Interface Inc (TILE) 2006 Q2 法說會逐字稿

Good morning. My name is Matthew and I’ll be your conference operator today. At this time I would like to welcome everyone to the Interface Second Quarter 2006 conference call. [OPERATOR INSTRUCTIONS]

I will now turn the call over to Mr. Jim Olecki. Please go ahead sir.

Thank you, Operator. Good morning and welcome to Interface’s conference call regarding second quarter 2006 results. Joining us from the company are Dan Hendrix, President and Chief Executive Officer and Patrick Lynch, Vice President and Chief Financial Officer. 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’ll 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 An archived version of this conference call will also be available through that website.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 Securities and Exchange Commission.

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.

Management’s remarks during this call refer to certain non-GAAP measures. A reconciliation of those non-GAAP measures to the most comparable GAAP measures are contained in the company’s results released and form 8K filed with the Securities and Exchange Commission yesterday, each of which can be found on the investor relations portion of the company’s website.

Lastly, please note that this call is being recorded for Interface. It contains copyrighted material. It may not be re-recorded or rebroadcast without Interface’s express permission. Your participation on this 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. Interface had another solid quarter and perhaps the most exciting news was the order number. Orders were simply fantastic. Orders were up 13% to $276 million. And we’re seeing this strength continuing into the third quarter. This trend bodes well for the second half of the year.

Overall, we made tremendous progress toward our core goals in the quarter. As you will recall those were one, take share globally and expand our leadership position in the modular market. Modular carpet is gaining acceptance in all markets throughout the world. As the leader in the industry, we’re benefiting from this growth, demonstrated by the fact that orders in our worldwide modular business during the quarter were up 16% year-over-year.

Two, drive sales in Bentley Prince Street business to improve profitability. We are particularly pleased with the performance of this business during the second quarter with both sales and profitability up dramatically. Strengthened by the rebound of the office market, it reached an operating goal of 5% for the quarter. And we’re well on to our targeted level of 8%. The rebound in the office market is here and we will continue to capitalize on its increasing strength.

Three, pay down debt. During the quarter, we repurchased $23 million in bonds further strengthening our balance sheet. To date, we bought back a total of $40 million in bonds. And overall debt is down $35 million compared with the end of the first quarter.

In short, we continue to execute against our stated goals, which led to further sales and profitability improvement for the company. We posted a strong sales number, especially when you consider the second quarter last year, included an unusually large refurbishment project for one of our customers, so the comparables are even more compelling.

We continue to invest in our sales and marketing efforts with the expansion of our sales force and a new branding initiative. We believe these investments are essential for the future growth of our business, especially given the aggressive path that we are on. And we believe they are already paying off in the form of increased orders.

The modular business continues to be the strength of our company. It had another impressive quarter in each of our geographic regions, Americas, Europe and Asia-Pacific. We’re very encouraged with Europe as economic conditions continue to strengthen there. And we’re taking advantage of those opportunities.

The corporate office rebound was a primary driver of growth. Although our marketing segmentation strategy continues to do very well around the world, as we continue to capitalize on market segments outside the corporate office market.

As I stated earlier, Bentley Prince Street continued the strong performance we’ve seen from this division recently. Our efforts to streamline costs, improve manufacturing efficiencies in this business are bearing fruit. And our team there has been doing an excellent job capitalizing on the growth opportunities, with sales up 15%.

I am confident that this business will continue to show improvement and profitability in sales throughout the year.

Our fabrics business is the only lagging piece of our company right now. We’ve made a lot of progress in this business over the past three years. They hit a couple of bumps in the road that affected its results this quarter. We experienced a few unanticipated disruptions in yarn supply during the quarter. However, we are working closely with our suppliers and expect this issue to be mitigated going forward.

In addition, in the first two months of the quarter we also saw some manufacturing inefficiencies due to the shut down of our East Douglass plant and the transfer of production to our Elkin, North Carolina facilities. Addressing these issues within our fabrics business is going to be our primary focus in the short term.

