Interface Inc (TILE) 2006 Q1 法說會逐字稿

Good morning ladies and gentlemen. My name is [Miles] and I will be your conference operator today. At this time I would like to welcome everyone to the Interface First Quarter 2006 conference call. [Operator Instructions.]

Mr. Olecki, you may begin your conference.

Thank you operator. Good morning and welcome to Interface's conference call regarding first quarter 2006 results. Joining us from the company are Dan Hendrix, president and CEO, and Patrick Lynch, VP and CFO. Dan will review highlights from the quarter as well as Interface's business outlook. Patrick will then review the company's key performance metrics and the financial results. We will then have time for any questions.

If you have not yet received a copy of the results release, which was issued yesterday after the close of the market, please call Financial Dynamics at 212-850-5600. Or you can get a copy off of the investor relations section of Interface's website. An archived version of this conference call will also be available through that website.

Before we begin the formal remarks, 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 any 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 risk factors in item 1A of the company's most recent annual report on form 10K filed with the SEC.

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

Lastly, please note that this call is being recorded for Interface. It contains copyrighted material. It may not be rerecorded or rebroadcast without Interface's express permission. Your participation on the call confirms your consent to the company's taping of it. With these formalities out of the way, I'd like to turn the call over to Dan Hendrix. Please go ahead, sir.

Thank you Jim and good morning to everyone. Overall the first quarter was a good, solid start to the year and we are very optimistic about the prospects for the remainder of this year. Now remember, due to the seasonality of our industry the first quarter is usually a slower period for us and our business typically picks up as the year progresses.

Sales in the first quarter grew 7% over the prior year, driven by solid demand across all of our major markets, particularly in the corporate office market, which continues to rebound. Currency fluctuations adversely impacted first quarter sales by about 3%, compared with the first quarter last year. So comparing apples to apples, sales were actually even better than they appeared.

We remain focused on improving manufacturing efficiencies in all of our operations, which resulted in expansion of gross profit to 31.5% for the quarter versus 30.3% in the first quarter last year. This was a significant accomplishment given the increases in the cost of petroleum-based raw materials that have occurred over the past year and it demonstrates the high contribution margins we can achieve with increased sales.

Of course, most of you know we announced in our press release earlier this week, we had a couple of nonrecurring items during the quarter. Excluding those items, those two items, our operating income was $20.7 million, which is an increase of 20.4% over the prior year quarter. The two items were a non-cash goodwill write-down in conjunction with the sale of our European fabrics division and a restructuring charge in connection with the closing of our East Douglass, Massachusetts fabrics plant.

Within our modular segment we continue to take share and grow the business at a rate faster than the overall market. Worldwide modular grew 8% in the first quarter despite the currency impact I alluded to earlier. With strong demand in each of our geographic regions, Americas, Europe, and Asia-Pacific.

One particular highlight, though, is our European modular business continued its double-digit growth in sales and operating income in local currency during the quarter as the economic conditions further improved in that region. Overall, operating income for the worldwide modular segment rose a strong 25% driven by higher sales volumes in GM improvements during the quarter.

Sales in our interior fabrics business also were up 8% due by large to the ongoing recovery within the office corporate market. And although our goodwill impairment charge relating to the sale of Camborne and restructuring charge for the closing of the East Douglass plant drastically impacted its operating profitability, these two actions taken together helped us achieve two very important goals. The sale of Camborne for approximately $28 million increases our financial flexibility enabling us to pay down debt or make additional investments in the businesses.

At the same time, our restructuring actions in the U.S. in keeping with our overall strategy of returning to historical profitability levels in the fabrics segment. And we believe the cost savings that we will achieve will have an immediate payback. Overall, the churn of the North American fabric market remains positive and we expect to see improved results from this business as we move through the year.

We made a similar commitment to sales and profit growth within our Bentley Prince Street business and we saw some success on this front in the first quarter as we grew sales 4%. I am encouraged by the level of order activity in this business and it's positioning in the marketplace and I expect much stronger results for the remaining quarters this year.

Overall, we are pleased with the start to 2006, particularly given the typical seasonal slowness we generally see in this period and market trends continue to look very favorable through the year.

