differentiation around sustainability with our products.
Got it thanks, very much I'll pass it along good luck.
Thanks.
Our final question comes from the line of Keith Hughes with Suntrust. Please go ahead.
Thank you.
What was what did units during the quarter and what's the expectation for this fourth quarter guidance, what are you sort of a year over year.
Yeah, So Keith for the corridor in Q3 units were down around 12%.
So if you think about growth units versus price units down around 12 price up around 6% that gets you to roughly what you see on the P&L.
I think we don't know for sure.
I think it'll be a similar mix in Q4, but to be fair, we don't know for sure.
Yes sure.
<unk>.
Implied pricing there.
I know you've been.
And raise price.
Last year is that going to start to abate in future quarters or are you still able to close them.
Yes Sterling.
Good.
Yes.
Keith I'd say I'd say this I felt good that we were able to hold price in the quarter, we're still continuing to see that in Q4 and the other thing. We've done is we've got some focused initiatives on new products that are actually priced more aggressively so rather than taking price down on our more premium products.
We're actually able to hold our margins, but offer more aggressively priced products. So we've got a great example of that in our carpet tile with our open Air collection, and we've launched that in rubber as well with <unk>. So we can continue to hit the project budgets that are needed, but not take price down at our most premium level.
Yes, I wouldn't want to talk about with your price down I mean, just anniversarying increases just some of the increase or just sort of say the math I should say in a way that's going to occur.
Hey, guys.
In the first half, we don't think that that will be an issue.
The back half remains steep.
It remains to be seen.
To see what the market conditions are as you know we have been really good at getting price and holding price.
We are so pleased with how well we've held price in this market and then it gets back to our differentiation and who we are as a company and people buy our products for certain reasons around design sustainability. So.
Okay.
Just switching to noise. That's a positive thing can you tell us.
No actually the quarter and what is it year to date.
Yes.
In the quarter and year to date.
It's incredibly it's incredible to us how strong and resilient the nor product is in the <unk> brand is particularly in healthcare and in some markets and education. Nora also does very very well.
Big infrastructure projects around transportation and airports and it's just a highly differentiated product that has very special applications.
And the product line is doing great for us.
That was good nor is running about a quarter of the company sales.
That's rough rough numbers rounding that's pretty close yes.
Okay alright, thank you.
Thank you Keith.
Yes.
I would now like to turn the call over to Larry <unk> for closing remarks.
Great. Thank you I just wanted to take a minute to thank the entire interface team for their continued great work this quarter and your ongoing.
Really great efforts to drive our our strategy and thanks, everyone for listening to the call today.
I would like to thank our speakers for today's presentation and thank you all for joining US. This now concludes today's call you may now disconnect.
Okay.
Okay.
Okay.
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