Interface Inc (TILE) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Interface earnings conference call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Miss Jessica Greenberger of FD. Please proceed.

Thank you, operator. Good morning and welcome. Sorry, good evening, and welcome to Interface's conference call regarding fourth quarter and full year 2008 results. Joining us from the company are Dan Hendrix, President and Chief Executive Officer, and Patrick Lynch, Senior 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 financial results. We will then open the call for Q&A.

If you have not yet received a copy of the results release which was issued today 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 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 An archived version of this conference call will also be available through that website.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 in the heading risk factors in item 1 A of the company's quarter report on form 10-Q for the quarter ended September 28, 2008 and annual report on the form 10-K for the fiscal year ended December 30, 2007, each of which are 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 these 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 today, each of which can be found on the investor relations portion of the company's website, www.interfaceglobal.com.

Lastly, please note that this call is being recorded and broadcasted 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 and broadcasting 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. Before we get into specifics about our quarterly results, I'd like to begin by talking about the challenges of the current operating environment and some of the opportunities we are seeing today. The fourth quarter was somewhat of a perfect storm for us. As you know, most of our business is make to order, which is a competitive advantage for us in normalized market conditions. Under this business model, we ordinarily carry a relatively lower level of fixed costs and a higher level of variable manufacturing costs compared with most companies.

Although our business was hanging tough in October, we saw a decline in sales and order activity in November and December. We reacted promptly to implement restructuring initiatives in the form of employee reductions and the shutdown of our manufacturing operation in Canada, but our margins still suffered and they were further impacted by currency changes. Based on our current level of business, we adopted the further restructuring activities that we announced this afternoon. Combined with our restructuring announced in December, these actions are expected to yield annualized savings of about $47 million. We will begin realizing most of those savings in the second quarter. In addition, we're seeing the cost of raw materials come down as well. There are some bright spots.

The secular shift toward carbon tile is continuing, driven now by refurbishment more than new construction. There is growing demand among customers for sustainable flooring solutions and our leadership position gives us a competitive advantage in being able to capitalize on this trend. Our residential carpet business in the US continues to grow even in the current market conditions, further evidencing the trend of carpet tile taking share in the overall carpet market, and we expect floor to be profitable in 2009.

Of course, the office market is not promising in the near term, before after years of opening up penetrating nonoffice segments, we now have a more balanced market approach. The nonoffice segment represents 40% of our sales company- wide with the office market representing 60%.

We are optimistic about the prospects in the nonoffice segment such as government, education and health care where the economic stimulus package in the US and other countries should drive additional sales, particularly as we move into the second half of this year. In fact, we're beginning to see some of these projects coming through in very select areas. In the timing of the stimulus funds for education projects may be just right as the second and third quarters are our historical buying season in that segment.

Bentley Prince Street is perhaps our toughest business to manage in this environment because of its high-end designer-oriented products which are typically the first to be cut by customers. In response, we've introduced lower cost products to appeal to a appeal to a broader price spectrum. In addition, we've taken a lot of cost cuts out of this business. We've reduced employment by 30% over the last two quarters. While we have not -- we have yet to fully realize the impact of these actions, we continue to see good demand for Bentley Prince Street modular products and are still working hard to further align its operations and cost structure with the current demands.

We're intent on making sure that we're in a financial position to not only weather the current environment, but to be able to take advantage of the opportunities in the marketplace that I've described, to take market share and emerge as even a stronger competitor.

To conserve cash as we announced in our press release, we decided to reduce our quarterly dividend to a $.0025 which should save us about $7 million in cash in 2009 while still maintaining our status as a dividend-paying company. This decision is part of our ongoing initiative to proactively manage our liquidity, to prepare for the maturity of our senior notes in 2010. Now I'll turn the call over to Patrick for him to give you some details about the quarter.

Thank you and good afternoon, everyone. I'll now take a few minutes to outline the financial highlights from the quarter. Sales in the fourth quarter of 2008 were $247.2 million compared with sales of $293.3 million in the year-ago period. The decrease in sales during the fourth quarter was due in part to negative impact of currency of $27 million as over 50% of our business came from abroad and 39% of our orders for the quarter were denominated in Euros, pounds sterling and the Australian dollar. Weakness in the corporate office segment globally and the deterioration in the emerging markets also contributed to the year-over-year sales decline.

