Interface Inc (TILE) 2006 Q4 法說會逐字稿

Good afternoon. My name is Janice, and I will your conference operator today. At this time, I would like to welcome everyone to the Interface Inc. fourth quarter 2006 full year earnings conference call.

[OPERATOR INSTRUCTIONS]

Thank you, Mr. Joyce. You may begin your conference.

Thank you, operator. Good morning, and welcome to Interface's conference call regarding fourth quarter and full year 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 the highlights from the quarter, as well as Interface's business outlook. Patrick will then review the Company's key performance metrics and financial results. We'll then have time for any questions.

If you've not received a copy of the earnings 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 An archived version of the conference call will also be available through that website.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 those, such as statements including risks and uncertainties associated with the economic condition of the commercial interiors industry, as well as risks and uncertainties discussed under the heading Risk Factors in the Company's Prospectus Supplement dated November 6, 2006, 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 certain non-GAAP measures. A reconciliation of those non-GAAP measures to the most comparable GAAP measures are contained in the Company's results release and Form 8-K filed with the SEC yesterday, each of which can be found on the Investor Relations portion of the Company's website, www.interfaceinc.com.

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.

[Technical difficulty.]

-- facility. Although our performance in fourth quarter is down versus the prior year, we showed improvement on a sequential basis in this business from the third quarter, and our primary focus in the near term will be on continuing the improvement of this business.

Overall, we believe conditions remain favorable for continued growth. New construction remains robust in the commercial office markets in Europe, Asia, and the United States. There continues to be pent up demand for office refurbishment in the U.S., Europe, and Australia, and modular carpet is gaining momentum as the floor covering of choice in most markets. And sustainability it top of mind among corporations around the world, and I said earlier, we're best positioned to take advantage of this trend.

In fact, the GlobeScan group of environmental experts, the people who know the most about sustainability, just recognized Interface as the number one company worldwide in the field of sustainability. We were placed ahead of the likes of BP, GE, and Shell Oil, who also have considerable sustainability platforms in place.

We are excited about the opportunities that lie ahead and feel confident that the hard work we have invested in our business to date has widened Interface's lead in the market and created a stronger foundation for growth. With a much improved liquidity and financial footing from our equity offering in operations, this will help facilitate our growth. We intend to leverage our position as the market leader to take advantage of emerging sales opportunities across our key markets and the traction that carpet tile is gaining against other floor covering products.

We remain very optimistic about the ongoing recovery we see in the office market and the potential for our segmentation strategy to continue to drive demand for our products in other markets. Through the first seven weeks of the first quarter, which is essentially our weakest quarter, business has remained robust, and we're looking forward to a very successful 2007.

With that, I'll turn it over for Patrick to give you some details about the quarter.

Thanks, and good morning, everyone. I will now walk you through some of the financial highlights from the quarter.

Excluding the results from the European fabric business, which was divested in April 2006, net sales increased 20.4% to $295.9 million from sales of $245.7 million in the fourth quarter of 2005, representing our 15th consecutive quarter-over-quarter improvement in sales. Currency changes positively impacted sales by approximately at least $6.8 million and operating income by approximately $775,000 during the quarter.

Gross profit margin for the fourth quarter 2006 was 31.8%, up from 30.6% in the fourth quarter of last year. We saw raw material pricing stabilize, and the higher sales levels and continued focus on cost controls resulted in improved profitability.

SG&A expense in the fourth quarter of 2006 was $64.5 million versus $56.7 million a year ago. The increase is due to the higher sales level seen in the quarter, as well as additional investments in reorganization costs [technical difficulty] support our sales and marketing initiatives. As a percentage of sales, SG&A expense was 21.8%, unchanged from the year ago period.

The leverage built into our business model was clearly evident in the improvement in operating income on a 20.4% increase in sales. Excluding the European fabric business, operating income increased 32.7% in the 2006 fourth quarter to $29.6 million from $22.3 million in the fourth quarter last year. As a percentage of sales, our operating margin improved to 10% from 8.9%.

Interest expense in the fourth quarter was $9.5 million versus $11.1 million, reflecting a combination of less spent during the period and improved pricing on borrowings under our revolving credit facility.

For the fourth quarter 2006, we reported net income of $12.1 million or $0.21 per diluted share, an increase of 112% over net income of $5.7 million or $0.11 per diluted share in the year ago period.

