Interface, Inc.
Q4 2019 Earnings Call Transcript

Published: 26 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2019 Interface Inc. Earnings Conference Call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question-and-answer session. I'd now like to hand the conference over to your speaker today, Christine Needles, Corporate Communications. Please go ahead.

[Christine Needles:]

Good morning, and welcome to Interface's conference call regarding fourth quarter and full year 2019 results, hosted by Dan Hendrix, Chairman and CEO; and Bruce Hausman, Vice President and CFO.

[Dan Hendrix:]

Thank you. Good morning everyone and thanks for joining our call today. I joined interface 37 years ago with leading the company as CEO from 2001 to 2017 and our CFO for 15 years before that. I continue to be involved with the company as the Board Chairman, and very fortunate now to have the opportunity service again, while we search for a successor. Our search for new a CEO will be a thoughtful progress, one that will allow us to focus on executing our financial, operational and sustainability goals. Over the past several years, we've made exciting progress across the business and become a much stronger organization as a result. We're continue to run the strategy that we've been successfully executing for the last three years focused on growing the top-line, taking market share, of the margin, our SG&A and we will continue to execute on the important initiatives that we put in place in response to the changing market. Our sales managers meetings with our teams in the Americas and Europe, and I cannot be more optimistic about the future of this company. It is a really great time to be an Interface. Our new leader in America someone who is well known and well respected by our team, Jim Poppens was integral in the restructuring and commercial success of our core business, and instrumental in driving our global marketing initiatives. We expect a seamless transition and a strong momentum with this welcome change. In Europe, I believe we have the strongest sales and leadership teams in that region than we've ever had in the history of the company. I feel strongly that this is a growth region for us, particularly in the UK where Brexit uncertainty is lifting and our sales team is positioned for success. We're executing on industry leading innovations, we're investing approximately $50 million over three years in manufacturing, including tufting technology that will give us a new design capability in a vacuum system to further separate us in the marketplace. But before I talk about what's ahead, let me first share with you the results of our fourth quarter and full year 2019. We delivered another solid quarter with net sales up 1% versus the fourth quarter last year and organic sales up 2% in a full year 2019 with net sales up 14% and organic sales up 2% versus the prior year. Fourth quarter GAAP EPS was up 155% versus Q4 last year while adjusted EPS was up 12% versus the fourth quarter last year. GAAP earnings per share for the full year 2019 was up 60% versus 2018 and its exit earnings per share was up 7% versus the prior year. I want to thank the entire Interface team for a strong finish to the year and your steadfast commitment to delivering on our strategic and financial goals. Our core carpet tile business had a solid fourth quarter contributing equally to organic growth with our spanning resilient business.

[Bruce Hausman:]

Thank you Dan and good morning everyone. Fourth quarter net sales were 339 million up 1% over the prior year period. Currency translation had a negative impact on fourth quarter net sales, of 5 million or 150 basis points year over year. In organic sales were up 2% which was in line with our expectations, our legacy Interface business in the Americas had a strong finish to the year up 4% compared to the fourth quarter last year with continued strong growth in LVT and solid carpet tile sales, legacy Interface sales in EMEA were up 1% in local currency but down 2% in U.S dollars due to currency headwinds driven by the Euro to USD and pound Sterling to USD exchange rates versus prior year.

[Dan Hendrix:]

Thanks Bruce. As we progress in the 2020 my focus is really on driving the top-line and grow sales, reducing SG&A as percentage of sales and paying down debt. We have a robust pipeline of new product design and innovations in both the hard and soft flooring categories. New cutting edge testing technology allows us to design products with dynamic highlights and pattern luminescent of hand woven and flat weave rugs. We have renewed focus on key strategic growth opportunities, including segment penetration, particularly in healthcare and education, and diversified pricing strategy. We are accelerating cross selling opportunities across our product portfolio and across market segments, and we remain focused on driving productivity in the selling system.

[Operator:]

Thank you. Our first question today comes from Kathryn Thompson from Thompson Research Group. Please go ahead.

[Brian Biros:]

Hey good morning. This is actually a Brian Biros on for Kathryn. Thank you for taking my questions. I guess we start on the corona impacts. You called out in the press release and also the prepared remarks. And I guess if you may provide more color on is impact only been seen in the Asian region or is it any impact in the other regions for you guys? And is that copper tile facility in China, you mentioned is that back to full operations or is this open but still not 100% back yet?