Overall, I am pleased with where Interface is today. The modular growth story is unfolding around the world. And nobody is better positioned that Interface. Our Bentley Prince Street business is back on pace. And we continue to pay down debt to further strengthen our balance sheet.

Going forward, we will further leverage these trends, while focusing our efforts on improving the performance of our fabric business. We are encouraged by the overall tone of business in the market, which is translating into strong order rates continuing into the third quarter. And we’re optimistic that we can continue to generate revenue growth throughout the year and improve profitability across our businesses.

With that, I’ll turn it over to Patrick, who will walk through some of the quarter’s details.

Thank you, Dan. And good morning, everyone. Excluding the results from the recently divested European fabrics business, net sales increased 12.2% to $258.7 million, from $230.6 million in the second quarter of 2005. This was our 13th consecutive quarter of year-over-year improvement in sales. There was no currency impact in the second quarter versus the same period a year ago.

Gross profit margin in the second quarter of 2006 rose to 31.4% from 31.3% in the 2005 second quarter, reflecting increased sales levels and the benefits of our cost reduction initiatives.

SG&A expense in the 2006 second quarter were $58.4 million, compared with $56 million in the second quarter of 2005, reflecting the higher sales levels achieved in the period, as well as planned investments in our residential flooring business and its sales and marketings efforts. As a percentage of net sales, SG&A expense was essentially flat with a year ago at 22.6%.

Excluding the results of the European fabrics business and the $1.7 million loss on its disposal, operating income was $22.8 million versus operating income of $20.9 million last year, an increase of 9.1%.

Interest expense in the 2006 second quarter was $10.9 million, down from $11.5 million a year ago. The reduction in interest expense was due primarily to a combination of less debt during the period and improved pricing on borrowings under our revolving credit facility.

Net income for the second quarter of 2006 was $5.9 million, or $0.11 per diluted share, compared with a net loss of $7.4 million, or $0.14 per diluted share in the second quarter last year. Net income for the 2006 second quarter includes the loss on the European fabric business disposal of $1.7 million or $0.03 per diluted share, as well as other expenses of $.5 million, or $0.01 per diluted share for premiums paid in connection with our repurchase of $23 million of bonds during the quarter.

The 2005 second quarter net income includes a loss from discontinued operations of $9.8 million or $0.19 per diluted share net of tax, a loss of disposal on discontinued operations of $1.6 million or $0.03 per diluted share net of tax and a tax charge of approximately $1.6 million or $0.03 per share related to the repatriation of foreign earnings.

Depreciation and amortization in the 2006 second quarter totaled $7.7 million compared with $8.1 million in the second quarter of last year. Capital expenditures in the 2006 second quarter were $7.5 million versus $2.4 million in the 2005 second quarter.

Now some key balance sheet data. At the end of the second quarter of 2006, we had $27.3 million in cash. We had $91.8 million of additional borrowing capacity under a revolving credit facility. And as Dan mentioned earlier, during the quarter we repurchased $23 million in bonds. Our average DSOs during the second quarter were 51.2 days versus 55.6 days we recorded in the second quarter of 2005. Our inventory turns were 4.8 compared with 4.5 a year ago. And our primary uses of cash during the second quarter was $35.3 million to pay down debt and $7.5 million for capital expenditures.

Now I’ll review some of the details from our individual business units. The second quarter continued to see growth driven by our worldwide modular business as sales in this segment rose 13.9% to $186.5 million from $163.7 million last year. Operating income in the quarter from this segment totaled $23.6 million or 12.7% of its sales versus $21.4 million or 13.1% of its sales last year, reflecting the previously mentioned higher sales and marketing costs in the quarter.

Sales at Bentley Prince Street increased 14.9% in the 2006 second quarter to $33.9 million from $29.5 million in the second quarter of 2005. Operating income improved significantly to $1.7 million from $0.5 million in the prior year period. These results demonstrate that all of the hard work by our employees in this business is truly paying off.