Depreciation and amortization in the fourth quarter totaled $8.3 million versus $8.2 million a year ago. Capital expenditures in the fourth quarter of 2006 were $10.9 million versus $12.9 million in the 2005 fourth quarter.

Overall, we had net operating and investing cash flow of $30 million for the 2006 fourth quarter, compared to $35.7 million in the fourth quarter of 2005. The difference was primarily due to higher inventory levels at the end of 2006.

Turning to the balance sheet -- at the end of the 2006 fourth quarter, we had $110.2 million in cash. The additional cash was a result of the cash flow from operations and the secondary offering in which we raised $79 million. That will primarily be used to reduce our outstanding debt.

At the end of the quarter, our additional borrowing capacity under our revolving credit facility was $98.5 million. Our average DSOs during the fourth quarter were 49 days versus 50 days in the fourth quarter of 2005, and our inventory turns were 5.4 versus 5.2 last year.

Now I'll review some of the details from our individual business units. Our modular business continued to post strong year-over-year growth. In the fourth quarter 2006, total modular sales grew 27.3% to $217.7 million from $171 million a year earlier. Operating income rose 38.8% to $29.7 million, or 13.6% of sales, from $21.4 million, or 12.5% of sales, in the fourth quarter of last year, driven by the increased revenue.

The North American and Asia Pacific modular businesses continue to perform well, but the biggest driver of our modular business has been the improving trends in our European division.

At Bentley Prince Street, sales rose 6.5% to $37.8 million from $35.5 million in the fourth quarter last year. Operating income was $1.5 million in the fourth quarter of 2006 versus $1.7 million reported in the fourth quarter of last year. However, our progress in that business is more evident when looking at the full year results. 2006 full year sales from Bentley Prince Street increased 10.1% over the prior year, with operating income increasing 68.6%. As Dan mentioned earlier, we expect to see improvements in this business throughout 2007.

Excluding the European fabrics business, our fabric segment had sales of $36.8 million in the fourth quarter of 2006, compared with $36.1 million reported in the year ago period. Excluding the European fabric business, the fabric segment reported an operating loss of $300,000, compared with operating income of $500,000 in the fourth quarter of last year. Although the U.S. fabric business continued -- showed an operating loss, it's important to note that on a sequentially basis the operating results for this business have improved by $200,000. While work remains to be done, we're confident the actions we've taken to right size and control costs will result in a progressive improvement going forward.

With that, we'll open the call up for questions.

Operator?

Operator, we're ready to take questions.

Yes, sir, I do apologize. Thank you. [OPERATOR INSTRUCTIONS]

Your first question comes from the line of Sam Dartkash with Raymond James.

Good morning, Dan. Good morning, Patrick. Can you hear me?

Yes, we can. Hopefully you can hear us.

Okay. I don't know if I'm speaking for a lot of people or not, but I think the first 10 or 15 minutes of the call might have gotten cut off, so if you had some critical elements of the prepared remarks, you may want to repeat them, at least in passing.

A couple questions -- talk about the order book if you could, Dan, both in terms of it's composition with respect to office versus non-office, and then also if you could give a little color as to how that book looks now through the first seven weeks versus December 31.

Well, it's interesting. If you look at our business in the Americas, which is the most segmented of all our business, actually the office segment was only 47% of the sales, and the non-office was 53%. And we started the year at 48/52, so the non-office is actually keeping pace with the office segment, as well, and that trend will continue into this year, as well.

In Europe, the office market was fairly robust in the second half of the year. So the segmentation -- we actually had good traction in segmentation there, but the office outpaced the segmentation in Europe. And in Australia, it's the same thing. It's 50/50 in Australia -- 50% non-office and 50% office, but in Asia it's pretty much 95% office. [Inaudible.]

[Inaudible] the order book. How does it look the first seven weeks versus December 31?

Yes.

It looks considerably better? I mean, any color you put on that?

The office is a good marketplace today, but the non-office is actually keeping pace with the office business.

I'm referring to the order book in total. It's up about 11% on year-end, which would suggest perhaps a deceleration versus your sales growth. But then I think you indicated that thing may have re-accelerated in the beginning of the year.

The first seven weeks, the business is higher than the 11% that we saw in the fourth quarter. We had a pretty good fourth quarter last year in the order book, as well.

Would the order book -- would the order growth through the first seven weeks be in excess of your sales growth in the first -- in the fourth quarter?

Sam, I can't give you that, but it's better than the 11%. It's nicely up.

