Interface Inc (TILE) 2003 Q2 法說會逐字稿

Good morning. My name is Kimberly and I will be your Conference Facilitator. At this time, I would like to welcome everyone to the Interface Incorporated 2003 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, press star, and then the number two on your telephone keypad.

Thank you. I would now like to turn the call over to Ms. Kristine Mormon (ph) from FT Morgan Walk. (ph)

Good morning and thank you for joining us. Welcome to the Interface Conference Call. We're here to discuss the company's results for the second quarter 2003 which were reported yesterday after the close of the market. The press release from yesterday is posted on the investor relations section of the company's website and an archive version of this conference call will be available through that website as well.

Hosting the call today from Interface are Dan Hendrix, President and Chief Executive Officer and Patrick Lynch, Vice President and Chief Financial Officer.

I'd like to say a word about procedures before we begin. After management has made its formal remarks, we'll take your questions. Please note that during today's conference call, management's comments regarding Interface's business, which are not historical information, are forward-looking statements. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from such statements including risks and uncertainties associated with the economic conditions in the commercial interiors industry as well as risks and uncertainties discussed under the heading "Safe Harbor Compliance Statements or Forward-looking Statements" in Item 1 of the company's most recent annual report on Form 10-K. We direct all listeners to that document.

Any forward-looking statements that are made pursuant to the Private Securities Litigation Reform Act of 1995 are made pursuant to the Private Securities Litigation Reform Act of 1995. The company assumes no responsibility to update and revise forward-looking statements that they've made during this call and cautions listeners not to place undue reliance on any such forward-looking statement.

Lastly, please note that this call is being recorded for Interface. It contains copyrighted material. It may not be re-recorded or re-broadcast without Interface's expressed permission. Your participation on the call implies your consent to the company's taping of it. With these formalities out of the way I would like to turn the call over to Dan Hendrix. Dan, please go ahead.

Thank you. Good morning and thank you for joining us today. Over the past two years we've taken a number of steps to strengthen our company and improve the operations in each of our business segments. We started to benefit from many of these accidents in our second quarter and our market segmentation strategy continued to create top line growth and our dedication to proactive cost management resulted in overall earnings improvement.

During the second quarter each of our business segments showed solid improvement with overall revenue growth of 11% and gross profit margin expansion of 120 basis points. Each compared with the prior quarter. Our continued focus on costs control and our commitment to fiscal discipline resulted in improvement in operating income of over $7m compared with the first quarter. Our biggest turn around was our broadloom (ph) business, which returned to operating profitability in the second quarter due to a sustained efforts to drive revenues and cut costs. Operating income in the broadloom business is $1.1m, which represented a $4.2m turn around in operating income, compared with the prior quarter. And broadloom sales increased over 30% versus the prior quarter. During the second quarter the broadloom business gained significant momentum through our market segmentation strategy, primarily in the institutional and healthcare segment. The broadloom business also is gaining its leading position and taking share in the corporate office market, as sales in this segment also were up compared with the prior quarter.

Our U.S. laundry business continues to benefit from its leading market position and its growing popularity across a variety of customer segments, with year-over-year growth in both sales and order volume. Sales in the U.S. laundry business increased 19% over the first quarter of 2003 and operating income grew by over 50% compared to the prior quarter.

In addition, our service business showed sequential top-line in operating profitability growth. While our fabrics business benefited from cost cutting initiatives and increased order activity. In fabrics, we are beginning to capture the positive results of the integration and restructuring programs that we discussed in the past few conference calls. And we believe fabrics is moving toward becoming profitable in the second half of this year. Our market segmentation strategy is one of the key contributors to the growth and improvement we saw during the second quarter. For example, we are a winning business in the education, hospitality institutional and Internet improvement markets, in addition to our historical presence in the corporate office market.

During the second quarter, the corporate office environment showed signs of life, as activity in the marketplace seems to have improved. We also are pleased with the early success of our launches into the residential carpet business, InterfaceFLOR and Prince Street House & Home Collection.

We also are continuing to pursue our geographical opportunities as well, as evidenced by our success in the Asia Pacific markets, particularly Australia, which posted a record quarter, and our operations in Southern Europe had a strong quarter as well.

