Q1 2024 Interface Inc Earnings Call

Participants

Christine Needles; IR; Interface Inc.

Laurel Hurd; President, Chief Executive Officer, Director; Interface Inc

Bruce Hausmann; Chief Financial Officer, Vice President; Interface Inc

Presentation

Operator

Good day, and welcome to the first-quarter-2024 Interface Inc. earnings conference call. (Operator Instructions) And finally, I would like to advise all participants that this call is being recorded. Thank you.
I'd now like to welcome Christine Needles, Corporate Communications, to begin the conference. Christine, over to you.

Christine Needles

Good morning and welcome to Interface's conference call. Regarding First Quarter 2024 results hosted by Laurel Hurd CYO. I'm Bertelsmann, 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. 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. They 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 eight K furnished with the SEC today.
Lastly, this call is being recorded and broadcasted for Interface. It contains copyrighted material and may not be rerecorded or rebroadcasted without Interface's 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, CYO.

Laurel Hurd

Thank you, Christine, and good morning, everyone. To start our call, I want to thank the entire Interface team for a very strong quarter, thanks to their efforts and the support of our customers and partners. We achieved robust performance in the first quarter, fueled by comprehensive strength across the Americas. These strong results reinforce the fact that our one interface strategy is working and yielding tangible results.
With that backdrop in mind, I'd like to take a few minutes to update you on our progress. As a reminder, our strategy focused on reducing complexity, driving continuous improvement and globalizing our core functions to support our world-class selling team. After a successful pilot in 2023. Our territories throughout the U.S. have transitioned to combine Nora and interface selling teams, and we continue to see tremendous synergies between the two. During the first quarter, the one interface selling team drove strong order growth, outpacing our expectations in a challenging macro environment. This collaborative and consolidated approach aligns incentives and maximizes coverage to win business together, reducing complexity is a core tenet of our strategy. We are continuing to simplify how we work across the enterprise and around the globe in everything we do in every functional area. And importantly, and how we provide the best products and services in the industry to our customers. We are also on track with operational improvements in manufacturing, including investments in new automation and robotic solutions, which will drive improved margins for adding robotics to some of the more manual parts of our carpet tile manufacturing process in the U.S., which is better for our workforce in these hard to fill labor-intensive roles. These robotic solutions will drive labor efficiencies and reduce raw material waste. We're in the preliminary stages of implementation, which will roll out in phases over the next 24 months. We're being prudent with our investments. And as we see the desired results, we will continue to assess and invest in efficiency opportunities.
Chris and I recently visited our facilities in Germany, the Netherlands and Australia. In Germany, we witnessed firsthand our automation investments that work in our Nora rubber manufacturing facility by automating the rubber price and cutting processes. We enhance employee safety and increased production throughput in Australia, we met with several customers across corporate office, education, hospitality and health care, and also the sudden event at our showroom where we showcased new products and interacted with over 80 customers. It was great to spend time in the field seeing how our strategy and innovation are playing out. There's a lot of great work being done, leading to encouraging progress on the horizon. Earlier this month, interface rolled out a fresh new brand attitude made for more, which showcases the best of interface and encompasses our belief that our flooring is made with purpose and without compromise, meaning that our customers get beautiful design, quality, performance, innovation and sustainability with all of our products, all the time we don't ask our customers to sacrifice design for performance for quality for sustainability. We are the preferred partner for flooring and design projects because we provide high design sustainability focused products across all of our brands and categories to our customers, which significantly differentiates us in the marketplace. We've introduced made for more around the globe at the same time, and it's another example of our one interface strategy in action. We look forward to Clerkenwell Design Week in May at NeoCon in June, where we will showcase several exciting new product launches.
Turning to our first quarter results. Net sales came in at the high end of our expectations, driven by the Americas. We continue to see notable strength in education with billings up double digits for K through 12 business was particularly strong, driven by increased demand for our expanded open air collection. Expanding our offering of carpet tile design at more accessible price points allows us to connect with our customers' needs for ultimately driving increased carpet and LVT sales. Corporate office was down low single digits in the first quarter, which we viewed as a positive outcome given the volatility in that segment.
Our renovation business remains strong as the trend for people returning to office continues, and we grew share in the U.S. carpet tile market in the quarter. As expected, retail sales were softer in the first quarter due to ongoing headwinds in the sector. However, we are beginning to see increased demand, and we expect stronger retail sales beginning in Q2, which is reflected in our updated guidance, while first quarter sales were down 2% year over year. Adjusted gross profit margin increased by 528 basis points year over year for selling organization continued to successfully execute fully priced and driving favorable mix. Gross profit margin also benefited some raw material deflation in the quarter.
Turning to orders. Total Company orders were strong in the quarter, up 5% year over year. Orders were up 7% in the Americas and up 3% in a triple-A strength in demand in Asia was partially offset by softer orders in Australia, which had tough comps. Our backlog was strong as we finished Q1, up 19% year to date. We remain focused on commercial productivity and aligning our sales teams to the fastest growing geographic markets and segments.
Before I turn the call over to Bruce, I want to talk about a recent update to our sustainability strategy, which marks a pivotal point in our Climate journey. Beginning in 2025, we will redirect investments from carbon offset purchases into initiatives that will both reduce our carbon footprint and accelerate our growth, including low-carbon innovation and circular solutions. We have proven over the past three decades that we can significantly reduce our carbon footprint while growing our business with our most recent figures, showing an 82% reduction in our global carpet carbon footprint to when we started the journey back in 1996 to 2023. We remain committed to helping our customers achieve their sustainability goals, and this change will enable us to continue to thoughtfully invest in differentiated innovation, accelerating development of more sustainable solutions that our customers will love.
In summary, I'm pleased with our strong first quarter results, and I'm more confident than ever that our strategy is working and yielding tangible results. With that I will turn it over to Bruce to go through the financials group will.