In our fabrics business, sales in the 2006 second quarter were $35.5 million compared with $33.7 million in the prior year quarter, excluding the European fabrics business. This was an increase of 5.3%. This segment had an operating loss of $3 million during the period, compared with operating income of $0.1 million a year ago. Included in the $3 million operating loss is the $1.7 million loss on disposal of the European fabrics business. And as Dan mentioned earlier, the remaining $1.3 million of the loss was primarily attributable to the disruption of yarn supply, higher raw material prices that were not passed on and manufacturing inefficiencies related to the transfer of production from our East Douglass facility to the Elkin facility.

Now I’d like to turn the call back over to Dan.

Thank you, Patrick. Before we open up for questions, I want everyone to know about a new deal between our residential business FLOR and Martha Stewart. Under this arrangement, FLOR is going to be manufacturing an exclusive line of Martha Stewart branded carpet tiles. The products will be available through our FLOR catalog and website and will be offered as an option in the Martha Stewart residential communities, being developed by KB Home beginning in 2007. We are really excited about this opportunity. They announced it today in their earnings release as well. And I believe it demonstrates the increasing acceptance of modular carpet in the residential market place.

And with that, I’ll open it up for questions.

[OPERATOR INSTRUCTIONS]

The first question comes from Robert Manowitz with UBS.

Yes. Hi. Good morning.

Morning.

Wondering if you could tell us if you have bought back additional bonds since the quarter end. And then secondly, if you could explain in a little more detail the path that you have going forward to buy more bonds under the agreement you have for the revolver.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

Yes. We have since the quarter end, we have acquired an additional $7 million in bonds. We have no restrictions under the credit facility to purchase bonds, essentially. So we have that entire revolver available to us to repurchase the bonds. There are no prohibitions in the indentures from bringing in either the subs or the $175 million senior notes. We’re above the 2 to 1 charge, so we can acquire any or all of the bonds. And our path forward will be that we will continue to evaluate pricing options as they present themselves and take advantage of opportunistic pricing on a go-forward basis.

Great. And the $7 million was the 730s?

That’s correct.

Right. My second question goes to working capital and my understanding of your numbers is that your working capital at the end of the quarter excludes the working capital associated with the European fabrics business. If that’s correct, if you could help us just understand the amount of working capital that went with that business.

Sure. Roughly there was about $12 million of receivables. There was roughly $11 million in inventory. And then roughly about $9 million of payables and liabilities associated with that business in working capital that was sold.

Great. And then my last question, for the remaining portion of the fabrics business that you described as sort of on the turn around here, do you have a goal in terms of margin for 2007 you could share with us?

We actually don’t give our individual divisions by projections like that. I will tell you that my goal is to get it back in the black in the second half of the year.

Okay. And then longer term maybe and I won’t hold you to --

A lot longer --

-- the timeframe. What the margin should generate?

Longer term, our goal is 8%. It was a 12% operating business in 2000.

Excellent. Well, good luck. Thank you.

Thank you.

Our next question is from Keith Hughes from Robinson Humphrey.

Thank you. On the marketing expenses on the carpet tile business was that associated with a specific line or what were those actually?

I don’t know if you were -- Yeah. You were [inaudible]. Do you remember mission zero?

I -- How much did that cost?

Oh, it’s over a million total.

And is that all that has affected the second quarter or were there other --?

No. That’s actually the first half of the year. Some large portion affected the second quarter because of the account was the big launch.

Okay. And if you look at margins in the carpet tile for the next couple of quarters, getting into what sounds like a fantastic business, you think we would head back to some year-to-year gains for some operating leverage?

Absolutely.

Okay.

If we made a lot of investment in the modular business in the first half of the year, and I think that investment will level out. But you’ll see the increased sales up.

Are you facing a nylon price hike here in the third quarter.