We believe modular carpet will continue to grow and take share from other flooring options. We're taking the steps necessary to further improve results at Bentley Prince Street and our interior fabrics businesses and we are very confident in our ability to grow sales and profitability in both of these businesses as the corporate office market continues to rebound.

I've been here 23 years and I believe Interface has never been positioned better to take advantage of the opportunities that lay ahead. With that I'll turn the call over to Patrick and he will walk through some of the quarter's details.

Thanks Dan and good morning, everyone. Net sales for the first quarter of 2006 increased 6.8% to $250.6 million from $234.7 million in the first quarter of 2005, representing the 12th consecutive quarter of year-over-year improvement in sales. Currency changes negatively impacted 2006 first quarter sales by approximately $7.5 million.

Gross profit margin in the first quarter of 2006 rose to 31.5% from 30.3% in the first quarter of 2005, reflecting increased sales levels, price increases past through related to increased raw material pricing, and the benefits of our cost reduction initiatives.

SG&A in the 2006 first quarter were $58.3 million compared with $54 million in the first quarter of 2005, reflecting the higher sales levels achieved in the period. As an addition, $1 million in additional expenses related to the performance vesting of restricted stock and the expensing of stock options, which were not present in the first quarter of last year. As a percentage of sales, SG&A expense was 23.2% compared with 23% a year ago.

For the first quarter of 2006, the company reported GAAP operating loss of $3.3 million or 1.3% of net sales, compared to operating income of $17.2 million or 7.3% of sales in the 2005 first quarter. As Dan mentioned earlier, the 2006 first quarter includes $20.7 million impairment of goodwill reported in conjunction with the sale of our European fabrics division, as well as $3.3 million restructuring charge related to the closing of East Douglass, Massachusetts facility, and the integration of these operations into our Elkin, North Carolina facility. Excluding these charges, operating income for the 2006 first quarter was $20.7 million or 8.3% of sales.

Interest expense for the first quarter of 2006 was $11.2 million, down from $11.6 million a year ago. The reduction in interest expense was due primarily to a combination of less borrowing during the period and the improved pricing on borrowings under the revolving credit facility. Including the restructuring charge and the write down of goodwill, we reported a net loss for the first quarter of 2006 as $17.1 million or $0.32 per diluted share compared with a net loss of $2.2 million or $0.04 per diluted share in the same quarter last year, which included a loss from discontinued operations of $4.8 million or $0.09 per diluted share and an after-tax loss on exposal of $0.3 million or $0.01 per diluted share.

Excluding the nonrecurring goodwill impairment and restructuring charge, first quarter net income was $5.7 million or $0.11 per diluted share. This compares with income from continuing operations of $2.9 million or $0.06 per diluted share a year ago.

Depreciation and amortization in the first quarter of 2006 totaled $8.2 million, compared with $8.1 million in the first quarter of last year. CapEx in 2006 first quarter were $8.6 million versus $3.4 million in the 2005 first quarter.

Now a few key balance sheet data items. At the end of the first quarter of 2006 we had $20.3 million in cash, $65.3 million of additional borrowing capacity under the revolving credit facility. Our average DSOs during the quarter were 52 days versus 55 we recorded in the first quarter of 2005. Our inventory turns were 4.9 versus 4.3 a year ago. Our primary uses of cash during the first quarter 2006 were for inventories, interest payments, prepaid items to insurance premiums, management bonuses, and bond repurchases.

Now I'll turn it over for a couple of details on the individual business units. The first quarter continued to show additional growth driven by our worldwide modular business, as sales in this segment rose 8.1% to $165.9 million from $153.5 million a year ago. Operating profits in the quarter from this segment totaled $20.7 million or 12.5% of its sales versus $16.5 million or 10.7 of its sales last year, reflecting higher sales volumes and unit pricing, which more than offset the effect of raw material pricing and higher sales in marketing costs in the quarter.

Sales at Bentley Prince Street increased 3.9% in 2006 first quarter to $29.1 million from $28 million in the first quarter of 2005. Operating income in this business remained flat at $0.5 million versus the prior period.

In our fabrics business, sales in the 2006 first quarter were $52.5 million compared to $48.5 million in the year-ago period, an increase of 8.2%. Operating loss within the fabric segment was $23.4 million during the period, compared with operating income of $1 million a year ago. The decrease is the result of the $20.7 million write off of goodwill in conjunction with the sale of Camborne, as well as the $3.3 million charged to restructure the North American business.

