Interface Inc (TILE) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first-quarter 2007 Interface earnings conference call. My name is Tayna and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of the conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Bob Joyce from FD. Please proceed, sir.

Thank you operator, good morning and welcome to Interface's conference call regarding first quarter 2007 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. It you have not 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 the investor relations section of Interface's web site. An archived version of this conference call will also be available through that web site.

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 1-A of the Company's most recent annual report on Form 10-K 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 and the Company assumes no responsibility to update or revise forward-looking statements made during this call and cautions listeners not the place undue reliance on any such forward-looking statements.

Management's remarks during this call refer to certain non-GAAP measures. A reconciliation of these non-GAAP measures to the most comparable to GAAP measures are contained in the Company's results released and Form 8-K filed with the SEC yesterday and in the Company's Form 8-K filed with the SEC on July 25, 2006, all of which can be found on the investor relations portion of the Company's web site, www.interfaceinc.com.

Lastly, please note that this call is being recorded for Interface. It contains copyrighted material. It may not be recorded or rebroadcast without Interface's express permission. Your participation on the call confirms your consent of 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, Bob, and good morning to everyone. The first quarter was a great start to 2007, especially since Q1 is seasonally our toughest quarter. We continue to see significant revenue growth, driven by the execution of our market segmentation strategy, the ongoing recovery in the corporate office market and the increasing awareness and acceptance of carpet tile and other segments, including the residential market. The strong demand trends also resulted in first-quarter orders increasing to 21.5% to $288 million. This is our highest order level for any quarter in more than six years and I believe it speaks well for 2007 that occurred in our seasonally slowest period.

We realized improving operating margins in our business excluding onetime items primarily from improving sales and manufacturing efficiencies in our Modular business which more than offset the operating loss in Fabrics. Our Modular business was the principal driver of our performance [with] first quarter sales increasing 24% and orders up 26%. Geographically, sales of Modular carpet were up across all key regions, particularly in Europe and the Americas providing the most significant growth.

On a segmentation basis we're seeing very nice growth in the non-office commercial spaces which are currently outpacing the solid growth of the corporate office market. The hospitality and education segments made the biggest gains in the first quarter. The strong sales performance in Modular carpet led to excellent profitability growth for this segment with operating income up 30%.

We're also pleased with the progress of our FLOR residential carpet tile business which grew sales 30% in the first quarter. Our partnership with Target is going well as we roll out our Rug In a Box product to approximately 1500 Target stores around the country.

As we discussed in the last call, we also will debut a Martha Stewart collection of FLOR carpet tiles later this year.

Modular carpet is increasingly becoming the flooring of choice and is taking market share from other flooring surfaces. Interface has built a leadership position in this rapidly-growing category and we are well positioned to capitalize on this secular shift.

We have been working very hard to improve our performance of our Bentley Prince Street business, which manufactures both high-style broadloom and carpet tile products and we're excited about the first quarter sales growth. Sales increase 24% and its operating income doubled despite some isolated manufacturing inefficiencies from a changeover in using more recycled materials and our processing to meet the state of California criteria. Looking forward, we expect to see that at least Bentley Prince Street generate significant improvements in profitability during the remainder of the year.

We are disappointed with the performance of our Fabric business, which reported additional operating losses during the quarter as a result of costs associated with headcount reductions, as well as continued manufacturing inefficiencies related to our plant consolidation program. We are diligently working to improve this business and based on its performance in March we do believe that the worst is finally behind us. However, we're also exploring possible strategic options and our analysis led us to record a non-cash impairment charge for the quarter.

The outlook for our core business remains excellent and we are poised to benefit from market opportunities that have played a major role in creating our success. Specifically, we continued to benefit from the secular shift toward modular carpet and our presence as a global market leader in this product category. The office market recovery continues, especially in the Americas and Europe and we believe that we are [at] relatively early stages of this cycle and there still is pent-up demand.

Our business in the residential market, while still relatively small, is showing very encouraging growth. We have segmented the broadloom business, having particular success in hospitality and health care and we continue to gain share in the corporate office segment. Sustainability is becoming top of mind among corporations around the world and as you have heard from me in the past, Interface has been a pioneer in this area and is well positioned to take advantage of this movement.

Going forward, we are focused on seizing the market opportunities in front of us and we remain optimistic about the ongoing recovery we're seeing in the office market and the potential for our segmentation strategy to drive demand for our products in other key markets. Through the first three weeks of this quarter, business has remained strong and we are looking forward to continued growth in 2007.

With that, I will turn it over to Patrick.