We actually are. And we raised our prices effective 7/31. So we’re actually going to pass that along when we get it. 3% was the price increase that we announced.

Your price has gone up 3%, correct?

That’s our price increase that we announced. 3%.

Right. Okay. And let’s see if there was anything else. If you look at the tone of business within all your sectors, is the corporate office, is it now taking the lead in terms of growth?

It’s interesting that the corporate office market in Europe has taken the lead. But in the United States, we’re still 50% office and 50% non-office. So, the other segments are growing as well.

I was talking just in terms of growth, office had seemed to lag some of the other sectors in this turnaround. Is it now the biggest growth?

Yes, it is growing. Yes.

Okay. That’s all I have. Thank you.

Our next question is from Matt McCall with BB&T Capital Markets.

Thanks. Good morning.

Morning.

You did provide some detail on the cost pressures. I think Patrick you talked about $1.3 million and quantified that. And then you said you’d be working through those. And I think Dan you referenced eventual margin improvement in that business in the second half returning to the black. Can you provide a little bit more color on the timing? Are you going to get through most of those issues in Q3 or are they still going to be lingering into Q4?

Our goal obviously is to get through them in Q3. And then the East Douglass parts behind us. But I believe by Q4, we’ll be in the black. But Q3 is our goal as we get that closer to the break even level.

Okay. About break even. Let’s see. If you look at your comps in the second half, especially in modular, it looks like they get a little bit easier. Does that imply -- It sounds like things are still pretty positive in that business. Does that imply some accelerating top line growth in that business?

Well, we had -- orders were 16% up in the second quarter. So, yeah. That would imply that the business is accelerating. Yes.

Okay. Okay. Thanks a lot.

Our next question is from Don MacDougall with Capital.

That’s [Attis] Capital. Hello?

Hello. We’re here.

Sounds good. The Martha Stewart venture that you announced, I’m not sure if you can give us any sense of or any goals as to how big that can be?

We don’t know. I just know that 50 million people follow Martha Stewart. And she’s going to promote floor tile for the home. And I think that’s a big endorsement of that product.

Now when you say exclusive, does that mean that you can’t use any other channels to residential or --?

No. No. No. She’s going to have her own line. We’re going to develop I think 8 products that are going to be a Martha Stewart signature product, branded Interface FLOR. So she’s going to have her own signature product.

Okay. And so do you have any other initiatives with major retailers or minor retailers, for that matter?

We’re actually in the Lowe’s stores today. We’re talking with a bunch of other distributors that are not insignificant. I can’t talk about it today. But we are. We’re actually in Crate & Barrel and we expect to be in their catalog and so forth. That was one that we have talked about. But, yes. We’re making really good progress there.

Okay. And I don’t -- pardon me if I missed this. But, you had said Cap Ex was $7.5 million in the quarter. And in your cash flow statement, I think your investing line was $20 million. What was the other $13 million?

That was -- Actually I believe that’s the source of cash from -- Yes. That was the source of cash of $20 million and that’s the net of the Cap Ex and the $28 million of proceeds related to the sale of the European fabric business.

Got it. Thank you.

Yes.

Our next question is from John Doe with Stifel Nicolaus.

Well, that was close. Let’s see.

Hey, John Doe.

Europe. Give me some flavor for what you’re seeing either country-by-country or overall, Dan.

I would say that the U.K. has always been a fairly strong market for us. But now you’ve got France and Holland and Eastern Europe kicking in as well. And one of the big things that’s happening is that the office market seems to be coming back in Europe. And then we’ve got this whole segmentation initiative particularly in the government and healthcare and exhibition and all that’s going on there. So you got a double hit there for us.

Is the EBIT margin percentage in Europe, and I know we can’t look at it on modular, but is that leveraging up pretty nicely now? And is the revenue growth there matching U.S. or leading it or --?

I would say that if you look at the European business that we’re hitting double digit growth on the top line. And we, for the first time, have broke through, in a long time, double digit operating income levels there.