Gross profit margin in the fourth quarter 2008 was 31.4% compared with 35.5% in the fourth quarter of last year. As Dan mentioned earlier, our margins were affected by the inefficiencies that resulted from the downturns as well as currency impacts. SG&A in the fourth quarter was $59.2 million or 23.9% of sales compared with $64.7 million or 22.1% of sales a year ago. Excluding unusual items which were detailed in our press release, and I'll discuss them again in a moment, operating income in the fourth quarter of 2008 was $21.2 million compared with operating income of $39.4 million in the fourth quarter of 2007. Including those items, the operating loss for the fourth quarter of 2008 was$53.8 million. As a percentage of sales, operating income excluding the unusual items decreased to 8.6% from an operating margin of 13.4% in the fourth quarter of 2007. Interest expense in the fourth quarter of 2008 was $7.4 million versus $7.2 million in the fourth quarter of 2007.

Net income for the 2008 fourth quarter excluding the unusual items was $6 million or $0.10 per diluted share compared with net income of $20.3 million or $0.33 per diluted share in the year-ago period. Including the unusual items, the net loss for the fourth quarter was $79.3 million or $1.29 per share.

The company's fourth quarter results included the impact of the following items: $61.2 million or $0.99 per share in noncash charges resulting from the impairment of goodwill related to Bentley Prince Street business. $11million or $0.13 per share in the previously announced restructuring charges. $13.3 million or $0.22 per share in tax charges resulting from the anticipated repatriation in 2009 of approximately $37 million in earnings from our European and Canadian subsidiaries. $2.8 million or $.05 per share in the noncash charges related to the decline in cash surrender value of our company-owned life insurance. Depreciation and amortization was $6 million in the fourth quarter of 2008 compared with $5.4 million a year ago. Capital expenditures in the fourth quarter were $8.5 million compared with $13 million in the fourth quarter of 2007. For the full year of 2009 we expect capital expenditures to be in the $10 million to $15 million range.

Now I'll take a few minutes to review some of the details of our individual business segments. In the fourth quarter of 2008, sales in our modular carpet segment were $218.5 million compared with $257 million in the fourth quarter of 2007. Exclusive of the restructuring charges, operating income for the modular segment decreased to $23.5 million or 10.8% of sales, inclusive of these charges operating income for the modular segment decreased to $12.8 million or 5.9% of sales from $40.1 million or 15.6% of sales in the 2007 fourth quarter.

The Bentley Prince Street sales were $28.7 million in the fourth quarter of 2008 compared with $36.3 million in the fourth quarter of 2007. After the good will impairment charges, Bentley Prince Street recorded an operating loss of $61 -- sorry, $63.9 million. As Dan mentioned, we're working hard to right size Bentley Prince Street and hope to see a stabilization of results in the first half of 2009. As an update on the restructuring, the Canadian shutdown and the employee reductions that we announced in December are nearly complete and we should be finished with all of our restructuring activities, including those announced today by the end of the first quarter.

Turning to the balance sheet at year end 2008, we had $71.8 million in cash. Inventories were $128.9 million, up slightly from the $125.8 million at year end 2007. Average DSOs during the fourth quarter of 2008 were 48.2 days compared with 54.3 in the fourth quarter of 2007. And inventory turns were 5.5 times compared with 5.9 times in the year-ago period.

We entered this difficult environment in a strong financial position and we have every intention of managing the business to maintain our financial strength. Going forward, we are very focused on continuing to generate strong cash flow, preserving our margins and maintaining the necessary financial strength and liquidity to navigate these times. With that, we'll now open the call up for questions. Operator.

Thank you. (Operator Instructions). You have a question from the line of Keith Hughes of Suntrust. Please proceed.

Thanks. A couple of questions. First, on the bond issue that's due in about a year, what is the current amount outstanding on that, Patrick.

$152.8 million.

$152 million And you had bought some bonds back in the past; is that correct?

We did in the third quarter in October. We bought about $22 million back in.

$22 million. Okay.

In the fourth quarter October, excuse me.

And the cash went down a little bit from the third quarter to $70-ish million. Usually I would expect you to get the money out of working capital in the fourth quarter. What's the status there?

Well, we actually bought $22 million in bonds in the fourth quarter, Keith.

Okay. So that's what is bringing the cash down. Okay. Okay. And I guess as you look towards this maturity, is the goal to get cash up and just pay these bonds off or would your preference be to just try to roll them over? What's your feeling on that?

We're going to run the business for cash. I mean we're cutting CapEx. It will be, you know, $15 million to $10 million, $24 million, I think we're going to get some out of working capital, obviously as this current environment in sales decline and we're going to look at all the options out there to refinance some of those bonds, but we're not -- you know, we're not -- we're going to run it as if we can't do that right now in this environment and we're going to run it for cash.