Now with that, we'll open the call up for some questions.

[Operator Instructions.] Your first question comes from Keith Hughes with Sun Trust.

Thank you. You highlighted in the release and on your prepared comments the strength you saw in Europe. Can you give us a little more detail on, was there a certain country in Europe, a part of Europe that was strong? And how much of Europe is your tile business these days?

Well the strength in Europe actually is coming from segmentation as well as from the corporate office rebound. The strong countries, France is starting to come back. We're seeing some pretty good growth out of France and in the U.K.

Europe represents about $240 million of the total business.

Of the total tile or the total Interface business?

Total Interface business, which is all tile.

All right. Thank you.

Thank you.

Your next question comes from John Baugh with [Stifle].

Yes, good morning. The U.S. modular, could you tell us what, I'm guessing it was up mid- to high-single digits in dollars. How much units, how much revenue? And then help us with how much segmentation was up year over year versus corporate being up year over year?

Patrick actually did the volume numbers, most of it was actually volume in that business. Very little of it was price increase. If you looked at the office segment that was probably 60% of the growth and 40% was the non-office segment.

And Dan do you expect pricing to change much? In other words, were you shipping off old orders on all price or there really won't be much pricing going?

I don't think you'll see much pricing going on from here.

Okay and then same question in Europe just on units versus --?

We didn't really have the same raw material price pressures in Europe that we had in the U.S. so most all of that is actually unit volume.

And as you said, in local currency you were up almost close to 10%, close to double-digits in units?

Yes, yes.

Okay. And then is there anything in your fabric business in terms of your mix that's hurting you? You're getting more volume, it looks like, and I don't know if there's any pricing in the fabric business, but is there a degradation in mix that's preventing you from getting more margin there? Or what are the margin issues in U.S. fabric?

I would say that the first quarter is typically the slower quarter for us, John, in that business. Seasonality-wise it really builds to the fourth quarter. There's a high contribution margin in this business and $1 million means a whole lot to this business and sequentially we backed up in the first quarter from t he fourth. And with the East Douglass move I expect to see the margins expand in this business as volume improves and as we get the benefit of East Douglass.

And the East Douglass benefits start when?

May 1.

May 1.

Yes, John. Also during the first quarter in the fabrics group we probably incurred about $300,000 to $400,000 of integration costs with overtime premiums, shipping product from the two facilities. So there was some nonrecurring charges in the fabrics business during the period that we should not see going forward to the tune of about $300,000 to $400,000.

Okay and then lastly on Bentley Prince Street. Was the revenue gain driven by tile or was there revenue growth in broadloom and help us sort of with the -- I know you're going through a lot of product initiatives there [inaudible question - microphone inaccessible]?

Yes, I would say that the highest increase was the tile business, but we also saw the broadloom business. Carpet tile continues to increase in the Bentley Prince Street business.

Okay. And is the product changeover or initiative there started to take hold? Are you seeing something in the backlog--?

We're seeing, I'm seeing a lot of good order activity and a lot of activity in the marketplace related to the Bentley Prince Street. We're benefiting from having a lot of new products, a lot of new design. We got [Jack Miskin] involved in the business today from a design standpoint. We've really never introduced better products in the marketplace and we're going to see the benefit of that and we're seeing it toady.

And I think the office market is improving, as well.

Okay, great. Thank you.

Thank you.

You're next question comes from Sam Darkatsh with Raymond James.

Good morning gentlemen.

Good morning.

You mentioned I think that the marketing costs in the quarter were up on a year over year basis. If I do my math right, it affected the year over year results by a penny. Dan, how do you see marketing spend as a percent of sales progressing as we go through the year on a year over year basis?

We're going to continue to invest in this business, Sam. Our goal as a percentage is to hold SG&A down. But we're investing in our residential business and we're investing in a brand new marketing initiative. But I don't see it being much higher than these levels that we have today that we're at. My goal is to keep SG&A under $60 million and grow the top line.

But we are going to invest in this business, it's the right time to invest in it. As we go into all these different segments, within healthcare, education, hospitality, we really need to invest to grow the business because it's there to take. And we may have costs a little bit ahead of sales, but we'll manage it as a percentage, my goal is to actually eventually drive it down but right now we're going to invest in the future.