Great. Help me with residential tile. You’re spending a lot of money on it. Of course, you were ramping it a year ago. If we looked at it the first half of this year, and I assume you still got an EBIT loss there. Is it widening? Is it similar? Is it narrowing? And kind of what’s the prognosis on the next 18 months for that business on an EBIT basis?

We’re losing about $1 million a quarter in that business. And actually since we’ve ramped it up and started, we’re losing about $1 million a quarter. And we keep reinvesting it as it grows its top line. The top line has gone about 40% on a compounded growth rate wise. And we’re going to continue to invest in it and grow it. My goal is to see if we can start reaching profitability levels approaching it in the fourth quarter. So, hopefully, the loss will narrow in the fourth quarter.

Okay. And then on Bentley Prince Street, how much of the growth, the 15% was tile versus broadloom? And then to your 8% kind of EBIT goal there, care to give any kind of a timeframe as to when you might see that?

I would say we would see it in ’07. That we will approach it in ’07. As far as the fastest growing piece of that business is the tile piece. We don’t give that data point out. But, both pieces grew. But tile grew the fastest in that business.

Okay. Well, that’s it. Thanks.

Our next question is from Sam Darkatsh with Raymond James.

Good morning, Dan. Good morning, Patrick.

Your orders -- I’m guessing, any accountability -- has mentioned this in the script or not, but I’m guessing that’s got to be a high watermark on an apples-to-apples basis for 10 years or something. Did you have a sense of the last time you had orders this high?

Well, from a modular standpoint, we really hadn’t had -- this is the high watermark for the modular piece. We had a lot of different businesses when you go back. The highest order rate was 300 plus million. But as far as the core businesses that we have today, it’s the high watermark for modular.

Now, there was an earlier question regarding the mix of demand that you’re seeing. Would the office market be growing at a similar rate both in terms of shipments and orders that the rest of the business is? Is that how we should look at it? Or is --?

In the United States, that’s true, that we’ve got this 50/50 mix in the United States. So the segmentation is growing as well as the office market. And both are growing nicely. In Europe, the office market is the biggest part of the growth.

I guess my question is if we look at fabrics-to-fabrics growth is below that of the carpet growth. And by inference then, it says fabrics by definition goes into the office market. Help us understand why the fabrics growth might be softer than the office growth in carpet?

Yes. I’d say there’s two pieces to that, Sam. One is that to me the office market related to the fabric business is a lot more driven to new construction and is not as driven to refurbishment the way the carpet tile business is in the office. So you’ve got that piece going on, as well as, I don’t think the open plan system furniture, which is a big part of this business is growing as fast as the traditional office market.

If panels aren’t growing as fast as say the system is, should that tell us anything about the potential longevity of demand in the office space because systems aren’t growing as fast? Or am I reading too much into that?

I think you’re reading too much into it. There’s also less fabric on systems furnitures today than there was 3 years ago, 4 years ago.

Got you. Okay. Thank you very much. Nice job gentlemen.

Thank you.

[OPERATOR INSTRUCTIONS]

And we have another question from Lee Rading with Wachovia Securities.

Hi, guys. Just wanted to -- Just a couple of minor items. One was on the Cap Ex that you mentioned was 7.5. What’s the outlook for the year on the Cap Ex side?

It’s 25ish. 25 to 30 range.

Okay. And then on SG&A, you guys mentioned that you got a lot of GAAP items that you’re investing in, but you did a good job of maintaining that same level. Should we kind of look at that similarly on a going-forward basis?

Yes, Lee. I hope it’s a percentage of sales that when we get the sales increase ramping up, the SG&A percentage comes down.

Great. Thanks very much.

And at this time, there are no further questions. I will now turn it back over to management for closing remarks.

Well, thank you. And I hope to have a great quarter report in the third quarter. You guys have a great week.

This concludes today’s teleconference. We thank you for your participation. You may now disconnect.