Interface, Inc.
Q3 2020 Earnings Call Transcript

Published: 6 Nov 2020

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[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Interface Earnings Conference call. At this time, all participants are in a listen only mode. After the speakers presentation, they'll be a question and answer session to ask a question during the session. You'll need to press one on your telephone if you require any further assistance, please. Press Star zero. I would now like to hand the conference over to your speaker today. Christine Needles, thank you. Please go ahead.

[Christine Needles:]

Good morning and welcome to Interfaces Conference Call regarding third quarter 2020 results hosted by Dan Hendrix, chairman and CEO, and Bruce Hausmann, vice president and CFO. During today's conference call. Any management comments regarding interfaces business which are not historical information? Our 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 statement, including risks and uncertainties associated with the ongoing covid-19 pandemic and those described in our FEC filings. The company assumes no responsibility to update forward looking statements. Management's remarks during this call also refer to certain non gap measures, Reconciliation's of the non gap measures to the most comparable gap measures and explanations for their use are contained in the company's earnings release and Form 8-K furnished with the FCC today. Lastly, this call's being recorded and broadcasted for interface, it contains copyrighted material and may not be rerecorded or rebroadcasted 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 the call for question. Now, I'd like to turn the call over to Dan Hendrix, chairman and CEO.

[Dan Hendrix:]

Good morning and thank you for joining us today. Before we discuss financial results for the quarter, let me first talk about the status of our business and what we're seeing in the marketplace. Thank you to our interface team for your hard work this quarter as we continue to manage through covid-19 pandemic and the ongoing impact on our business. We remain focused on managing the things that we can control. We'll continue to invest in initiatives, specifically our product innovation pipeline and selling system that will set us up for long term success. I'm very proud of the team for providing the best in class service levels while ensuring the safety of our people that there are net sales were down 20 percent in the third quarter versus last year. I'm encouraged by some early bright spots in the business. Third quarter orders increased 11 percent sequentially compared to the second quarter, potentially signaling stabilization. We saw modest sequential improvement across all product categories. We're beginning to see modestly improving trends in Europe. In particular, we're having a standout year in our north rubber business in Germany and our business in China has returned to growth. Australia seems to have a better handle on covid-19 than most of the world, and more people are returning to the office in Asia-Pacific or work from the home is less common. This is a positive signal for us with half our revenues outside the United States.

[Bruce Hausmann:]

Thank you, Dan, and good morning, everyone. As we closed out the third quarter, orders were down 21 percent compared to the prior year, with orders down 25 percent in America's, 16 percent in the media and 15 percent in Asia Pacific. That Fed orders increased 11 percent over the second quarter, potentially signaling a signaling stabilization in demand that sales in the third quarter 2020 were 279 million, down 20 percent compared to the prior year period, but up seven percent sequentially compared to Q2. Declines in capital were somewhat moderated by lesser declines in equity and rubber. Sales in the Americas were down 29 percent, with declines across all product categories in sales were down 17 percent in local currency and down 12 percent in U.S. dollars. Again, with declines across all product categories. And sales in Asia-Pacific were down 10 percent in local currency and they were down eight percent in U.S. dollars. Declines in capital were offset by solid performance in both LTT and Rubber and our global market segments. We continue to see growth in living, which includes student housing, senior living and multi residential. We also saw growth in public buildings and transportation in the quarter. Third quarter adjusted gross profit margin was thirty seven point two percent. While this was down two hundred and seventy basis points from the prior year period, it was still a very healthy outcome when carpet production was down 31 percent year over year. This is a testament to our strong supply chain, strong plant operators and our ability to flex our plants and cost structure with changes in demand.

[Operator:]

At this time we'd like to take any questions. You may have to ask a question, please. Press star and the number one on your telephone keypad. Our first question comes from Kathryn Thompson with Thompson Research Group. Your line is open.

[Brian Biros:]

Hey, good morning. It's actually Brian on for Kathryn. Thank you for taking my questions. I wanted to start with the outlook for Q4 and kind of help bridge the gap between the two statements of Q3. Orders were up 11 percent sequentially, but Q4 is on track, similar to Q3. And I guess sort of thought if orders are up a little bit more than maybe Q4 would be a little bit more. But it sounds like it should be down to a similar scene in Q3. So I guess how do we bridge the gap between us two?

