Q3 2025 Interface Inc Earnings Call

Speaker #1: Thank you for standing by, and welcome to the INTERFACE third quarter, 2025 earnings conference call. All lines have been placed on mute to prevent any background noise.

Speaker #1: After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad.

Speaker #1: If you would like to withdraw your question, again, press the star one. Thank you. I'd now like to turn the call over to Christine Needles, Global Communications.

Speaker #1: You may begin.

Speaker #2: Good morning, and welcome to INTERFACE's conference call regarding third quarter 2025 results. Hosted by Laurel Hurd, CEO, and Bruce Hausmann, CFO. During today's conference call, any management comments regarding INTERFACE's business, which are not historical information, are forward-looking statements within the meaning of federal securities laws.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: Including risks and uncertainties described in our most recent annual report on Form 10-K, filed with the SEC, as supplemented in our first quarter 10-Q.

Speaker #2: 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.

Speaker #2: Lastly, this call is being recorded and broadcasted for INTERFACE. It contains copyrighted material and may not be rerecorded or rebroadcast without INTERFACE's express permission.

Speaker #2: 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.

Speaker #2: Now, I will turn the call over to Laurel Hurd, CEO.

Speaker #3: Thank you, Christine, and good morning, everyone. INTERFACE delivered another strong quarter, exceeding our expectations, with currency-neutral net sales growth of 4% and significant profitability gains.

Speaker #3: We saw continued strength in the Americas and increased momentum in EEEA. With broad-based growth across all regions, all product categories, and the majority of our market segments.

Speaker #3: We are pleased with the quality of our earnings. Net sales increased through a balanced mix of price and volume, and adjusted gross profit margin expanded by 208 basis points, driven by favorable mix and manufacturing efficiencies.

Speaker #3: This consistent execution, underscores the power of our diversified portfolio, the strength of our brand, and ongoing share gains in key markets. I'm proud of the INTERFACE team and their unwavering commitment to serving our customers.

Speaker #3: Our one INTERFACE strategy is driving these results. As we've discussed before, this multi-year plan is focused on building strong global functions to support our world-class local selling team, accelerating growth through enhanced commercial productivity, expanding margins through global supply chain management and simplifying operations, and leading in design, performance, and sustainability.

Speaker #3: Since launching our one INTERFACE sales team structure in the US in January 2024, we've been delivering a single cohesive customer experience across carpet tile, LVT, and NORA rubber.

Speaker #3: This unified approach has exceeded our expectations and continues to drive consistent quarterly growth. Driven by our combined selling team, NORA rubber grew 20% in the third quarter and is up 19% year to date.

Speaker #3: To build on this momentum, we will accelerate investments in automation, productivity, and innovation to further strengthen the NORA product portfolio and drive long-term growth.

Speaker #3: We're preparing for the launch of a new rubber flooring innovation in early 2026 that we believe will accelerate growth in the healthcare segment, among others.

Speaker #3: We look forward to sharing more about this on our next call. Additionally, our investments in carpet tile automation and robotics are delivering meaningful productivity gains and margin improvements.

Speaker #3: These investments are exceeding expectations, improving efficiency, reducing waste, and enhancing service levels. We are now extending these robotic systems to our facilities in Europe and Australia, and we continue to explore and identify new opportunities for automation across the company.

Speaker #3: From a product standpoint, we continue to expand our addressable market, delivering high design at compelling price points to create new opportunities for growth. During the quarter, we introduced our Stellar Horizons carpet tile collection, which spans a range of price points and supports segment versatility.

Speaker #3: The collection offers exceptional durability, acoustics, and cleanability, while balancing design and functional performance. We also introduced three new resilient products that expand color, design, and aesthetic options across the category.

Speaker #3: This includes two new LVT styles, In The Mix and Raw Materials. And a refresh of our NORA Mint XP rubber offering. These new and updated styles give customers more ways to specify INTERFACE products across a range of spaces and budgets.

Speaker #3: We continue to differentiate our portfolio through exceptional design, superior performance, and an unwavering commitment to sustainability. Now, let's turn to our third-quarter results.

Each AAA was up 3.5% driven by strength in AA and Australia.

We ended the third quarter with our backlog of 17% year to date reflecting solid, underlying demand.

Our strong results, this quarter reflect how well our teams are delivering for our customers.

That's evident in the recognition we received from the design community.

Interface earned multiple number 1 rankings in the floor, Focus half, 250 design survey where designers named us and industry leader in service quality design and performance.