Overall, we are encouraged by our second quarter results. Our top line is growing, we have successfully cut costs, our liquidity has improved and our market segmentation strategy continues to provide the breadth and diversity that will ensure the future growth of each of our business segments going forward.

Now I'll turn over to Patrick, who will review the financial details for the quarter.

Thank you Dan and good morning everyone. I'll start by reviewing the income statement. Sales in the second quarter of 2003 were $233.9m, compared with $233.8m in the same period last year and $210.2m in the first quarter. Operating income during the second quarter of 2003 was $3.7m, which included a restructuring charge of $2.5m, compared with operating income of $13.1m in the second quarter of last year and compared with operating loss of $3.4m in the first quarter of 2003, which also included a $2.1m of restructuring charges.

The restructuring charge in the second quarter of this year, completes all of the expenses in connection with that previously announced initiative, to rationalize our fabrics division and reduce worldwide workforce.

Loss from continuing operations was $3.9m in the second quarter of 2003 compared with income from continuing operations of $1.4m in the second quarter of last year and loss from continuing operations of $9m in the first quarter of 2003. Net loss for the second quarter of 2003 was $5.4m or 11 cents per share, compared with net income of $777,000 or 2 cents per share in the second quarter of 2002 and compared with net loss of $10.4m or 21 cents per share in the first quarter of 2003.

Gross profit margin in the Second quarter of 2003 was $27.7m compared with - - excuse me 27.7%, compared with 29.7% in the same period a year ago and 26.1% in the first quarter of 2003. The year-over-year decreases due primarily to the decline in sales volumes in our fabrics business, which has been hard hit by the down turn in the office furniture industry.

The sequential increase in gross profit margin is due mainly to increased volumes in our U.S. and Asia Pacific modular businesses, as well as in our broadloom and service businesses. Interest expense was $10.2m in the second quarter of 2003 versus $10.8m in the same period a year ago and $10.2m in the first quarter of 2003.

Depreciation and amortization in the second quarter of 2003 was $9m, this compares with depreciation and amortization at $9.6m in the same period a year ago and $9.3m in the first quarter of 2003. Capital expenditures in the second quarter of 2003 were $3.8m insistent with our previous forecast we continue to expect total capital expenditures for fiscal 2003 to be approximately $15m to $17m.

SG&A expenses in the second quarter of 2003 were up $2.4m versus the second quarter of last year and were up $1.6m versus the first quarter of 2003. These increases were due to continued investment in our marketing efforts such as InterfaceFlor and our I2 campaign as well the foreign currency impact.

I believe it's important to highlight the impact of the strengthening Euro on our second quarter results. The Euro has strengthened by 23% compared with the same period a year ago, therefore the 2003 second quarter results in Euros resulted in an incremental $10m of reported revenue as a result of the translation of the strengthening Euro into U.S. dollars. This increase in reported revenue however translated into only $330,000 in incremental operating income

Further more our fixed costs in the second quarter were down year over year by $700,000 Euros but after currency translation resulted in $4m more in reported expenses, in other words the strengthening of the Euro masked some of the positive impact of our cost spending initiatives.

Moving to financing activities as Dan mentioned earlier, we announced the amendment and restatement of our revolving credit facility during the second quarter. The amendment and restated facility like its predecessor provides a borrowing amount of up to $100m, depending on the level of assets maintained in a specified borrowing base.

The facility matures on May 15th 2005 but may be extended to October 1st 2007 as the company meets certain conditions relating to liquidity and the repayment of long-term debt. This new credit facility provides interface with increased financial flexibility and ample liquidity, allowing us to meet our working capital needs and to pursue potential growth opportunities going forward. In conjunction with the amendment and restatement of our credit facility we also terminated our accounts receivable securitization facility, consequently a disclosing of the amendment and restatement, the balance on the securitization facility, which was approximately $26m, was paid off with borrowings under the new revolver and that debt is now reflected on our balance sheet. At the end of the second quarter we had approximately 21m borrowed under the credit facility and 45m of ample available borrowing capacity.

I'll go over some details for our individual business units. We are particularly encouraged by the performance of our Broadloom business. The second quarter of 2003 marked a return to operating profitability in this business segment, we were able to capitalize on the strong backlog that existed at the beginning of the quarter resulting in 34% sales growth and 4.2m improvement in operating income compared with the first quarter of 2003. Our market segmentation strategy allowed us to win new business in a variety of markets, which was further supported by an increase order activity in the corporate market.