Bruce Hausmann

Thank you, Laurel, and good morning, everyone. first quarter net sales totaled $289.7 million, a decrease of 2% versus the first quarter of 2023. First quarter FX neutral net sales in the Americas were up 0.5% year over year, we saw strength in education offset by softness in the retail sector, driven mostly by project deferrals. Fx neutral net sales in each triple-A were down 5.1% driven by a softer macro environment. First quarter adjusted gross profit margin was 38.6%, an increase of 528 basis points from prior year's first quarter, primarily due to strong execution from our selling organization to hold price, favorable product mix and raw material input cost deflation.
Adjusted SG&A expenses were $86.2 million in the first quarter compared to $83.2 million in the first quarter of 2023. The increase was primarily due to inflation. First quarter adjusted operating income was $25.5 million compared to adjusted operating income of $15.2 million in the first quarter of 2023. The increase was due to higher gross profit margins in the quarter. First quarter adjusted EPS was $0.24 versus $0.07 in the first quarter of 2023. Adjusted EBITDA was $38.8 million versus $26.3 million in the first quarter of 2023. We generated $12.6 million of cash from operating activities in the first quarter and liquidity totaled $388 million, which consisted of $90 million of cash and $298 million of revolver capacity, in line with our capital allocation strategy. We repaid $24.8 million of debt in the first quarter, resulting in net debt or total debt minus cash on hand of $302 million at the end of the quarter, our leverage ratio was 1.7 times calculated as net debt divided by LTM adjusted EBITDA. We remain focused on paying down debt, which continues to strengthen our balance sheet and positions us to capitalize on future growth opportunities as they arise.
Capital expenditures were $4 million in the first quarter of 2024 compared to $5.7 million in the first quarter of 2023. And as we look to 2024, while the macro economic environment remains dynamic, we continue to be encouraged by improving trends. We are increasing our full year net sales estimate, and we continue to expect gross profit margin expansion this year. As Laurel mentioned earlier, we now expect higher retail segment sales, which generally have lower gross profit margins compared to our more premium product offerings. This sequential change in mix is reflected in our adjusted gross profit margin guidance and with that backdrop in mind, we have updated our full year 2024 guidance, and we are anticipating the following for second quarter of fiscal 2020 for net sales of 335 to $345 million, adjusted gross profit margin of approximately 34.5%, adjusted SG&A expenses of approximately $86 million, adjusted interest and other expenses of approximately $8 million, fully diluted weighted average share count of approximately $58.8 million shares and for the full year of 2020 for net sales of $1.29 billion to $1.31 billion, adjusted gross profit margin of approximately 35.5% to 36%, adjusted SG&A expenses of approximately 26% of net sales, adjusted interest in other expenses of approximately $30 million, an adjusted effective tax rate for the full year of approximately 28% and capital expenditures of approximately $42 million.
Now I'll turn the call back to Laurel for concluding remarks.