On the sustainability front, we were named Manufacturer of the Year in Ed's Net Zero Awards.

And recognized by Metropolis in their Planet Positive Awards for our all-in strategy.

These awards acknowledge the bold steps we are taking to be carbon negative by 2040, without an office, and they are a testament to the hard work and dedication of our entire team.

Looking ahead, we remain confident in our strategy and disciplined execution. Continued investments in innovation, automation, and commercial excellence are strengthening our foundation for sustainable growth.

With The Talented Global team, a powerful brand and a proven strategy interface is well positioned to deliver differentiated design, strong financial performance, and long-term value for our shareholders with that. I'll turn it over to Bruce.

Well, thank you, Laurel. And good morning, everyone.

Third quarter. Net sales were 364.5 million of 5.9% as reported and 4.2% on the currency neutral basis versus the third quarter of 2024. Both ahead of our expectations,

Third quarter currency neutral net sales were up 4.1% in the Americas and 4.3% in each AAA year.

Adjusted gross profit margin was 39.5%, an increase of 208 basis points versus the third quarter of 2024, driven by favorable pricing and product mix combined with manufacturing efficiencies, partially offset by higher raw material and tariff-related costs.

Adjusted sdna. Expenses were 90 million in the third quarter, compared to 85.5 million in the third quarter of 2024, primarily due to higher sales, commissions and very little compensation on increased sales and profits inflation and foreign currency exchange variances.

Adjusted operating income was 54.1 Million up, 24.5% year-over-year.

With 66.2 million versus 53.7 million. In the third quarter of 2024,

Third quarter adjusted earnings per share was 61 cents, a 27% increase versus 48 cents in the third quarter of 2024.

We generated $76.7 million of operating cash flow during the third quarter and ended the period with $482 million of liquidity.

Net debt is defined as total debt minus cash on hand, which was $120.4 million. Our net leverage ratio was 0.6 times, calculated as net debt divided by the last 12 months of adjusted EBITDA.

As part of our balanced Capital allocation strategy. We repurchased 0.7 million of interphase common stock during the quarter.

Overall our strong balance sheet provides flexibility and optionality in today's Dynamic environment and the ability to continue investing in the business for growth and margin expansion.

Turning to tariffs, you may recall. Our exposure is limited and primarily tied to Imports of Nora rubber from Germany and lvt from South Korea into the US.

We continue to offset tariff related costs through pricing and productivity initiatives.

When tariff costs are successfully offset on a dollar-to-dollar basis, we are able to protect our gross profit dollars; however, there is a dilutive impact to our gross profit percentage.

In Sum we are successfully managing care related costs and our plan is to continue doing so

With that backdrop in mind, and on the strength of our year-to-date results, we are raising our full-year guidance.

For the full fiscal year of 2025. We now anticipate net sales of 1.375 to 1.390 billion.

Adjusted gross profit margin of 38.5% of net sales.

Adjusted sgna expenses of 362 million.

Adjusted interest in other expenses of $25 million.

Adjusted effective income tax rate of 26%.

Capital expenditures of $45 million and fully diluted weighted average share count of 59.1 million. Shares to note, all figures are approximate.

With that, I'll turn the call back to Laurel.

Thank you, Bruce. The interface delivered another strong quarter with growth in all product categories, growth in all regions, and growth in the majority of our market segments, while driving meaningful profit growth and margin expansion.

We are encouraged by the quality of these earnings and the strong execution in a challenging and uncertain macro environment.

I want to thank the entire Interface team for their relentless focus on winning business and serving our customers with that. We will open up the call for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 in your telephone keypad to withdraw your question. Simply press star 1. Again your first question today comes from the line of Brian bureaus from TRG. Your line is open.

Hey, good morning everyone. Thank you for taking my questions today.

Brian sales were above the guidance range. Uh second Corner Road sales slightly above the guidance, right? So clearly something's working over there. Uh last quarter you decided strong momentum and education outperformed a tough comp. It sounds like this quarter maybe it's Healthcare that's the out performer. Uh so this is here with the surprise was that drove the sales outperformance relative to your expectations 3 months ago

Yeah, thanks, Brian. Um, and it is healthcare. We noted healthcare was up 29% for the quarter, which is, um, above our expectations. We've been really focused.

On the healthcare segment. It's, you know, our top 3, Priority segments are really corporate office, education and Healthcare. Um, but we've been working to expand our product portfolio in healthcare.