[Bruce Hausman:]

Hey, Brian. This is Bruce Hausman, good morning. So the impact is only being seen in Asia right now. And the planet that we have in China is backup and running. And I guess what I was just told to say and the Coronavirus issue is that it is evolving every single day, as you know, from the front page of the newspaper. But so far, so good, we have not had any impact in our supply chain. And so far, so good, we think we're hopeful that for the full year, we can recover the impact that we're seeing. However, the first half, as we mentioned, we could see an impact on the top-line of 10% to 20% of the Asian operations, and Asia's about 200 million in revenue just to quantify that for you just put some bands around it.

[Brian Biros:]

I have a quick follow up. I think 50 million in CapEx, you guys mentioned for 2019 through 2021 spend on the manufacturing innovations. You gave some color in the prepared remarks? Can everything just help us think about kind of what the benefits are for that going forward? And whether that's mostly a margin savings play? Or maybe there's some revenue add there from the products more environmentally friendly or something, or that opens up new end markets or customers. Maybe some clarity on what that looks like going forward impact to Interface? That would be helpful.

[Dan Hendrix:]

This is Dan. We are investing in a backing system that will give us the lowest carbon footprint product in our industry. Climate change is a really big deal to our customer base, particularly in users in our design group. They're starting to measure specifications with carbon in the spec. And so it is innovation and it will actually grow the top-line with specs that will hold. came out with a C3 which they actually calculates carbon embedded carbon in their buildings. So I think we're way ahead of the game here. We already had a lowest carbon products, this will give us actually and we hope to get to negative carbon products eventually. And then on the testing side, it's a product technology called true test. And it gives you a design and the style is not in the marketplace today. I don't know, if you remember when we introduced tapestry in the day, this is similar to that technology a lot more exciting. So these investments really aren't on the gross profit line, they're actually going out and getting sales.

[Operator:]

Our next question comes from Michael Wood from Nomura Instinet.

[Michael Wood:]

First question, I just wanted to see if you could provide some color on your gross margin outlook and SG&A within guidance. And on SG&A in particular, how should we think about first quarter comparisons given that large investment that elevated SG&A in 1Q '19?

[Bruce Hausman:]

Hey Mike, this is Bruce Hausman. So as you can see from our press release. We're providing guidance for full year, top-line 2% to 4%, we're providing EPS guidance of $1.60 to $1.70. And we're providing CapEx guidance as well as tax rates. And so in this end share counts. What we're not doing is we're not breaking that down by quarter and we're not necessarily breaking it down by components of the income statement, gross profit versus SG&A. We're really focused on making sure we hit the top-line number and making certain that we hit the bottom-line number without trying to break apart the pieces.

[Dan Hendrix:]

One of the things Mike is that I think our SG&A as a percentage of sales is too high. We need to grow into our SG&A number and we need to reduce those percentage. We create a lot of muscle this company which I'm excited to actually get back in here and run a company with muscle we created through a lot of investments. But we need to grow the top line and look at wide spaces within the new LVT rubber markets that we have cross selling opportunities with our modular carpet business. But I think, we're going to try and focus on improving the top line in this company and taking share. We've never really gone after a dealer market, particularly United States that I think we really need to go after and focus on. So, I'm actually focused on running the plan that we have, it's a great strategic plan that we put in place the last three years. We've built a lot of muscle on the selling organization. We just need to get productivity out of our selling group. And I think we're going to focus on design as well as a company because I think design is how you drive specs as well. So to me, it's really about driving operating income line and driving the top line and growing into our SG&A.

[Michael Wood:]

Okay. And in fourth quarter you didn't see any acceleration organic sales, despite the fact that you had that large project that was creating an unfavorable headwind in the prior quarters. Can you just talk about what kind of offset that in fourth quarter in terms of your core organic growth was it Asia weakness that you saw or something else that took away?

[Bruce Hausman:]

Yes. Mike, this is Bruce, just to clarify. We actually did have a headwind in Q4 related to that large order that we were, that was lapping as a comparable from the year 2018. So, similar to the Q2 and Q3, there was a headwind that we saw in Q4 it just wasn't quite as large. But we did come in right where we thought we would. We came in 2% organic growth was which is exactly where we thought we would come into the quarter.

[Michael Wood:]

Can you, finally talk about, we drove the higher tax rate. I'm sorry.

[Dan Hendriz:]

Go ahead. Sorry.

[Michael Wood:]

I just want to ask within your guidance, just you're guidance to a pretty high tax rate versus what you had in '19 and prior years. I appreciate those other comments you had Dan on organic sales within the tax rate question? Thank you.

[Bruce Hausman:]

Sorry Mike. Are you asking about the 2019 tax rate or are you asking about the 2020 guidance tax rate?

[Michael Wood:]

2020, you're guiding to 28%, if I'm not mistaken, and I think you ended an adjusted effective around 23 for 2019. So just wondering why the big increase?