If you weren't able to roll over easily, would you just use the cash and then borrowings off the revolver, Patrick, to bring these things in?

That's right.

Okay. And final question, you talked about raw materials in your prepared statements. Can you give us some sort of indication how much raw materials are down given current prices from the peak?

Yes. I would -- we've got actually a calculated number. From the fourth quarter to right now prices -- if you look at the raw material spend is about $25 million down.

Down $25 million. Okay. On a percentage basis, how much would that be?

About 9%.

9%. And is that primarily nylon that's come down?

That's also backing as well.

Nylon and backing. Are those -- do you think those prices are going to continue to decline short-term?

I do.

Okay. Thanks a lot.

Thank you.

Your next question comes from the line of John Baugh of Stifel Nicolaus. Please proceed.

Good afternoon.

John.

The fourth quarter, if my math is right, you did about $10 million in free cash flow; is that correct?

That's about right.

And what -- if we got a spread of $10 million to, what, $15 million between D& A and CapEx, let's just assume we don't have any net income for the moment, leave that out, but, if we've looking at a 20% -- you know, 15%, 20% revenue decline in '09 versus '08, what would the free cash flow number be for '09 if that scenario developed with a zero net income number?

Well, I mean I haven't done it with a -- you know, under those scenarios, but probably in the $30 million range.

Okay. And I believe you mentioned that by the end of Q1 all of these restructuring activities, including the one you just announced today, would be implemented or completed. Is that right and as we think about it, so this $47 million annual run rate and savings really begins April 1?

Uh-huh.

Wow. That's quick work. Dan, Bentley just continues to be an issue and, you know, it sounds like tile is doing well. I assume broadloom continues to bleed. What are both the kind of near term financial options or levers, and then sort of maybe comment on the longer term strategic options or levers as it relates to that business?

Well, we're turning every knob we can to reduce the costs down on this business. I mean we're trying to gear it to break even somewhere around $100 million in revenues.

Okay.

From a strategic standpoint, and I think you got to get through this storm before you try and think about strategic options for that.

Fair enough. And then could you comment on -- I think you said international was 50% of the mix for the quarter. Did I hear you right on that? And then comment on Asia, Europe, US and maybe some color and, particularly in Europe, as to some of your key markets there and what the -- you know, I assume the outlook is pretty bleak, but any color.

Well, it's been 50% US and 50% outside the US. That mix has been there most of the year, starting 2008. If you go to the European market, France actually looks okay. The UK is one that is getting hit, but it's not getting hit as bad as you think except for the fact that the currency has been impacted so much when you translate it. Our -- on a pound sterling basis, our UK business was somewhat flat, actually, which is pretty amazing in itself. And you've got a lot of competitors that compete from the continent into the UK and they've seen the Euro -- their Euro sales decline by over a third.

So from a competitive standpoint, I think the UK is great. But I think the UK is going to be one of our toughest markets. We're seeing London really be impacted, but outside of London, we're actually seeing some pretty good activity. But I anticipate the UK to be the toughest market in 2009. Germany was actually up double digits for us and France showed some strength in the fourth quarter, but for the year, France was down double digit as well. Eastern Europe really had a liquidity crisis in the quarter and a lot of the construction work just stopped because of funding issues. And eastern Europe really hasn't started up yet.

If you go to Asia, the Australian market, besides the fact that currency is down 35%, continues to be a good market for us. Even going into 2009, it appears to be a good market. China was up 22% for the year, but I anticipate in China that we are going to see some short-term issues around China as well. The pipeline in China looks pretty good going into the second quarter. It's been soft in the first quarter and, you know, Asia, I think, is going to hopefully be okay. We'll see. It's started out slow, but it was okay in the fourth quarter. In the US, we were up in the US for the year.

If you look at the commercial market, I think it was down, if you look at it from an industry standpoint, double digit. We got impacted in November and December in the US with the office market really showing some weakness, but the other segments are holding their own.

That's a great run through, thank you. And then just lastly, are you seeing -- I assume in your mix your office is your highest margin. If I have that wrong, correct me. So I would assume there's some pressure on margins going forward with the mix. Could you comment on your -- that and your average selling price and whether pricing is an issue and volume is weak and raw materials coming off?