Okay, nicely up. Okay, next question -- the residential initiative, what was -- and if you could -- and as I recall it was expectations were something like $20 of $25 million for sales in '06. Where did it end up? And what was the operating income negative impact in '06 from the residential initiative?

The run rate was over $20 million in the fourth quarter in that business. It ended up actually a little, right under $20 million from an orders and billings standpoint. We lost about almost $4 million in that business, and that's all by design. We're reinvesting and reinvesting in that business. And I mean, I am firmly convinced that modular carpet belongs in the home and that we have something here that has a huge upside for us.

The $4 million, that's an annual number for '06?

It's about $1 million a quarter.

Okay, and then at what point do you expect that business to turn breakeven in '07?

I can actually turn it breakeven any time I want. My goal is to grow the top line at 40% a year, and that's what my target is. And we'll probably lose $3 or $4 million again, and that's all be design to grow the top line and create a nice business.

If you're growing 30 or 40%, that means you're going to ramp up the marketing costs even further? Or at what point do you begin to absorb those marketing costs?

You'll see it in the second half of the year.

So second half of the year may be breakeven on a year-on-year basis?

Mm-hmm.

Okay, and then --

I'm less focused on making money in that business, as I am growing it.

Okay, and then your production plans, overall production, will that mirror sales or shipments in '07? Or are you going to take in inventories? How are you looking at production?

As far as the working capital piece?

Yeah, I mean, inventories, are they going to remain fairly consistent with sales?

Yes, they are. I mean, I think that from an inventory standpoint -- we did not reduce our inventories in the fourth quarter the way normally do, and so we won't have the ramp up in the first quarter. We ramped up $19 million in the first quarter. We will not see that this year, because we wanted to keep the service levels and business was pretty strong. And we did not want to inhibit the service levels for that business.

In the year ago period?

We took it down significantly last year, and it hurt the first quarter performance. We're not -- we didn't do this.

Gotcha, okay. So one would suspect then that your incremental margins in Q1 and into 2007 will be pretty 'normal?'

Yes.

All right, and then two more quickies, and then I'll defer. Broadloom -- modular was fantastic, at least based on what we were looking for. Broadloom may be a little soft. Is -- could you discuss them? And is that what the industry, as a whole, is doing, maybe that mid to high single digit growth rate?

I would say that the commercial market in total was in that range, mid to high, and it's mirroring that market. It is not a broadloom business. Understand that it's got a pretty significant component that is carpet tile, as well, and that piece is actually still continuing to grow nicely.

Okay, and the margins in broadloom?

I believe 8% is on the table, and we're going to get there. I don't see anything that's not going to prevent us from getting to the 8% level.

And what -- is the volume on that 8%, needed to get 8% --?

You need to run it somewhere around the $150 to $160 million range.

All right, last question -- any thoughts on capital -- on cash usage beyond paying down debt? Share repurchase probably doesn't make a lot of sense, at least theoretically. Maybe dividend payouts -- what are your thoughts on that?

Yes, dividends are obviously in our future. I think that we need to pay a modest dividend to our shareholders. We haven't paid a dividend in five years, but we're going to run the business for cash still and grow the modular business. That's our strategy. That hasn't changed.

Okay. Thanks, folks. Keep it up.

Uh-huh, thank you.

Your next question comes from the line of Keith Hughes with SunTrust.

Thank you. Sam was right. The first part of your presentation was cut off. Can you just go over again the different geographies of modular U.S. versus Europe versus Asia in terms of growth in the fourth quarter?

And I did a fantastic job on that conference call, and it got cut off -- the best ever.

You always do a best ever job, Dan. They cut you off.

Yeah, Patrick [inaudible] details that he went over.

That's a shame that it got cut off.

Well, you're looking across -- all the modular businesses performed very well. I would say, globally, modular was up 27%. Europe was up higher, about 30%. That did have some currency impact in it. The Americas was up mid-25s, and Asia Pacific similar range in terms of sales.

And within the entire segment, how much of it was price? How much of it was units?

I think now it's becoming unit-based, but the price comparisons are pretty much [technical difficulty] worked its way its way out of the comparison.

Okay, and final question -- within the modular, if we look at growth rates of office, non-office, in the United States here, specifically, would it be similar or --?

Yes, the office and non-office growth rates would be very similar. We started the year at 48/52 going into 2006, and we ended the year at 47% office and 53% non-office.

Okay, that's all I have. Thank you.

Thank you.

Your next question comes from the line of Carl Reichardt with Wachovia Securities.