It's the one team that continued to exceed our expectations, and we grew in healthcare, um, outside the U.S. as well. So really, really strong quarter that exceeded our expectations.

And Brian I would just also add our what interface selling teams are just executing so strongly you know we just continue to upscale the organization and we continue to see in our selling organization and our customer services organization, a Relentless focus on, uh, winning for the customer and making sure we serve the customer and importantly making sure we win business and take care.

Uh, it's definitely working for you guys on the...

On the Nora and the rubber. Um, I guess further investments, you mentioned in the prepared remarks. Um, I know you're going to provide some more color, I guess, next call. But anywhere.

Commentary, you can add on the, the Investments, you might make their if that's the cross expanding capacity. Um, or just more Automation in the, the north facility would be interesting to hear.

Yeah, we've been making Investments, um, all along in Nora and we will continue to amplify that as our sales growth continues to exceed expectations. So we're doing a few things 1. We're investing in making sure we can support the capacity.

Secondly, we are investing in additional productivity initiatives to increase our throughput. Um, and also to um, to really help Drive um, Drive efficiencies, and then we're also investing in Innovation. So that's what we'll share more about, um, on our next call. But we're excited about continued opportunities. To grow the north business,

Brian, I would just add, if we think about capex in 2026, it may be slightly up, potentially around $10 million compared to 2025 levels, as we invest in these productivity initiatives in innovation and initiative. Again, it's all about growth, it's all about innovation, and all about projects that generate margin expansion.

Uh, last special for me on margins, Uh, current guide for the year. Looks like it's 38 and a half, uh, a nice. It's been a nice Step Up throughout the year to get there. Um,

You might have signed into the past that you want to get to that kind of balance between price, volume, and cash generation. Um, so if you're going to be at that level this year,

How do we think about margins from here, with all the positive things you still have between mixed efficiencies?

Do we see further margin expansions from here? Or do you kind of keep it at this level to accelerate volumes even more? So, I'm just curious how you're thinking about margins at this level and going forward.

Brian. Thank you for noticing um as we've mentioned previously, you know, our our ambition is to get to 38 and a half percent and we we got a good shot at hitting that number this year. Um, to be fair, we have to deliver a strong Q4 uh which we intend to do, but as it is a, it's a challenging Dynamic environment. And, um, it's a balancing act between taking care, um, wanting for the winning for our customers and also, um, making sure that we can, um, that we can hit, we can hit that nice sweet spot between taking care and growing the business.

Thank you.

Your next question comes from a line of Alex Paris from bington research. Your line is open.

Hi guys, thanks for taking my call. I just wanted to say congratulations on the beat and Rays.

Thanks Alex.

Um,

I have a few questions. I'll start with uh... uh...

A question about the shape of your Q3 outperformance. Uh, in terms of momentum, you know, how did it I think on the last call you, you said, uh, July, uh, was strong from an order standpoint in broad base. Uh,

How about August and September and then maybe to get a similar comment about the fourth quarter. How did October go?

So the quarter played out pretty consistently, and October, I would say, continues in that same event. The Americas especially continue to look good.

And outside the US is a little bit. Um you know those macros are more challenging certainly in Europe so we're watching that order momentum as well but we feel really good about where our guidance is for Q4. Yeah I agree and I'll start demand is solid.

Our backlog is strong, and we just need to continue executing strongly.

Great. Um, thanks for that color. Um, and then, you know, the market segments discussion: Healthcare up 29% in global buildings, corporate office up 5%—great performance. I understand you said education declined slightly.

um,

Can we put some numbers on that? And I mean, it was a down.

3%, or was it down 8%?

Ah,

sound less than 3.

You know, every things coming in 1 piece phases, uh, it's up, uh, High single digits for the year. So we've got a great education business, we've got great product, we got great momentum, so it's just, it's your timing in the quarter and not a big quarter for Education as well. Q2 is really education season for us. So,

It's not something we're concerned about.

Okay, great. Um, and then on the, uh, gross margin expansion. Um, you kind of listed the things that influence that. It was similar to last quarter: favorable price and volume, as well as manufacturing efficiencies. Um,

I think you said last last quarter that uh, uh,

80% of the game was manufacturing. Uh, uh, efficiencies is it sort of a similar thing going on this quarter?

About half and half. Um, so our manufacturing efficiencies have been working very, very well, and that drove about half of the margin expansion. The rest was a combination of price and mix.