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 Fabrics business which was divested in April 2006, net sales increase 19.7% to $279.3 million from sales of $233.3 million in the first quarter of 2006, representing our 16th consecutive quarter-over-quarter improvement in sales. Including the European Fabrics business, sales increased 11.4% from $250.6 million reported in the first quarter of 2006. Gross profit margin for the first quarter of 2007 was 31.6% compared to 31.5% in the first quarter of last year. SG&A expense in the first quarter of 2007 was $64 million versus $58.3 million a year ago. The increase is due to continued investment in our selling and marketing infrastructure. However, due to successful cost control efforts, our SG&A expense decreased as a percentage of net sales to 22.9% from 23.3% in the same period last year.

As Dan said, during the 2007 first quarter, we recorded a onetime charge of $48.3 million for impairment of goodwill and other intangible assets associated with our Fabrics business. We also recorded a $1.9 million loss on the disposal of assets in our specialty products business. On a GAAP basis, the Company reported an operating loss for 2007 first quarter of $26 million compared to an operating loss of $3.3 million in the same period in 2006. Excluding the impairment charge and the loss on the disposal of the assets in our specialty products business from the 2007 first quarter results and the Company's European Fabrics business, the $3.3 million restructuring charge from the first quarter of 2006, operating income for the first quarter of 2007 increased $24.2 million, or 8.7% of sales from $19.5 million, or 8.4% of sales in the first quarter of last year. Interest expense for the first quarter of 2007 was $9.1 million versus $11.2 million last year, reflecting less debt during the period.

For the first quarter of 2007 including the onetime items we reported a net loss of $40.6 million or $0.68 per share, versus net loss of $17.1 million or $0.32 per share in the 2006 first quarter. Depreciation and amortization in the first quarter of 2007 totaled $8.6 million versus $8.2 million a year ago. Capital expenditures in the first quarter of 2007 were $11.9 million versus $8.6 million in the 2006 first quarter. Overall, we had a net use of cash from operating and investing activities of $30.2 million in the first quarter of 2007 compared with $43 million in the first quarter of 2006. This difference was primarily due to improved working capital management in the first quarter of 2007 versus the prior-year period.

Turning to the balance sheet, at the end of the first quarter of 2007, we had $64.7 million in cash. During the quarter, we reduced our outstanding debt by an additional $16 million. In total, we've paid down $65 million over the past 18 months. At the end of the quarter, our additional borrowing capacity under our primary revolving credit facility was $97.6 million. Our average DSOs in the first quarter were 52 days versus 55 days in the first quarter of 2006 and our inventory turns were 5 times versus 4.3 last year.

Now I will review some of the details of our individual business units. Our Modular business continued to post strong year-over-year growth. In the first quarter of 2007, total Modular sales grew 23.7% to $205.2 million from $165.9 million in the same quarter of last year. Operating income rose 29.5% to $26.8 million or 13.1% of sales, from $20.7 million or 12.5% of sales in the first quarter of last year primarily driven by the increased revenue and improved manufacturing efficiencies. Our Modular business continues to perform well in all geographies, but the most significant growth has been in Europe and in the Americas.

At Bentley Prince Street, sales rose 23.9% to $36 million from $29.1 million in the first quarter of last year, operating income nearly doubled to $1 million in the first quarter of 2007 from $500,000 reported in the first quarter last year. As Dan noted earlier, temporary manufacturing efficiencies from a changeover to processing more recycled material impacted our results for the quarter. We expect Bentley Prince Street to generate significant improved profitability for the remainder of the year.

Our Fabrics segment had sales of $35.8 million for the first quarter of 2007; modestly up from the $35.2 million reported in the year-ago period when you exclude Europe's Fabrics business. The Fabrics segment reported an operating loss of $50.3 million, which included the onetime impairment charge of $48.3 million. The operating loss during the quarter was primarily due to costs associated with headcount reductions and some manufacturing inefficiencies related to our plant consolidation program.

Now I will turn the call back over to Dan.

Thank you, Patrick. Before we open up for questions, I'd like to jump back in here and give you a few additional thoughts.

While the corporate office market continues to recover, we don't need a robust office market in the United States to grow our Modular business. With the success of our market segmentation strategy, the U.S. corporate office market now represents about 25% of our overall business. We improved our profit margin in the Modular business by 60 basis points despite some growing pains to catch up with our capacity -- with demand, and that is largely behind us. As Patrick said, we believe that our Bentley Prince Street business is taking market share and that its profit margins will improve. While we're disappointed with the performance of our Fabrics business, its management team is working very hard to return to profitability and we believe we're finally over the hill and we will see significant improvement going forward.