Gotcha, next question. Picture, we understand, the stock option accelerated investing situation correctly. It was about $1 million or so and was it because the stock ran to a certain level and therefore it was almost a one time issue and can you help us understand exactly what transpired there?

That's right, during the quarter, only about $200,000 was related to stock options. There were $800,000 related to restricted stock grants that were issued several years ago and due to the price performance component of those grants, they, investing accelerated ahead of the amortization and therefore we incurred about $800,000 of additional expense in the first quarter and we should not see any of that for the balance of the year. I think there's one traunch out there that could vest in the balance of '06 but that's a much smaller piece.

Right, so that would have been $1 million is about a penny or so, so that would have been a penny, it was as a result of the stock running to a certain level and that does not recur unless the stock hits a higher level than the high point during the quarter, is that correct?

That's right and it certainly would not have that magnitude of an impact. The one item that's out there in '06 was issued in 1997 is almost fully amortized so the P&L impact would be not as great.

Okay, last question and I apologize if you talked about this because I had to step out for just a minute. The raw material issue, benzene looks like it's down on a year over year basis, apparently significantly at least in some reports. Does that indicate to you that raw material inflation shouldn't be much of an issue if at all, over the foreseeable future next couple of quarters.

In about five, going on six months, we hadn't seen any activity in that area Sam and I think we'll anticipate the same thing going forward today.

Okay, excellent, thank you.

Once again as a reminder ladies and gentlemen if you would like to ask a question, feel free to press star and the number one on your telephone keypad. Star one on your touchtone telephone keypad if you have a question at this time.

Your next question comes from Larry Taylor with Credit Suisse First Boston.

Good morning guys, couple of things. One, just following up on the raw material question, do you think there's the potential for some decline in raw material prices as you're looking ahead to this year?

I wouldn't forecast that today, Larry, based on where it is. I think there's a demand supply issue that's going to help us manage the raw material price increases. But I wouldn't forecast there's going to be a decline in raw material prices based on activity in [oil] today.

Okay and second, thinking about asset of business sales, obviously we saw one recently announced. Is there anything else out there pending as you guys look at it you think may not fit in the profile that you want to have for the company going forward?

Well, we actually don't talk about acquisitions and divestitures on the conference call but we actually divested one that didn't fit, it was in Europe and to me didn't have a lot of growth process so we divested of it to pay down debt. But there's nothing out there that's pending today.

Thank you.

Thank you.

Your next question comes from Michael Kim with UBS.

Yeah, hi, good morning, it's actually Rob Manowitz with UBS. Just two quick questions. First, on the bond repurchases, it looks like you bought $8 million today is that correct and then B, how did that break out between senior and subordinated notes.

Yes, that's correct, we did repurchase $8 million and they were all senior notes.

And I assume the 730 is how you've done in the past?

That's correct.

Right, and then secondly, if you could elaborate, you made a comment on this being a great time to invest in business. I'm not disagreeing with that at all, it looks like you're 100% accurate. I'm curious where the investment will be, is it on people, capacity, product lines, redistribution?

It's actually in a lot of those areas, Rob, we're going to invest in new people, new sales people, we're going to invest in new products as we penetrate these segments. We're going to invest in a branding identity for interface and we're increasing significant capacity in our U.S. modular and our Thailand plant and our Australian plant. But we will be in line with the $25 million that we've given this group.

Thanks, great job.

Once again as a reminder ladies and gentlemen if you would like to ask a question, feel free to press star and the number one on your telephone keypad. Star one to ask a question at this time. We will now go to the line of Phillip Hogan with Deutsche Bank.

My questions have been answered, thank you.

Thank you sir, again, ladies and gentlemen, star one if you have a question at this time. You're next question comes from Kevin [Hull] with Magnet Star.

Hey guys, can you talk a little bit about just some of the different divisions your target margins, the BPS division, you're targeting by an 8% EBIT margin, the interface you've established, talking about 8% and then modular about a 14%. What kind of time period do you think you get there and what are some of the biggest variables to achieving those targets?