Laurel Hurd

Thank you, Bruce. Interface delivered a strong start to 2024.
Despite the dynamic global market, we continue to see positive trends in our business. We remain focused on executing our strategy and driving sustainable growth to increase value for our shareholders.
With that, I'll open it up to questions.

Question and Answer Session

Operator

Operator, if you wish to ask a question, please press star followed by one on your telephone and wait for your name to be announced, there is star one, if you wish to ask a question.
And your first question comes from the line of Kathryn Thompson from Thompson Research Group. Your line is open.
I thank you for your commentary to date. A couple of different things. First one is just I'll discuss the balance of price versus volumes in the quarter and any color that you can give in terms of volumes and price with carpet tile and other major categories would be great. And then also against the backdrop, very solid growth in backlog and any color that you can give on mix there would be great by product category. Thank you.
Maybe I'll take your second one, Kevin. This is more of if we look at our order growth, we feel really good about where we sit on a really strong quarter in order growth. And it's we were showing growth in all categories. So across carpet tile, a little bit stronger growth in LVT and rubber, but carpet tile also showing growth, which we were really excited about.
And I just say you asked a little bit about the mix of price versus volume in the quarter, Catherine, so price was up around 2%. Volume was down around four, and that's where you see the negative two on the P&L and that's all in across all product categories globally.
Okay, great. And then I know you gave some commentary about margins, just really the upper end it down slightly given the mix going forward. But against that backdrop, you did have some some good solid performance this quarter in margins because of various tailwinds, including better raw materials. Maybe talk a little bit more about and what do you expect ex mix in terms of the puts and takes for gross margins as we look into 2024?
Yes, sure. And just to clarify, we actually brought the high end of our gross margins up compared to our prior guide. So I just wanted to make sure that was noted, yes, yes, the 71 basis points, yes. Exactly the thing I want. The thing that we also wanted to flag is that I'm sure you noticed sequentially from Q1 to Q2, the gross margins will go down. Most of that is due to the mix. So here's the good news. We're raising our revenue $30 million on, which is fantastic. It's just that we our best estimate is that that will probably come in at a slightly lower gross profit margin than our more premium products on. So we're really happy with the volume. It's carpet volume, which is also at a slightly lower gross margin than rubber and LVT for us. So we're happy for the volume, and we're pleased to be able to take the revenue up. It's just that that the note in our guide is that it is at a slightly lower gross margin than what we saw in Q1.
And Kevin, I'll just jump into one on on carpet As Bruce mentioned, you know, the strength we're seeing there compared to the industry. We're really encouraged by. So our own in our Q1 billings in corporate in the Americas were pretty strong compared to the industry. And so we're feeling good about that.
And thanks, I'll jump back in the queue.
Your next question comes from line of David MacGregor from Longbow Research. Your line is open.
Yes, good morning and congratulations on the results strong quarter.
Thanks, David.
I guess I had lots of questions, but let me just pick up on the observation of the backlogs that rubber and LVT are stronger than carbon. Is that a reflection market demand? Or is it more a reflection of some of the initiatives that you've undertaken in the one interface where you're really focusing on the attachment sale of the LVT and rubber product to a Tyler?
Yes, I think it's I think a stat that we're seeing and it's early days yet. So we kicked off the one interface selling team in the U.S. on January first. And what we're seeing now is actually we had a bunch of our sales leaders in this week and we were talking about the order momentum and trying to put our finger on it because honestly, it's a tough market out there and we feel good that we're gaining share. And as you said, we're seeing more attachment across rubber and LVT.
It's early days.
So we're encouraged with the momentum of holding each other accountable to deliver growth in a single market regardless of what product family is really starting to take hold on. But we're encouraged. I don't think we expected to see it so soon. So more to come.