And finally, Q1 is easily our slowest quarter and we hit our highest order level in more than six years which does bode well for the remainder of this year.

With that, I'll open it up for questions.

(OPERATOR INSTRUCTIONS). Keith Hughes, Robinson Humphrey.

Dan, within the tile business, had fantastic revenues, but the operating income was up more than revenues, but not up as much as much as it would normally be with that good a business. Was there anything specifically within tiles that kept profits from being even better in the quarter?

Yes, we're actually adding capacity in Thailand and in Australia, significant -- we're actually doubling the footprint of both those businesses. And whenever you're adding capacity, you have temporary disruption and we're running our Australian business actually 24/7, and so you had inefficiencies along with that. The capacity in Thailand is up and running today and we're over the hill there and we have a fantastic plant there that has a lot of capacity that can actually help service other markets. And so I think that was the biggest issue related to the margins.

Did you have number on what that hurt you in the call?

No, we don't throw that out there, but I will tell you that our Asia-Pacific business typically is a 15%-plus operating income business and we hit 10% for the quarter.

Okay. And also on raw materials, Mohawk was talking about an increase coming. Are you seeing one on nylon in commercial?

Not yet. We're hearing rumblings of it.

That's all for me. Thanks.

Sam Darkatsh, Raymond James.

Talk about the orders up 20% companywide, which is very impressive. Talk about how that looks on a segment-by-segment and/or a region-by-region basis to see how broad-based that might be?

If you look at around the world, the U.S. and Europe were stronger than Asia, but Asia was actually very good as well. As we said, the segmentation, actually the nonoffice outpaced the office as far as orders and growth goes. If you looked at Bentley Prince Street, our broadloom business was actually up nicely, as well as the modular business, which is -- it's nice to see that the broadloom business is actually taking some share. It was pretty broad-based, Sam, it was not just one particular area. We had a lot of success in hospitality this quarter and health care.

You also mentioned in your prepared remarks, Dan, that you think you're in the -- I don't know if this is an exact quote -- but you think you're in the early innings of your demand ramp, and yet its look like BIFMA, with February as an exception perhaps, decelerating. How would you help investors reconcile those two points?

I'm not sure on that, Sam. I actually attended a U.S. Green Building Council deal last night in New York and I probably talked to 40 architects and designers, and they're basically saying that the market is fantastic. I have talked with architects, designers, and the U.S. market is as good as I have seen it in awhile. So I'm having a hard time reconciling the two, and possibly the modular carpet is taking a lot more share of the office market than we realize. But I know in Europe, we're in the very early stages, and typically the U.S., when you have the downturn that we had, is a seven- to eight-year cycle, and we're probably in year 3, 3.5.

A question for Patrick. With you NOLs now, Patrick, what do you suspect the difference between cash taxes and reported income tax expense might be for the quarter? What might the cash flow benefit be from that this year?

Probably a $15 million to $20 million delta positive.

And the amount of the NOL at present (MULTIPLE SPEAKERS)

Is $[130] million.

$[30] million in total?

Yes.

Okay, I will get back in the queue. Thank you much.

Matt McCall, BB&T Capital Markets.

Dan, you mentioned -- I wanted to reconcilable a couple of comments. You said Europe and the U.S. were very strong, didn't hear you mention Asia, wanted to get some more color on demand trends there. I understand the margin pressure or comment, but I think you commented that Australia was running flat out, you're adding capacity, so I don't think there's a demand issue necessarily, but I just wanted understand what's going on in (MULTIPLE SPEAKERS)?

Asia-Pacific was up significantly, it just wasn't up as much as Europe and the U.S. But, it was double-digit.

So no issues, I just -- I haven't heard you mention it. And you talked a little bit I think in the first question about the incremental spending with Thailand, with Australia. What about on the SG&A line? Can you talk a little bit about some incremental spending there?

We're still obviously investing in infrastructure to grow this business and we are not adding salespeople at the rate we did last year and we're taking a little bit of breadth, but we're still adding people and I think we will get leverage out of the salespeople that we added last year. But we're still investing in this infrastructure, particularly in hospitality, particularly in some of these other segments to grow it, and in China and in India.

I think in the past, Dan, you've broken out some of the incremental spending. I know you have talked about the -- specifically the residential effort, you talked about losses there. Any other color you can add?

We actually improved on the loss a little bit. It has been running $1 million a quarter and we were between $500,000 and $1 million, so we are seeing the improvement in the sales go to the bottom to line there. And I'm really, really encouraged by the rollout of Target and what that can do for this business, and obviously the Martha Stewart rollout as well. So we're getting a lot of great activities that I think will drive the top line there. And, as I said, I think we can approach breakeven by the end of the year.