I would say if you look at the modular business, we hit 12.5%, we saw pretty nice expansion from the first quarter a year ago. My target margins of getting to the 14% is two years and I think, to do that, we just need to continue to grow the top line.

As far as the Bentley Prince Street business, it's the same thing as we talked about, we need to get sales volume to $150 million to do that, we need to grow it, currently it was $125 million last year, we just need to continue to grow the top line to do that, we'll see the 8%.

It's really all about sales volume in that business, we've done a fantastic job in lowering the cost of that business, changing the product mix, a more profitable profit mix and any flow through actually has very nice contributions to the bottom line there.

Within our battery business it's the same thing, we've done a lot of things to reduce costs but we're right at the margin there. If we do the $50 million, $52 million, we have a break even business. If we get it up to $55 million, you actually have a nice business that can move toward that 8%, so it's all about sales volume there.

Great, thanks a lot.

Thanks.

Your next question comes from Lee [Rading] with Wachovia Securities.

Hi guys, I wanted to follow up on your earlier comment that you guys continue to diversify away from office corporate, but you also mentioned that you're seeing constraints there, continue to rebound. I'm just wondering if you could give us an update of exposure you did in the past to office corporate environment.

Well, you know our goal Lee is to get it to a 50/50, office and non-office. We actually have that break down in the United States today. In Europe, it's more like a 75/25 on the office, in Asia, it's more like a 75/25 office.

The office did pick up in share in the first quarter which was actually a nice thing to see. It actually outgrew the other segments. But we're at a 65/35 overall today, I think that is right.

Yeah, yeah.

And I think in the next three years we'll see that move closer to our target of 50%. But we're, the opportunities, we're not going to give up anything in the office market, understand that's a bread and butter market that we love and so we're going after that just as hard as we are in the other segment.

I know you're going after that, in addition to that technical and after a few others, what do you think you're getting the most traction on, is it education...

I would say that it's short term hits, education has a big opportunity for us, particularly in the United States. Hospitality has another big opportunity for us as well. Assisted living and healthcare, a big opportunity. But right now it's education that we're getting a lot of traction in. And I think this year in hospitality, we're going to see a lot more traction.

But there's a couple more areas, the reinvestment that you were talking about earlier, is that where the focus of the reinvestment is?

It's in the residential business as well, we don't talk a lot about that, and it's in new salespeople as well and it's in the marketing branding area.

How many sales people are you guys looking to add this year?

20.

Okay, you talked about the order trends being positive and seeing good traction there. Just wanted to get, how relevant, when I look at your backlog now, only 1.4% year over year and orders up .4%, is that something that is a good takeaway when I look at the business?

If you take out, if you currency adjust it and we actually had a lot of good order activity last year in the first quarter related to some major project work. Going into the second quarter with the order activity we had in the first it's actually a pretty good trend.

Okay, could you comment, going through the quarter, if you saw January, February...

January was slow, it always is, but it was the first two weeks was very slow. It seems like people are coming back later and later from their vacations to me. And then February was a nice month, it was slower than what I would have liked and then March was very good.

Okay so you ended up on a strong note there.

Yeah.

Okay, and then lastly here, working capital, working capital looked like a greater use during the quarter, I know it typically is, but it looks like it's greater use than it typically is and I know one of the areas I know was on an accrued expense side.

Yeah.

I was wondering if there was anything unusual there.

Well, a couple things, we didn't manage payables as effectively as we had in the past and the cost is about $8 million. We did have unusually large exists out of our deferred comp plan, some introductions from the new rules around deferred comp plans. We had unusually high people exit the plan which we used cash at about $3 million there.

And then management bonuses or employee bonuses were slightly higher year over year to the tune of about $3 million this year versus last year. So those are the major components.

Okay and going forward, it shouldn't be any surprise second half source of working capital as usual?

Yeah, we over bill inventories maybe about $4 million higher than we had planned really kind of looking at the order trends late into the quarter and we made decisions to go a little higher than we had planned going into it. But you should see that level off as it does historically.

Great, thanks very much.

And at this time, I'd like to turn the call back over to management for closing remarks.

Well, thank you for listening to the call and I would say I'm very excited about 2006 and hope to report some great news going forward.

Ladies and gentlemen, we do appreciate your joining us today, this does conclude our Interface first quarter 2006 conference call, you may disconnect.