Right. Um, and then you had a very unusual tax rate in the quarter 4.8%, how about a little color and then your guidance for the full year. I know it's on an adjusted basis is unchanged at 26%. So, uh, uh, what what, what, what what, what special items were in the Q3?

To 2032 and of course as you can as, you know, Alex that required us to go back and remeasure our deferred tax assets and liabilities and um it resulted in a uh non-cash pickup on our interests, uh expense line of 10.4 million. Um and again this is just an accounting requirements. Due to the

Change in legislation in Germany to re-measure those assets liabilities.

Okay, that makes sense. Uh, uh, but again, you, you you give guidance to 26% on an adjusted tax basis. So, you're, you're adding, uh, you're adding a 10.4 million bet to the tax expense on the 9-month basis to get to that. Because otherwise, it's, it's like 18% or for the full year.

Yeah, 2 different numbers. There's a gap number and then there's the adjusted number. So the 26% is our adjusted effective income tax rate that excludes that, uh, pickup related to the German tax legislation.

Great. Does that make sense? Um yeah, makes perfect sense.

and then, uh,

Lastly, I noticed these are, uh, cats and dogs. But, uh, the amortization of intangibles fell; it must be running off. How should we think about that going forward? I think it was $1.4 million last quarter, and this quarter it was about $0.5 million.

And I appreciate your attention to detail. Uh, actually, so now we're all done with that amortization. It's now, um, you'll no longer see it on P&L.

Okay, the drop, so they run a course.

Gotcha. So, uh,

That is a typical add back to gross income to get to adjusted gross income. So there won't be any add back in Q4 and going forward.

That's right. But of course there was always a wash because there was the expense in that income, and so we won't see the expense in that income, and hence we won't see the add back. So,

Okay, perfect. Thanks that answers all my questions. And again, congrats guys.

Thanks.

so, our next question,

David McGregor from

your line is open.

Yes, good morning, everyone. Congratulations on the results. Uh, just got a great trajectory going here.

Um, thanks, David. I wanted to, yeah, I guess I wanted to add a few questions here on a few different things. But um, let me go back to the gross margins and 38.5%. I guess if you adjust for tariffs, it's even 30 basis points better than that. Um,

When we talk about kind of The Upside from this level, um, is that upside at this point driven by just volume leverage and just um, you know, just growing your units as you go forward. Uh, is it, is there more sort of a mixed benefit that, um, maybe you know, emphasizing Healthcare and Nora that drives that I'm just, just trying to get a sense of as opposed to just asking you what the upside is, just try to get a sense of, you know what? The drivers are to further upside from here.

Yeah, thanks, David. And, um, as Bruce mentioned.

We had stayed at 38 and a half as our ambition to get there. I'd say we got there earlier than we expected to be honest. And that's because of really 3 things. 1 is mixed

So both country mix the US doing really well as well as um, as you mentioned, the Norah rubber sales growth in the US.

Um, our productivity initials are paying off. Um,

Better than we anticipated the Investments that we're making and then there's volume leverage as well. So, you know, as we look forward, I think we've got more room to go on productivity. We'll continue to drive, mix and volume Leverage.

And at the same time as Brie said, we really need to look at how we drive share growth and make sure that, you know, it's a competitive market out there. We don't want to overlook the sweet spot that we'll need to navigate.

So if I could just sort of pick up on a couple of these things here, uh, I don't know. Operator is there any other questions behind me in the queue?

No, there are not.

Okay. Thank you. Um, I I have a cute a few here for you, if you don't mind. Uh I guess when you uh automate the front end of the manufacturing lines, it's obviously created a lot of productivity, uh benefit. And now you're going to take those learnings and you're going to go to Europe and to Australia, if we isolate that, what could that represent in terms of gross margin upside.

Robotics and it's actually, it's, it's a, the benefit that we originally scoped out was a benefit because we had very difficult jobs to fill. We're also seeing benefit around less waste. So we're using, we have less waste in our manufacturing facilities which is helping us with our inventory and helping us with our cost of sales. Uh, it's helping us, there's a lot of little things like we're just using fewer cones, for example. So there's a whole bunch of things that will help us, uh, that are helping us in the US. Uh, and that will also help us similarly in Australia. And in Europe clearly though, to be fair, those are smaller Business Systems in the US.

Okay. They are. Uh but it sounds like, you know, when you talk about the 3 buckets, mixed productivity and volume leverage, the big part of that productivity bucket is, is this um, migration of what you've learned.