[Bruce Hausman:]

Yes, so it's a good question. You might remember we had a couple of pickups in 2019, like one was related to the Bentley Prince treat business that is a discontinued operation. And we've talked about that in the prior quarter. So that was a onetime pickup that does not recur in 2020. And the other thing that we're seeing, just like every other global company is just some erosion of the tax reform benefits around the global intangible tax, the so called guilty tax, and also the tax. We're seeing some erosion in some of those components, as tax reform sort of continues to bake into the income statement and continue to get clarified around the world.

[Operator:]

Our next question comes from to Keith Hughes from SunTrust.

[Keith Hughes:]

Thank you. Questions on Nora. How would Nora do in the quarter year-over-year?

[Bruce Hausman:]

Keith, it's Bruce. Nora continues to stay on track with our acquisition model and our expectations that we had when we announced the deal. We just continue to be so pleased with the progress around that acquisition and the pace of integration. And we're continuing to methodically integrate that business, so that we're one company with three product lines. And so right on target…

[Dan Hendrix:]

Keith this is Dan. I'd also say that, as I get out and go to various businesses, and I'm actually headed to sales market across the Northeast. The cross selling opportunities between Nora and Interface are really exciting to me. We've never been really strong in healthcare on the larger carpet side and they're very strong in healthcare. So I think we're going to focus on the education part and the healthcare part for cross selling. And in the outlined markets, we're also given ourselves to all three products. So I think the cross selling, we haven't realized that, because I think we can. But I'm excited about that opportunity for us.

[Keith Hughes:]

And you have talked in the numbers about resilient half the organic growth being out of resilient. I've seen LVT was up stronger down in the quarter. Is that fair to say?

[Bruce Hausman:]

We continue to see fantastic momentum in LVT. And we're right on track Keith to where we had anticipated in order to be $100 million business run rate in 2020, which is absolutely fantastic with accretive margins.

[Keith Hughes:]

And you gave some revenue guidance in that release. Did that assume this decline in Asia that you talked about earlier? It's like, what you're talking about?

[Dan Hendrix:]

Well, I would say that despite what's going on with Asia and the declining sales we're up 4% in orders. Today, this quarter, so I'm excited about the other markets, Europe and United States and Americas.

[Keith Hughes:]

And I guess finally, the question on our carpet tile. Is that gives us a little bit which is gives us about where this industry is at this point. Do you have feels like some share gain here? Do you have any feel what markets you're investing in carpet tile North America?

[Dan Hendrix:]

Well, I would say that we are actually investing and I don't know if you remember we did the non-office segments, but we're actually going after the education, hospitality and healthcare markets with magic carpet and with the resilient part of our business. And as we've never really gone into lower product categories. We've actually forfeited that market and I think we're determined to figure out how to sell into that market particularly United States.

[Operator:]

Our next question comes from John Baugh from Stifel.

[John Baugh:]

Let's jump right in. I wanted to maybe discuss a 2% to 4% organic growth guide for '20. Could you provide any color, because there's a little bit of an acceleration where we just completed, where that would either come from geographically or product wise?

[Dan Hendrix:]

I think I'm excited about the European business, which is kind of lot of people are excited about Europe. We've invested in a lot of what I call commercial leaders. We have 5 new commercial leaders in Europe. And I just think we're poised to take shares in the European market and also capitalize on the fact we've got hard surfaces now there. And I think the U.S. has got pretty good momentum going, as well, particularly with the Nora integration of cross selling. We built a lot of muscle the last two to three years in sales tools and productivity tools. We put in sales force, we've put in interface advance, and I think we're ready to capitalize on some of that. So I think it's U.S., I think, it's Europe as well.

[John Baugh:]

And then what if anything is going on with LVT sales around the world? You mentioned the 100 million I assume that's consolidated. What are you seeing around the globe in that product category?

[Bruce Hausman:]

John, this is Bruce Hausman. The sales just continued to accelerate. And we can we have not seen any stopping in terms of the momentum with that product line globally, which is great.

[Dan Hendrix:]

Yes, I would say that we adopted that earlier in the United States and Europe was following the U.S. from adoption standpoint and Asia is next to come. So I think Europe is going to see some pretty good LVT growth as well in revenue.

[John Baugh:]

And is there any change in the, go ahead.

[Dan Hendrix:]

No, no, We introduced that first the United States then Europe and then Asia, so you got adoption there. The U.S. should be ahead of everybody else as they got it first.

[John Baugh:]

Understood. And then is there any margin profile change in LVT business?

[Bruce Hausman:]

John, this is Bruce. So, as we mentioned last quarter, we launched some 3 millimeter LVT that actually comes at a slightly higher margin than some of our previous product lines. So not only are you seeing, are we able to, are we bringing additional LVT products to market, but we continue to be able to bring it to market at very competitive and at strong margins.