We continue to see very strong performance from our worldwide modular business in the second quarter of 2003, the year-over-year growth in both orders and sales in our modular business is a testament to our strong market positioning and growing market share. We expect similar positive results for modular in the third quarter of 2003 as well. Even though our fabrics division did not show sequential top-line growth during the second quarter, we're able to improve operations in this business segment, as our restructuring initiatives began to generate efficiencies in the integration issues we experienced in the first quarter - -first quarter are for the most part behind us. As a result we were able to cut cost and decrease its operating loss despite the depressed level of activity. Our service business benefited from market segmentation strategy as well, our intensified focus on cost control and revenue growth. During the second quarter of 2003 this segment showed an 11% sequential growth in sales and a $2m reduction in its operating loss.

Now I'll turn the call back over to Dan.

Thanks Patrick. Our second quarter results showed increase operating profitability in each of our businesses and an improved tone for the overall marketplace. While we cannot say whether this is an indication in the long awaited recovery, we can say that we're successfully executing our strategy and continuing to find ways to improve out business, as a result we're looking forward to the second half of this year.

To conclude, I would like to highlight the key aspects of the focus going forward. We will continue to drive revenues and capitalize on all the opportunities we have to grow the soft line, through market segmentation as well as through the expected recovery in the corporate office segment. We will continue - - we will remain dedicated to our goals, contain the expenses and streamlining our cost structure, we will strive to generate cash through operations and through reductions in our working capital requirements. And we are committed to returning Interface to profitability as quickly as possible.

Now I would like to open it up for questions.

At this I would like to remind everyone, if you would like to ask a question press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Robert Manowitz (ph) of UBS.

Hi, good morning Dan, good morning Patrick.

Good morning.

I was wondering Dan if you could talk a little bit about the composition of your sales it sounds like you're making some head way in health care and education. What percentage of your aggregate sales at this point are non-corporate and --?

I - it's an odd business segment but I will tell you in the modular business we're below 60% now that our corporate sales which puts us up in 40% range. If you looked at our Broadloom business it's a fairly similar picture. Actually in Europe we're - I mean in Asia we're almost 50% on corporate. And we've moved significantly away from the 70% number that we were at when I took over the company.

Okay and if we factor in fabrics what does that mean for the average?

Average is probably more like 80% tied to the corporate office ( (inaud)

Okay and would you at this point in the year given that we're more than half way through venture some guidance. For the full year I know you were a little hesitant.

Yes we're actually as policy we do not do that.

Okay and then lastly Patrick and I apologize if I missed this, but the tax re-fund that you guys had been expecting what's the status and timing of that?

We received it in the second quarter it was about $16.5m.

Okay so that's included in your balance sheet items same quarter?

That's correct.

Right thank you.

Your next question comes from Mary Gilbert of Imperial Capital.

Hi yes I wanted to find out what's the status of the raise at the foreign business that's to be sold or -?

Yes we were - actually we're in negotiations as we speak. We hope to have an announcement with in the next 45 days.

And what would be the magnitude of the revenue - I mean the proceeds from?

Well we're in the process of negotiating that and I really don't want to put that out there.

Okay and then are you on target to generate free cash flow of $30m to $40m this year still?

Yes I believe so I think we're probably closer to the lower end of the range of the $30m to look back at last year when we generated a little over $40m in pre-cash flow the second half of last year. But I think we should be on target for the $30m going forward.

Okay great.

Your next question comes from Keith Hughes of Sun Trust Robinson Humphrey.

Hi good morning it's Scott Phillips fitting in for Keith. On the charge could you refresh my memory is the $2.5m how much of that is cash?

In this quarter 2m was cash in this quarter and that's the completion of our previously announced restructuring initiative.

Okay that's - going back to the segmentation question earlier you said that modular corporate sales are below 60%. Could you give us any kind of inside in what particular in use markets have seen better strength in the past quarter? I know in Broadloom you mentioned - I think health care and institutional. What about on the modular side?

Modular, I would say it was education mark, education which is the institutional of the government.

Okay got you.

That was the strongest --.

That was the stronger category?

Right, healthcare was - and hospitality also were up.