Public range and and, um, take yeah. Okay. Good. And then, uh, on on the volume, on the, on the volume Leverage.

Talk about sort of incremental margins right now, and I realized they're a little bit different from Dora versus LBT versus, you know, carpet tile. And we think carpet tile, you have various price points where you could get some variance in your operating leverage. But how should we be thinking about incremental margins and the potential upside from here on incremental margins?

um,

I think the situation that we're in David is we are going to continue to be laser focused on driving efficiencies and our manufacturing environments. Um, it's just so important that we do that to to, to maintain our competitiveness and in a really challenging Market to make sure that we have the right price points to meet our customers where they are so that we can continue driving volume and we can continue driving, share the, the other things David that we've been doing is we've talked to about expanding our addressable Market by pushing a bit more to accessible price points particularly in carpet tile. And we've done that through, you know, design for manufacturing, making sure we maintain our efficiencies while we're doing that.

But that's helping us drive growth, so we'll continue to do more of that as well. And again, sort of manage that sweet spot.

so I mean if if on the 1 hand you get a little more Norah coming in here, you're making the capacity Investments, we would presume that that becomes a

A stronger part of the mix. On the other hand, you've got more medium price point products rolling out. Alright um alright. So should we just be, should we just be thinking incremental margins kind of remaining kind of in line with the art right now.

Um, I guess I'm just looking for a little bit of help there.

We want to deliver this year. We've got...

We we had we got a great year, uh, great 9 months behind us. We got to deliver another 3, great months. And we'll have a solid year, and then if we do, we'll hit our ambition. And I think, to be fair, David, I I appreciate your question. I appreciate your probing, I think, maybe when we release our year-end results, and we see how this all shakes out, we would be in a stronger position to talk about, you know, perhaps, what is our next ambition, around, gross profit, but for right now, we just want to hit the current ambition got it. Okay. That's, that's that's fair. Thank you for that. Um, you had talked a while back, now about adding kind of global product category management. I think you might have actually staffed somebody in that seat. Yeah, um, and I guess this is all part of the, the 1 interface program, um,

Talk about sort of the percentage of revenues and how that might be changing from, uh, jobs that are kind of across multiple categories and across multiple, you know, America and Europe um or just you know sort of that that that expanded scope of an order as opposed to selling carpet tile to a guy in Cincinnati. Um, you know, we're getting more projects where we're selling, you know, all 3 products to, you know, companies spanning both America and European markets. I I'm obviously making this stuff up.

But but just try to get a sense of how that, how that's changing and, and I presume that's a margin driver for you. So, I'm just trying to get a sense of proportion at this point.

Yeah. So a couple things in that first of all, we did um add Global product category management. So we're really looking and that will help us drive our Innovation funnel for the future. We're going to see some new innovation come next year, which I think will be really exciting, but and those are global global Innovations Global launches, we're looking that at those on a real macro level

I'm just selling carpet tile to corporate office. We're really selling that full suite. And as you're saying, we also, we have great Global customers. And we're now offering the full Suite of products to those global customers that honestly, still in early days. I mean, we're still continuing to build that out, and we'll continue to do that further. Um, as we go forward,

That that's helpful and then uh Bruce you mentioned Capital allocation up about 10 million next year in capex versus where you're going to be this year. Uh is is that full 10 million associated with Nora, or are there other, um, programs?

Uh, portions.

A large portion of is, is Nora, but there are, there is innovation happening outside of Nora and there's a, there is some automation of us that's happening. Us have nor as well. So,

Okay. Yes, but I'll Capital application as well. You're you're you're buying back stock. Uh which is, you know, a real Milestone I guess for interface. Um, how do you think about sort of that program going forward is, is this kind of a residual? We don't have any other immediate use for the cash so we buy back stock or are you um, sort of employing Targets in mind with respect to

Do you want to accomplish on a repurchase level?

Yes. I mean it's opportunistic. However um, we always keep in mind our number 1 priority, which is to invest in the business around growth margin expansion um and making sure that and Innovation. So um while also, while while also making sure and being good stewards of the the corporation and to our Capital, allocation priorities. And so, you know, when there's opportunity we are making sure that we return Capital back to our shareholders.

Well, congratulations on all the progress. Great to see. Thank you.

Thanks David, appreciate it.

And that concludes our question and answer session. I will now turn the call back over to Laurel. Heard for closing remarks.

Right. Thanks to everyone for joining the call today, and thanks to the entire interface team for another great quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.