So far the pricing is flat for us in the US. That's the market you're probably talking about the most. And I don't -- you know, we typically don't lower prices and I don't really see us doing that, but our price is holding in there.

The issue we have is we were geared up for a lot more business within the plant -- plants in general and we had to reduce a lot of overhead costs and that's what restructuring charge was all about, was reducing the variable manufacturing and the variable overhead to meet demand. But from a variable margin, standard variable margin standpoint, I think we're going to hold our own there. The education market is -- the K through 12 is typically a little bit lower margin job, but we actually also sell a product that's engineered to meet that marketplace. But the higher end is typically very close to the corporate margins as well.

Great. Thanks. Defer to others.

Your next question comes from the line of Matt McCall of BB&T Capital Markets. Please proceed.

Thank you. Can you hear me?

Yes.

Okay. Thanks. I'm at an airport, kind of flying blind here, so bear with me. Dan, you just mentioned you were addressing your variable overhead, your variable manufacturing costs in terms of restructuring. Your sales are down about 16%, SG&A only down about 9% year over year in the quarter. What's the expectation of that going forward? I see the work you're going to do on the CapEx line. How should we look at SG&A spend in '09?

We're going to take SG&A down further. Part of the restructure was not just the manufacturing, it was also the SG&A side. We ended up at $55 million, $57 million in SG&A. What was our SG&A in the fourth quarter? Sorry. 59? I try to get SG&A to around $52 million, $53 million, Matt.

Okay.

Right now that's my goal in absolute terms and then adjust it from there if the market continues to deteriorate.

And that's also assuming an April start for --

That's with everything we've got in play.

Okay. Okay. And then -- and in the release you referenced significant profitability in '09. I know you are talking about $47 million in cost savings and -- but what volume level do you assume there? Do you assume the current level hold, the Q1 run rates hold. How should we look at your expectations and what is baked in -- what your cost savings should bake in from a profitability standpoint?

What we're trying to do is manage it to a certain level of sales and, obviously, you need to do that work and make sure that our modular businesses are over 10% operating income. That's how we're looking at it and we're adjusting to it based on quarter to quarter business activity.

Okay. All right. I think that's all I have. Thank you, guys.

Your next question comes from the line of Sam Darkatsh of Raymond James.

This is actually Sam -- Jeff calling in for Sam. My first question would be on pricing, seeing any competitive pressure there, still having success on price increases?

Yes. We've -- we're holding our own on price. Actually, we're holding our own on price really around the world. So I -- you know, pricing is not -- right now is not a margin issue for us today.

Okay. So no increase in promotional activity or no material increase?

No. We don't really -- we don't throw promotions out there except in our floor business, which is a very small business.

Okay.

That's our residential business floor.

Right. The restructuring that you just announced, can you walk us through which geographies that's going to take place in?

It's really a -- a lot of it is in the US related to trying to get the production down because we were geared up for a lot higher production and in the -- and in Europe. A lot of the European is around the SG&A line as well. So -- and we did it around the world, Asia as well. It's pretty much based on the size of business, it's pretty much in all areas we've taken costs out.

And this -- the Q1 restructuring, is that all in the modular segment, also?

No. Some of it was actually in the Bentley Prince Street as well.

And do you have that breakout for us?

We don't give that out. I'm sorry.

Okay. Those are all my questions. Thank you.

Thank you.

Your next question comes from the line of Lee Brading of Wachovia. Please proceed.

Hi, guys.

Hey, Lee.

On the cost savings, you mentioned that your goal is to hit a 52, 53 kind of run rate in SG&A. I mean to get there, what kind of -- at the $47 million cost savings, how much of that is running through SG&A?

If you looked at the cost savings that we have in play today, we're somewhere between 54 and 53, with everything that we've done so far, a quarter.

So far. So that doesn't include the 47 yet?

No, it does. I'm sorry. We're at 59. We've taken it down to l something that's -- to something that's under 55.

Okay. Make sure I'm understanding the repatriation and the cash flow and how that works. Does that -- the $37 million you're bringing back, if you looked at your cash balance now, is that $37 million in your cash balance now the reported number?

Yes. Everything with the exception of a portion in Europe which is availability under one of their credit facilities, which is about 10 million Euros. With the exception of that, it's all in cash.

Okay. So you'll fund that up over in Europe and then bring it over?

Correct.

When is the timing of that expected to happen?

We could do it any time. We'll just continue to monitor the cash balance and do it any time, probably the first half of '09.

Okay. And I don't know if I heard it. Did you say what is the revolver availability?

About $57 million.