Our next question comes from Andy Stone of Long View Capital.

Hi good morning could you give me a break down of what the company's cash flow from operations was for this quarter please?

Sure cash flow from up pre-cash flow, let me just grab it here real quick, depreciation and amortization was $9m. The excluding securitization, the use of cash from receivables was approximately $10m. Inventories generated about $1.5m the reduction in pre-paids was a source of about $1.7m. And in the net effect the accounts payable and accrued expenses was $6.5 resulting in about $7m in free cash from operations.

Okay I'm just looking at my notes. Did you say on the last call that you expected cash flow from operations to be $30m or was that just for the full year?

Free cash flow it was $25m forthe second quarter. And the difference in the second quarter from our originally announced expectations was primarily in the working capital area. I expect that working capital will be positive in the second quarter as it turned out to be slightly negative as it related to the receivables as well as the reduction in our payables which was then off set by the income tax refund that came in, in the second quarter.

Okay so the apples to apples comparisons is the 25 from what you had been anticipated versus the 7?

That's correct and the Delta really is in the working capital area.

Okay are you --?

(indiscernible) for CapEx and depreciation.

Okay and does that 7 include the tax refund that you got?

Sorry.

Does that $7m includes the tax refunds?

Yes it does.

The number is embedded in there, okay. Second of all can you just give me an update on where you stand with the pension, the under funded pension?

Sure we - from July 1st we agreed to a new schedule of contributions with the actuary. And it will generate there - a positive additional $1.5m pounds contribution in 2003, and then continue going forward in 2004 until 2005.

So about a $1.5 million a year?

That's correct.

Finally did you visit the new the rating agencies after doing the new back deal of securitization?

We have not, no.

Okay. My final question is to do with the other assets, the $285m. Is that primarily Goodwill or there are other assets in there?

Right. I think its $217m is good will.

Great, thank you.

Our next question comes from Jeff Cobalot (ph) of Solomon Brothers Asset Management.

Good morning. First the gross margin opportunity, reduced your staff level by 500 people first half this year (technical difficulty) see some of those cost settings? Did any of them show up in the second quarter, or will they start showing up at around ---?

Some of them showed up in the second quarter and then should continue in the third quarter we still have some savings that will realize to our fabrics business.

Okay, and can you comment about orders in hand now?

I say that the order trend has remained fairly positive through the first three weeks of July. We are up over last year in orders and shipments. Its one of the situations where the --- you cant draw a line in the sand and say that the full profits market is coming back, but there is improved activity in that market place.

Okay, any comment on pricing?

It hasn't changed that much, pretty much where its been this year.

Thank you.

Again if you would like to ask a question at his time, please press star from the number 1. You have a follow-up question from Mary Gilbert from Imperial Capital.

Yes, I just wanted to confirm the free cash flow target of $30m, that for the full year?

Yes.

Okay, so in other words ended this year, started the year with $34m in cash at the ending ---?

You are breaking up, but yes. I believe I heard your question.

Yes okay, so you do expect to end the year with $64m in cash.

That's correct.

And so at the end of the quarter you had approximately $45m available under the revolver? How much was outstanding in LC?

$15m.

And where does availability stand today?

Its increased its probably nearing $50m.

$50m, and LC is still the same there at around $15?

Actually I think they have gone up by about $2m since the end of the quarter.

So about $17m?

Today, that's correct.

And then what about borrowings?

Borrowings have gone down.

where will they be, they were $21m at the end of the quarter where were they ---?

Right around $18m now

Okay and then on the --- I'm sorry I missed out on --- what was the accounts payable this quarter?

$60m.

Okay. The working capital you had expected to decrease but instead it increased ---?

That's correct.

--- In the second quarter, do you expect to make up for it in the second quarter?

Absolutely. Primarily in Europe we built some inventory for the holiday season and the inventory levels will come down second half.

Okay. And then also, one last question, in the $30m on excess cash you expect to generate this year, is that after considering the proceeds out of ---?

No that's in there as well.

That is in there?

That is correct, the non-strategic asset. That's correct.

Great.

At this time there are no further questions. Mr. Lynch are there any closing remarks:

No, thank you for joining us.

Thank you for joining us.

This concludes today's Interface Incorporated 2003 second quarter earnings conference call. You may now disconnect.