I mean how much forward visibility do I will note it seems as well wishes probably or early innings of this kind of a structural change in terms of how you go to market and do you respond to that by adding more resources in your sales organization? And just trying to take that new that new basket of product for that new mix of product to the market?
Yes, it's a great question.
So it takes a while. You know, we've got a specified sales team and it takes them a while to actually build their momentum and we added seven almost eight. I think it is new sellers in Nora, that's really amplifying that growth. And what we're finding right now is in addition to potentially looking at, we'll learn as we go. And if we need to add more resources to fuel the growth, we'll definitely do that. We're also looking at some of our supporting functions that this momentum is having on our business. We do some design services for our customers. It's a great indicator of how strong our on our order momentum is when our internal design services start getting pressured. And so we're looking at some supporting functions to make sure that we're there to service the growth.
I just wanted to ask you as well about the lower costs that you achieved in the quarter and how much of that would be a reflection of just markets pricing versus some of the improvements you've made and the investments you've made in your procurement function?
Yes, I think it's I think it's probably both. So we're seeing some of the on the investments roll through. We talked about on Bruce and I were out in Vine home, Germany, looking at our North facility and we made some investments there, excuse me and automation and seeing that flow through and starting to have a nice impact, but I think that's early days, too. So a lot of those investments are just laying in the investments we're making in LaGrange, we're ramping up, but we can only get so many machines so quickly. And so some of that will take time over the next 24 months. I think that's another one that's in early innings, honestly.
Yes, it sounds like. And then I wanted to ask you about your balance sheet. You're down to 1.7 times where the whole discussion around the interface balance sheet has really evolved over the last couple of years and you've done a great job of deleveraging. I guess what do you do now with that on our Do you start looking more seriously at developing an acquisition funnel or just talk about you can Bruce mentioned in his comments that it creates opportunity. I guess I just wanted to drill a little further on that and how you're thinking?
Yes, I think it is, as you said, I'm really I'm proud of the team for how aggressively we've gone after the data. It helps us give us a lot of options going forward. And I think we're really assessing our number one investment will continue to pay down debt, but our number one investment will be internally things that we can do to to service our business growth, which we're finding more and more of those, but it does give us options to pick up and pick our head up and see what's out there?
I think right now we're really focused on on the here and now and we think we've got a lot to invest in with respect to innovation and automation going forward, we'll go through.
Congratulations on all the progress.
Thanks, Evan.
As a reminder, if you wish to ask a question, please press star followed by one on your telephone and wait for your name to be announced.
And your next question comes from the line of Alex Paris from Barrington Research. Your line is open.
I'm wondering, Laurel and Bruce, congratulations on the strong quarter.
Thank you.
A lot of good questions so far. I got a couple being sort of newer to the story. I just want to understand that a little bit more the dynamics of the gross margin on an area of focus clearly, and it continues to benefit from favorable mix and price and input cost deflation. So starting in reverse order input cost deflation, but just catch me up to today, how long have we been benefiting from that? And will it continue or it has has it been largely anniversaried at this point.
Great question, Alex. And actually for being new to the story, I think you're very strongly up to speed ahead on this call. And in the current quarter, if you think about our gross margin expansion, about a third of that came from price. A third of that came from raw material deflation, and a third of that came from mix and we have benefited from raw material deflation over the last few quarters. What we're seeing right now is really pretty and not to be fair a ton of puts and takes, but pretty steady raw material pricing right now with the exception of a little bit of pressure on freight. And our best estimate is that the year over year pickups on raw materials will come to a close in the back half of this year.