[John Baugh:]

And then lastly, just to clarify, you used to give out sort of a backlog number we just see that I guess you're not doing that. But you did comment I think your orders were up 4%. Is that a consolidated comment and what period is this sort of? Thank you.

[Bruce Hausman:]

John it's Bruce. So the 4% number is year-to-date quarter are up total company. We don't provide backlog it's you guys have heard me talk about this previously, I don't it's not necessarily indicative of future, just sort of you snap the line you look at your backlog, which is why we don't necessarily talk about, it's one component of many components about where that future of revenue growth is going to come from.

[Operator:]

Our next question comes from David MacGregor from Longbow Research.

[David MacGregor:]

I guess, just we're on orders. A lot of talk on the last quarter's call about orders and, the observation was made that orders had become increasingly choppy. So I thought we'd start with If you could update us on cadence within the quarter how order had locked and if you saw that, sort of the velocity of the orders seems to be picking up a little bit, but has it stabilized in terms of the flow or is still very choppy? And just talk a little bit about what you're seeing in terms of the quality of the order book?

[Bruce Hausman:]

David, this is Bruce. I think that was the word, I think I was the one who said the word choppy and I think that people read too much into that. When you look recently, things bounce around. It's just been a smooth progression throughout the quarter, the way I would sort of describe it. And I think, looking at 4% that's a good number for us, year-to-date.

[Dan Hendrix:]

And one thing, it was in the script, but we had a sales meeting in the United States as one of the best sales meetings I've probably ever attended. And then I went to management meeting at the top 125 in Europe and those two groups are very optimistic about what's going on in their geographical regions. And pretty excited about going out and be able to grow the top-line. So that's, that sort of gives me a little bit of encouragement about the first. We haven't been at 4% in orders. That's a good time for us.

[David MacGregor:]

And the observation I think, Bruce, you made the call that 4% was across your company, Is there much disparity in that number if you look at region-by-region?

[Bruce Hausman:]

We don't normally give out order growth rates on a geographic basis. However, given all the sensitivity around coronavirus, this quarter I'd like to just tell you that orders are down 8% year-to-date in Asia. But for total company they are up 4%, which obviously means that they're, we're seeing strong order growth in Europe and in Americas.

[David MacGregor:]

And expect that in Asia. You talk about price points, and it sounds like an exciting opportunity, but frankly so opportunity we're talking about for over a year now. Just update us in terms of sort of metric you're using in terms of specifying wins that both hard and soft content, or what's the metric you're using on that? And could you update us on that?

[Dan Hendrix:]

Well, to me, we really hadn't been focused on cross selling even focus on how to actually get Nora settled into the Interface culture and vice versa. And it takes a while to get the cross selling, actually get the people identified, get the products identified, getting the markets identified. And me stepping in here in the last six weeks, I think we finally got all right, we got the people identified. They're going to actually carry the three products. So I'd say that, we always had a cross selling opportunity, but I think we're able to execute it better now, given that we've had 18 months to get it going.

[David MacGregor:]

And just one question for me on the carbon products initiative. I think the conversation has been around 15 million to 20 million of cost reductions overlapping '20 and '21, is it still 15 million to 20 million, is that still a good number to use?

[Dan Hendrix:]

Well, based on the carbon negative side of the equation, that one is closer to 10. I'm not familiar with the other 5 million where that comes from, except we've got a lot of improvement in manufacturing that we're targeting. So that whole pipeline is probably more like 15 million.

[Bruce Hausman:]

This is Bruce, just to clarify. That's the kind of savings that bleeds in not just this year, but it bleeds into into next year.

[David MacGregor:]

I think you indicated that last quarter as well. One more like just on the balance sheet. You thought, you could get it down to 2.0 times by the end of '20. Is that still the goal?

[Bruce Hausman:]

You talked about net debt to EBITDA growth?

[David MacGregor:]

Right.

[Bruce Hausman:]

That is, we say this. We are very, very focused on continuing to deleverage the Company. So we're super we're right on track with where we said we would be being at 2.6, as we ended up this quarter, which is fantastic. And we're going to continue focusing on deleveraging. We do have a goal of getting down to 2.0 by the end of this year. But I just wanted to say, for everybody's benefit that deleveraging the balance sheet is a very, very key focus for us.

[Dan Hendrix:]

Yes, I want to echo that.

[Operator:]

And I'm showing no further questions in queue at this time. I'll turn the call back for closing remarks.

[Dan Hendrix:]

Well, thank you all for listen the call. It's good to be back for me in this role, and I'm looking forward to having this great year. And I'll talk to you next quarter. Thanks.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.