[Bruce Hausmann:]

Yeah, good morning, Brian. Bruce housemen, so the way we're thinking about Q4, based on everything we know today, is that if you think about year over year top line growth, it'll be really similar to what we saw in Q3. And if you think about gross profit margins, we're thinking that they'll be very similar to what we saw in Q3. And if we think about full year Gené, it'll be about 310 million approximately for the full year. And of course, we have three quarters banked so far. So you can pretty much back into the Q4 number. And so, you know, the good news is that we're seeing stabilization in the business. The good news is that orders sequentially are up. But based on all the puts and takes of the numbers, that's kind of how we have our best estimate of where people will probably come out.

[Brian Biros:]

And then, I guess on the gross margins in the quarter, down 20 basis points, I think I was a little more than Q2 is down, I guess what are the drivers for that in the quarter? And it seems like volume production should have been a little higher in Q3. Hopefully, we would have seen some lower input costs from the lower input costs that were in the first half of 2020 kind of flow through the income statement in the back half of the year. I guess how we think about the puts and takes for the March performance in the quarter.

[Bruce Hausmann:]

Yeah. Good morning, Brian. This is Bruce again. So, you know, in Q2, our production was down about 36 percent and in Q3 it was down about 31 percent. In Q4, we're anticipating a similar level. There are, as you mentioned, there are a lot of puts and takes in that. We felt really good about where the gross margins landed for the quarter based on grid operators and our plants, great supply chain organization and a strong ability to manage costs. You know, we're not necessarily seeing this is not an inflationary environment from an input inflation standpoint, but it's not necessarily a heavy deflationary environment either. So you kind of take in all those factors. And again, where the Jeep landed, we thought it was a great outcome and we're anticipating a similar outcome for Q4. Yeah. And we and we continue to bring down finished goods inventory as well. Yeah, that's a really good point. I don't know if you heard that point, but finished goods inventory was down 25 percent, you know, which is. Which is. So we continue to be very focused on our working capital.

[Brian Biros:]

Thank you.

[Operator:]

Your next question is from Keith Hughes with Truist Securities known as Open.

[Keith Hughes:]

Thank you. Given some of the shifts in the market you talked about towards soft surface from carpet you're addressing, given the downturn with an tunnel now, are you looking to permanently take some professional capacity out and given this production rate you discussed earlier?

[Dan Hendrix:]

Not right now, and we're not you know, we continue to look at capacity in Asia. We have a lot of capacity there and we're going to, you know, we want to we want to capture the China market. And we have a plan in China that services the Chinese market and our Thailand plant services, the rest of Asia. And we have an Australian plant. So we're not looking to take it out today, but we'll continue to look at it and flex it as demand ebbs and flows.

[Keith Hughes:]

Ok, and you discussed a million dollar run rate of cost savings. Can you talk about how much of that will be realized in 20 and how much in 21?

[Bruce Hausmann:]

Keith, this is Bruce. I was wondering if you're going to ask that question. We're still working through our AOP or our annual operating plan process. And we're you know, we're going department by department, line by line and grinding through all the numbers. And so we don't have any forward guidance on that number for this call. But we will provide that on our next call. And but I would just say that we're going to continue managing the cost structure of the business in line with our current demand. And I'm sure you've noticed our Estudiantes way down year over year. And I think that we're doing a good job of controlling that line and making sure that that's in alignment with our with our with our current top line.

[Keith Hughes:]

It's fair to say the majority of it will be seen in 21.

[Bruce Hausmann:]

You know, there will be some things that will happen in 2001, like, for example, you know, merit increases will come back. For example, the bonuses, you know, all sort of get reset based on new targets and things like that. So that's all the math that we're working through and the furloughs and the furloughs that come back. We had a number of furloughs. We also had some wage support programs this year, principally in Europe, where they're government sponsored programs that we get reimbursed. And, you know, we're just not sure if those will be recurring next year, if that's, you know, country by country government. But government by government has to approve this.

[Dan Hendrix:]

So but we have taken out some permanent structural costs as well. We have.

[Keith Hughes:]

That's part of the 80 million. That's incorrect.

[Bruce Hausmann:]

Yes. Yes, it is. OK.

[Keith Hughes:]

And I guess just any kind of update us on the CEO search where you stand on that.

[Dan Hendrix:]

We're looking at doing that next year. It's a tough time to do a search in this pandemic, so we're looking to kick it off next year.