Morning, guys. How are you?

Good.

A couple of clean-ups -- Patrick, do you have payables for Q4?

Do I have payables?

Yes.

Yes, $56.6 million.

Thank you, and do you know what your '07 CapEx spending plan is at this point?

It'll be in the $35 to $40 million range in '07.

$35 to $40, okay. And then Sam got most of my other questions. And just, can you give us an update on the facility in China and where you are in that process in terms of opening it?

We are looking for a site today, and we're continuing to grow the market. And the timing on that will depend on when we create enough critical mass to start it up. But we're in site selection and looking at where the best places to put the facility would be.

Okay, terrific. Thanks so much.

Thank you.

Your next question comes from the line of Robert Manowitz with UBS.

Yes, hi. Good morning. Your recent history has been one of organic focus, but if you look longer term, the history maybe over the last eight to ten years was more acquisition-oriented. And I'm wondering with the decline in leverage, the increase of cash, whether you've become a little more oriented toward acquisitions?

I would say that we're not going to put our head in the sand about acquisitions, but that is not our strategy today. We're not actively trying to acquire businesses. I think we have a lot on our plates with the modular business to grow that worldwide, particularly if we're looking at a residential offering, as well. But we have a lot to say grace over today and we have a lot of organic growth that we can create, so no, we're not actively looking for any acquisitions.

Great, and then a follow up question on your comment about a dividend, do you happen to know what your restricted payments basket is today?

It's -- no, I don't, but I know it can support a dividend.

Okay, great. Maybe I'll follow up with you. Thanks.

Thank you.

Your next question comes from the line of Jeff Kobylarz with Stone Harbor.

Great quarter, guys. Some general comments about your outlook for raw material costs?

Raw materials costs have stabilized. Oil just doesn't seem to want to go down, particularly [benzene], but I would say that we've had a stabilization of raw material prices to date, which is a nice environment to be in.

Right.

And they clearly have not declined.

Okay, any general comments about pricing, average selling price for a similar product year-over-year and what your outlook is for that in '07?

I would say that our price, margin-wise, when we introduce new products, we tend to get price increases with new products. But if raw material prices don't increase, we won't raise prices. But if they do, we will.

Okay, and did you say your [inaudible] strategy is better implemented in the U.S. and so is there upside in Europe?

We actually started it earlier in the U.S., and we got a lot more traction. We're probably about a year and a half behind in Europe, but we are getting traction in Europe. But the U.S. is the most established, which gives us a lot of opportunity in Europe, as well.

Right. Thanks very much.

Thank you.

Thanks.

Your next question comes from the line of [Brian Kruge] with [Waddell and Raid].

Hi, guys, good quarter. I was wondering if you could talk about any new products coming out there year.

Well, I just looked at the new products that David Oakey introduced to our sales force in the first week in February, and I would says that they're the best products that I think we've introduced in quite a while. It's all around this [inaudible]. It's all around random and so forth, and I've never seen our sales force more excited about new products.

What are the margins on new products versus your existing portfolio?

If it's a new product, it's a new idea, we price it just a little bit higher, and then as it matures, it comes down a little bit, like everybody else. We don't give that out, though.

Okay, great. Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Keith Hughes with SunTrust.

Yes, just a follow up. Patrick, the $9.5 million of interest expense, is that something we'll get to see for the next couple of quarters?

You should see that come down. You know, we only had about 45 days of the benefit of that cash and the debt reduction associated with that, but it should come into the $9 million range.

Does that number on that line item include the interest income from your cash?

It does.

It does include that?

[Inaudible.]

Okay, and finally, what was the ending share count for the year -- or the ending share count for the fourth quarter?

58.653 million.

That was the average, correct?

Right. Total outstanding, I think, was 61 million.

That's we'll say I meant before as my question.

Yes, it'll grow.

61 -- okay. All right, thank you.

And I want to add something on the product introduction, since I've got you on here. We also -- I didn't want to leave out our Bentley Prince Street, so we also had some fantastic products that we introduced at the sales meeting for Bentley Prince Street, as well. Jack Michigan is helping design products for us, and we came out with a lot of great products, I thought, there as well. I didn't want to miss that.

All right, thanks.

Thank you.

[OPERATOR INSTRUCTIONS]

Sir, there are no further questions at this time.

Well, thank you, and I'm sorry we missed the first introductory remarks. But anyway, have a great day and a great quarter, and we'll talk to you in a few months. Thanks.

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