Great.
That's helpful. And then look, the other two, let's talk about mix and price. You say a third comes from price. Those are price increases and they're durable. You don't usually take them back once they're put into place.
Yes, I can come I can comment on that, Alex, just to give a little bit of context, especially in the US where we have a on the incentive side selling organization. Those guys really do a nice job of putting price out and holding price. So to your point, we don't often we won't take prices down. And in the U.S., which is our largest market, they're really incented to hold them.
So they're fighting every day for it.
It's a tough market, but proud of the progress.
Great. And then lastly, and this line of questioning the mix, it's clear that LVT and rubber have higher gross margins than tile, how about by market segments, corporate office, education, healthcare, government, et cetera, retail, it's a mix of customers across all those segments on clearly health care and education come at stronger gross margins than say retail does.
But to be fair, we also have very strong margins in our corporate office business. So it varies by mix. It varies by segment. It varies by customer, it varies by geography. So so there are a lot of different puts and takes. I think the headline is that everything that we sell comes in at gross margins that we like. And so but if you were to stack rank them, I think you're aware of this Alex rubbers, the strongest gross margins fall by LVT, followed by carpet.
So and then just to add on that as well, our tight our margins in the US are stronger. So on that helps to when we mix up in the US.
Yes.
Great.
Super helpful on. And then kind of continuing down the line of the new guys, a stupid questions because I have had to do that at this point, ask order order growth of 5.1%.
Very encouraging.
You talked a little bit about it in the prepared comments and your question about it already. Here's the fundamental question. How quickly do orders turn into revenue at enterprise?
Well, there is a big range. The average is sort of E&O 12 to 13 ish weeks. However, some stuff goes out same day and then some stuff doesn't go out for a few quarters some. So when you peel into the data, there's a huge range. But if you were to average it out, it's about it's around 12 weeks.
And I'll just comment to our our or I think Chris already said this, but our orders in April continue with the same trend.
So we're feeling we're feeling good about the order strength in April, I've Excellent.
And then and then retail in US retail is going to be a contributor to the increase in net sales guidance. As I heard of, is the recovery in retail faster than you had expected. I realize that puts some pressure on and revenue, even though it's a small segment puts some pressure on revenue in the second half and you expected that to continue through the first half?
Yes, I'll take that. And then Bruce, you can just jump in and answer it as you said our retail business is small.
We don't we don't talk about it a lot. It's about 4% of our total business.
So it's not a huge segment.
But in the back half of last year, we had some significant pullbacks that impacted our our revenue and we weren't sure when they were going to come back. We didn't lose the business but some retailers made a decision to not refresh their stores and that has some we were pressed pleasantly, we're pleased. I would say that the stores need to get refreshed eventually and we're starting to see that come through, which is what will start impacting us in Q2.
Yes.
I would just add, I mean, I'll reiterate what Laura said as project deferrals instead of lost business, which we knew we were going to get that business. The question was timing.
So and we're starting to see it come back to so that from a timing perspective isn't coming back a little sooner than expected that, you know, again, I expected to see pressure on that front in during both the first and second quarters, but it sounds like it's coming back a bit in the second quarter.
It is coming back a bit in the second quarter sooner than expected. And then our current view is that it will also be there in Q3. So it is you're right, I mean.
Okay, great. Good news. And then the last question again from my ignorance of there was a CAD400,000 charge for a cyber event. I wasn't aware of that. When does that occur? Is that buying the company or do you expect more expenses in that regard?
Yes.
So Alex, that was actually a credit. We had an insurance claim related to our 2022 cyber event. And those for we had we incurred some hard costs. And so we actually got insurance recovery on that arm. And so what you're seeing on those on the GAAP and non-GAAP adjustment schedule is actually a pickup.