And on that Target note, Dan, I think you said 1500 stores. We were in 300, correct?

Yes.

So the test went well. What's the timing of that 1500?

It rolls out September.

And then finally, you made a couple of comments about Bentley Prince Street, the expectations for margins to improve in '07 and I think the target there is 8%. We're going to reach the 8% by the end of the year -- how are you looking at the [improvement]?

The target's 24.8% and it's the build during the year to get to that level. But, yes, I think our basis has always been [0.88]% in 24 months and I think we're well on that way.

Okay, thanks guys.

John Baugh, Stifel Nicolaus.

By the way, good working capital numbers, that's good to see. I wanted to zero in on modular again and maybe some comments on European margins with the sales growth there and comment on sort of how the U.S. profitability compared.

U.S. obviously still the highest that we have. I will tell you that the European business has now crossed double-digit land and our goal has always been to get that to 15% and I know we'll see our way to 15% there.

Is there in the segmentation when you look at your numbers, say -- .

Back up on -- one of the things that's great about Europe is that we do have a lot of excess capacity there. We're running probably about 65% capacity, so we're not investing in a lot of capital in the infrastructure to grow that business. So you will see a very, very good incremental margin improvement with sales growth.

So that 26%, I think it was order increase in modular, [a good] -- Europe's probably slightly ahead of that?

A little bit.

So, you expect to leverage that capacity going forward in Europe?

Yes.

On the segmentation, as you further penetrate I guess maybe even education or hotel/motel, you've done well with hospitality, health care. Is there any margin differential between that and the corporate markets?

We try and price our products at the same increment margin, John. In the mix, there may be a little -- you may have different price points at the low end or the high end, but overall, we try and price it very similar to the office market. And they're using unbranded nylon yarn and so forth to try and bring the product cost down, but incrementally margin wise, we try and keep it very comparable.

And how was your average selling price per square yard if you still measure it that way? I think it's north of $20. Is it still moving up, is it stagnant?

I would say that it's -- we haven't really had a price increase lately, so it's somewhat stagnant.

Okay.

You're getting comparable -- you're getting unit growth now.

Lee Brading, Wachovia.

Hi, guys. A couple of questions here. On the amount of the debt reduction, was that all in buying back bonds, and particularly was that buying back the [730s]?

Yes, yes for both of those questions.

Okay, great. And CapEx for the year -- do you guys still expect to spend 35 to 40?

Yes.

And then from a working capital standpoint, you talked about Target coming on in September. Should we still expect working capital trend like you have in the past, decline from here by year end?

Yes.

Okay. Is there much of an investment when you look at the Target operations?

There obviously is some investment in ramping up for that, but it's all within our plans. It will come down as the year goes along.

Great. And then talking about the fabric side and impairment, what did you guys write the value of that fabric business down to from a book value standpoint?

We really don't comment on that.

I guess can you comment a little bit about the exploring alternatives at this point? How are you going about that? Are you hiring somebody --?

Don't comment on that either, Lee. I'm sorry, it's just something -- we don't comment on acquisitions or dispositions.

Great.

Lee, let me take a minute and just amend an earlier answer that I gave on the delta between the accrued taxes and the cash taxes. That number is closer to 15 now that I got a minute to think about it, the delta between the amount that should be accrued and the cash taxes. Let me just amend that earlier question, please.

Thank you, that is helpful.

Stephen Kim, Citigroup.

This is [Mark Montanan] on the line for Stephen. Early in the call, you suggested that expected residential breakeven would probably occur around year-end. Do you still expect this to be around the $25 million annual sales pace? And if so, how far on an absolute basis are you from this rate?

We don't really comment on that first part, but yes, $25 million is the rate that we expect to be at. Actually, that's what we expect to do for the year (MULTIPLE SPEAKERS) so the rate would be higher at the back end.

And my second question, in reference to the cash balance and future years cash flow, is debt reduction still your number one priority?

Yes, it is.

All right, thank you.

[Chris Venan], Wachovia Securities.

I just had a quick question. You talked a little bit about not taking a price increase in awhile. Any thoughts about anything like that through the rest of '07?

We'll probably have a price increase at some point in time in '07.

And then outside of some sort of ASP increase or something like that, anything else that you think can drive operating margin outside of just leverage from volume, that kind of stuff?

I would say that the raw material environment is okay. It's not a negative for us, and if we can get the sales growth and utilize obviously the assets that we have, we'll see improved margins.

Great. Thanks, that's it.