Okay. And is that all the -- on the US side?

Just on the US facility. That's right.

Okay. Okay. And then --

There's 12 million in Europe.

Okay. In addition to that. Okay. On the working capital going forward, I mean obviously, you know, we're assuming sales decline, you get a working capital benefit. Is there -- I apologize if you already said this. Is there areas of improvement that you see that you can eke out more just from the normal decline in sales and working capital decline? Is there particular areas that you're focused on?

Obviously we're focused on inventories.

Do you see -- are there opportunities there?

Yes, there are some opportunities within our Asian business. We have a lot of high inventories around the yarn, raw material inputs and we're trying to get consignment put in in those areas to help with that. And then you've got just increased turns.

Okay.

You just -- you keep working at it and --

Right.

There's going to be a natural decline in working capital just due to the level of business.

Exactly. I wasn't sure if there was anything much more outside of the natural decline.

Not much. Except we're going really push on the turns.

Makes sense. And on the -- you gave out Q1 orders of, I guess -- well, not Q1, but first six weeks, I believe. What, down, 27%. Any breakdown international or by sector, any differentiation there?

I would say that the one that's getting hit really the hardest would be the European business, if you looked at it, and then what I call the China business that I alluded to.

Okay. And how is the US side doing?

The US is holding its own.

And when you say holding its own, kind of maybe more down in the single digits as opposed --

It's not single, but it's not down 27.

Got you. All right. Thank you very much.

Thanks. (Operator Instructions). Your next question comes from the line of Garland Buchanan of Babson Capital. Please proceed.

Hey, good evening.

Hello.

Have you guys done any bond buy backs?

We have not.

Have not. Okay.

Not since October.

Not since October?

Correct. We did $23 million in October.

Okay. So nothing in the most recent quarter?

Right.

Okay. And is your plan then to, if you can, buy bonds throughout the year or are you looking to settle at maturity?

We are being optimistic and keeping all of our options open there.

Okay. Any covenant issues of which we should be aware?

None.

Okay. And the $47 million in savings, is that -- is that something that's just going to keep you at more normalized margins or are you looking to get some net benefit in cash from that?

More normalized margins.

Okay. All right. Thank you very much.

Your next question is a follow-up from the line of Mr. Keith Hughes. Please proceed.

Yes. Patrick, can you give us the -- I don't know if you already said this, the excluding charges of operating profit for Bentley Prince Street and the same thing for corporate expenses?

Corporate expenses was 0, it was break even and Bentley Prince Street was $2.6 million loss in the quarter.

$2.6 million. All right. Thank you. And finally, Dan, you had commented on raw materials earlier. Is there going to be any benefit in the first quarter of raw materials or is that going to come later in the year?

There will be some.

Okay. Thank you.

Thanks.

Your next question is a follow-up from the line of Mr. John Baugh. Please proceed.

Yes, a quick for, Patrick, on the repatriation, the $13.3 million, is that cash that goes out in the first quarter. How do we think about the cash staying at the end of the year versus after repatriate?

This would be cash that we would just bring back from our Canadian and European subsidiaries. There's no cash going out. There's no cash taxes associated. There's a small withholding cash tax that we will have to pay, somewhere in the$500,000 to $600,000 range, but it is not a cash tax charge. It's shielded by the NOL. So we've just provided for it as part of the earnings per share charge and then we'll just, you know, intercompany transfer those cash balances from our Canadian subsidiaries and European subsidiaries to the US subsidiary.

Super. Thank you.

Okay.

You have a follow-up from the line of Mr. Matt McCall. Please proceed.

Thank you. You talked about the floor business being profitable in '09. What was the -- what were the total losses in '08?

$3.5 million.

$3.5 million. And that's the total business or just US?

That was the US. European is another 5 million.

And so is it US and Europe profitable in '09?

I anticipate the US to be profitable and I anticipate we'll cut the European loss to like [2.5] million.

So -- okay. Thank you all.

Thank you.

(Operator Instructions). One moment while we construct a list. Your next question comes from the line of Chris Arndt of Select Equity. Please proceed.

Yes, just a quick question on the US revolver and the European revolver, I just want to make sure I got this straight. There was $57 million available that you could draw upon in the US and $12 million in Europe; is that right?

That's right.

And how long does this revolver go out?

The US is December of 2012 and the European facility expires at the end of '09.

Okay. That's it. Okay, thanks.

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

Thank you and we'll talk to you in the second -- in the second quarter -- or the end of the first quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.