Scott, you are right. I missed that So thank you very much. I appreciate the additional color, and I'll talk to you on our follow-up call.
Thanks.
So thank you.
Your next question comes from the line of David MacGregor from Longbow Research. Your line is open.
Yes, just follow up. Thanks for taking the follow-up. It seems like we've got a few minutes here. I just wanted to get you to comment on the observation in the press release that now he'll talk about the drivers of the gross margin, I believe, and you're referring to synergies from globalization of core functions and so I guess we've talked a little bit about some of the things you've done in terms of sales resources and spec writers. But I just thought I'd get you to comment on anything maybe that we haven't talked about that you feel is worth noting and then maybe factors that you've been working on that really hasn't come into play yet in the numbers, but you would expect to have a more beneficial impact and become more visible in the second half.
I think thanks for the follow-up. I appreciate it. And it's stuff we love to talk about. So we have we talked a lot about the selling combined teams in the Americas. We're doing a ton of work, honestly, across every function. So a couple of examples, our marketing organization, which used to be very, very regional and even country level we have we have one marketing team that's on driving initiatives around the world. So we launched our made for more brand campaign, which hit which is zone, which is great, exciting. You'll see it on our website and social media on. That's an example that speed to market one voice for the brand that goes and hits the globe all at one time. So really efficient. Another example that I think is yet to be seen, we will start to see signs of it at Clerkenwell and at NeoCon is we've globalized our design function and that doesn't mean every product is a global product, is there certainly regional nuances but we're looking at it from a global point of view to have we have one design team. They sit in different places around the world, but there's one team really putting our best efforts against our biggest opportunities. So we've got some exciting new product launches that we'll showcase at home at NeoCon. That's another example. And then the third, I'd say, as you know, we hired a Chief Supply Chain Officer and we're globalizing that function as well. There's so much opportunity as Bruce and I looked at we went to see the facilities in China, in Australia, in Germany and the Netherlands. And there's just so much learning that's happening in sharing and everyone's on the same team, driving great results, helping each other to see how efficiently we can learn from each other. And there's really good best practices that are coming through some of the investments that we're making in LaGrange, we've showcased to the other regions, and we're assessing whether that makes sense for those markets or not.
But that's where the that's where the beauty is.
We do it efficiently. We do it once and we scale it down. So there's a lot more to come from that from that perspective, it's good work so far.
Do you find that as you're building out this capability with the one team, one dream global scale opportunity. Are you are you finding that you're getting a better audience? You're maybe getting a little more traction with larger global accounts as opposed to maybe smaller, more fragmented accounts?
Yes.
Yes, it's interesting.
You know, there are a couple of examples of that, whether on in our in Australia, we met with a large global account. And some of it is that we're as you say, we're approaching it beyond one & one flooring solution. There is more than that. There's another example in a major retailer that we met with. It's really looking at a multi-floor solution. And again, we've shown up a little bit differently in the past, and we're now coming with with one voice. So I think you're right, we're getting on we're getting up a higher level audience, and we're also much more coordinated and making more impact as we do meet with our customers. And they're enjoying it. They don't have to work with separate teams right there. We show up with one one voice and we know their needs at home as well.
Group group.
Congratulations on the progress for you.
Thanks, David.
There are no further questions at this time. So let's turn the call back over to Laura head.
Well, thank you so much. I appreciate you all listening today and want to again thank the team for all the work that they're doing and the great progress, great start to the year, and we look forward to updating everyone next quarter.
That does conclude our conference for today. Thank you for participating. You may now all disconnect.