[Keith Hughes:]

Ok. All right, thank you.

[Operator:]

Your next question is from David MacGregor with longer research.

[David MacGregor:]

Yes, good morning, everyone. What a day to day. Good morning. Welcome back to the first question that was asked about, you know, the discrepancy between, you know, the observation on the order book and then the thought, the work. You will look a lot like 3Q. I guess the building in the orders is happening a little further out in the order book. Is it? And I guess the question I wanted to ask on this point is, are you seeing any slowdown in the number of push outs and revisions and deferrals? Is that what's giving you some sense of encouragement when you talk about the improving order patterns? Or maybe you just elaborate a little further on that?

[Dan Hendrix:]

But we're not seeing as we're not seeing cancelations, but we are seeing delays, David, in the order book and I order book actually, I think has grown a little bit and said we just don't know what the fourth quarter next year is going to look like with the pandemic and even the second wave of the pandemic. So we're thinking that we're we've stabilized where we are, and that's down 20 percent today. And hopefully we'll see the office market come back. But we're not just sitting on the office market. We're actually going out for a lot of other opportunities and trying to go after the health care market with our other business, trying to go after this deal of business that we've talked about on the last call, David. So we're trying to take share out there as well.

[David MacGregor:]

Ok. And then I wanted to come back and ask you about the dealer discretionary business, because, you know, it's kind of a new business for you, I think, isn't it? And I'm just trying to understand how we should think about that with regard to the cash flow for 2021. Clearly, your CapEx is going to go pretty sharply against, you know, what your thoughts are in terms of maintenance capex these days. But my guess is, as you build a discretionary view of discretionary business is probably a bit of a burden to working capital. So could you just talk about how we should think about 21? And I realize you have to provide 21 guidance yet, but just conceptually, all the moving pieces directionally in the cash flow model for next year.

[Dan Hendrix:]

Well, let me see if I can answer for the CapEx maintenance were around 30 million dollars next year and CapEx and we're going to hold it to that line. We're really focused on paying down debt as far as that. It's the U.S. business we're focused on the on the dealer business. You know, 90 percent of our business goes through the dealer, but we specify almost all of our business and we hold this back and we pull it through the dealer. But the dealer has discretionary business that they also control. And we've really never focused on that discretionary piece of the market with its dealers because we've always focused on the end user and the community. So we're going to pivot and really focus on the dealer and show some love with products and with technology and with our salespeople actually call them and treat them like a customer.

[David MacGregor:]

So how should we think about that in terms of just the inventory build that's required?

[Dan Hendrix:]

There's not an inventory build on that at all.

[Bruce Hausmann:]

We don't anticipate any sort of meaningful increase to working capital to go and capture that piece of the market.

[Dan Hendrix:]

There is there is going to be some new product development around the mid to low in pricing that goes after that dealer market. Right. But it won't be inventory related. Right.

[David MacGregor:]

So it is going to be somewhat of it to the extent you're successful. This is going to be a little bit of a headwind to gross margins over just for next year.

[Dan Hendrix:]

Well, engineers will engineer the product to go out to that market. We have pretty healthy margins in there. OK.

[David MacGregor:]

And finally for me, just how should I think about keeping down a little bit of debt in the quarter? And how should I think about deleveraging goals for the next 12 to 18 months?

[Dan Hendrix:]

Well, my goal is to be one or two. I've always been who is my goal? And we're going to take all our available cash to pay down debt.

[David MacGregor:]

How quickly can you get to there Dan?

[Dan Hendrix:]

Two years. I think I'm looking I'm looking at my CFO but two years, that's for sure.

[Bruce Hausmann:]

Yeah. Our number one capital allocation policy, David, is to pay down debt first. And as we mentioned, we're going to decrease CapEx materially next year, which will free up a lot of additional free cash, both in order to do that.

[David MacGregor:]

OK, great. Thanks very much, guys.

[Operator:]

As a reminder, if you'd like to ask a question, please press staff for the number one on your telephone keypad. And we have no further questions, I turn the calls on. Two presenters for closing remarks.

[Dan Hendrix:]

Thank you for listening to our third quarter call, and I'm looking forward to talking about the fourth quarter calling in. Please, everybody be safe. Thank you.

[Operator:]

This concludes today's conference call, you may now disconnect and.