Charles Kantor, Neuberger Berman.

Hey, good morning. One of my questions has already been answered, but I guess just on a more macro level, there seems to be a tremendous I guess movement to a greener world, which is I think good for everyone and it certainly seems to have been -- I guess this is the year of being green, maybe the decade or maybe the century. How much is that impacting your overall environment, and how sensitive are your clients and prospective clients to the fact that you have been this kind of company for a very long time and it's, excuse the pun, put it's part of your fabric?

I would say, Charles, that that's one of the advantages that we have in the marketplace, is that we went down this journey or this path in 1994 and there's a tremendous amount of credibility that we have in the marketplace in that we've been talking about this for 13 years. And so, yes, it's part of our DNA, it's part of our fabric and it's an unbelievable the amount of companies are trying to figure out what their position is going to be on climate-neutral products and offsetting the carbons and so forth. And we have a lot of knowledge that we can share with these customers and it just helps in the business world. The A&D community, they are very, very in tune with the environment, have been for quite awhile. And now their customers, the end users are asking the same questions and it's -- the movement is here and it's to stay and it's accelerating and we're in a great place in that we actually offer carbon-neutral products today, climate-neutral. All of our carpet [sold] in the United States is climate-neutral and it has been that way from the beginning of the year and we're in a good place.

I guess I just want to push a little bit on this. I know your desire and skills have always been kind of a front-runner in the market, but if you could -- how important do you think in the competitive environment does being a green company provide you with some of these very large multinational [corporate] (inaudible)?

I would say that there's two things that are happening today in the marketplace that are actually playing into our strengths. One is that companies are coming to us about sustainability and want to learn about it and the fact that we're global. They now want to provide products on a global basis and we have that advantage as well. And it's very important to the marketplace. And last night, I was talking to our sales force in New York City at this event and they were saying that it's just amazing how many customers are calling them in to talk about sustainability and want to talk about our global platform. And it's an advantage that we have and we are winning business with it.

Thank you.

(OPERATOR INSTRUCTIONS). Eric Glover, Canaccord Adams.

I'm just wondering if you could provide some color on the manufacturing changes you're making in California to increase the recycled content. Like how far along is that process and why you making those changes specifically?

There has been a change in the California criteria where you have to have a certain percentage of post-consumer recycled content in your product to sell in California from a government standpoint, and so we made a move to create -- have a certain percentage of our backing post-consumer to meet that criteria. And we're done with it. We actually are through that and it's running fine.

What is that percentage?

It's actually 10%.

Thank you.

Larry Taylor, Credit Suisse First Boston.

I wonder if you guys could comment on your objectives for the balance sheet longer-term. Obviously you've made a lot of progress repaying debt. Where do you want to be in terms of leverage over time and how do you think about those goals?

To me, I'm not an investment-grade CEO. I do want to have a very healthy balance sheet and the ability to invest in our business and I think we're approaching that. We will continue to pay down debt and at some point in time we will announce stock repurchase programs when we get to a certain point in the balance sheet. $200 million is a very comfortable range for us in EBITDA to find a debt of 2.

Okay. When you think about other uses of cash flow, and again longer-term, and I'll try and keep the question general so I'm not asking you to comment too specifically, but are there strategic investments that you might make either in acquisitions or in the development of new business lines the way you have with residential that could be a use of capital going forward?

Today there's nothing really on the horizon. In our minds as a management team, there's tremendous headroom, particularly in the modular business to take a lot of share through all of the segments that we're going after, residential and obviously the nonoffice segments, and we're going to drive that. We're not going to put our head in the sand obviously about acquisitions, but we're not actively pursuing that today. There are some things on sustainability that we might look at that are incremental to our business and the recycled content that goes into our product.

Okay, thank you very much.

Jeff Kobylarz, Stone Harbor.

Good morning, guys. I was just curious if you could just say how much were the start-up in manufacturing efficiencies that occurred in Thailand and Australia?

We gave a percentage that typically we're 15% in our Asia-Pacific business operating income wise, and we were at 10% for this quarter.

And did all of it occur in the first quarter, or is some of it going to occur in the second quarter?

We still have a little bit in Australia, but Thailand is up and running nicely. We are through that hump and we should see the improvement coming out of both Australia and Thailand. Thailand is taking some pressure off our Australian business.

Thanks very much.

There are no further questions in queue at this time. I would like to turn the call back over to management for closing remarks.

Thank you for listening and I expect to have a very good year this year and thank you for being shareholders and I'll talk to you next quarter.

Thank you for attending today's presentation. This concludes the conference. You may now disconnect and have a great day.