Interface Inc (TILE) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2009 Interface earnings conference call. My name is D'Malli and I will be your operator for today.

At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Jessica Greenberger of FD. Please proceed.

Thank you, Operator. Good morning and welcome to Interface's conference call regarding second quarter 2009 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 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 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 An archived version of this conference call will also be available through that website.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 annual report on Form 10-K for the fiscal year ended December 28, 2008, which has been 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 yesterday, 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 recorded or rebroadcast without Interface's expressed 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 and good morning to everyone. It will be no surprise for me to tell you that the economic environment globally remained very challenging during the second quarter. But we were successful in implementing our restructuring and cost cutting initiatives to scale our operations to the current market conditions. As a result we turned in solid results all things considered.

I'd like to point out that we are facing very tough year-over-year comparisons to last year's second quarter which was marked by the highest orders for the carpet tile in our history and our strongest second quarter ever in terms of operating income and earnings per share. That was a different economic time and place, though, so I'm really charting our progress on a sequential basis at this point.

As we predicted in our first quarter conference call, sales improved sequentially over the first quarter primarily driven by the buying season for the education segment. We continue to benefit from our market diversification strategy as non-office segments in general held up reasonably well compared with the corporate office market which remained weak globally.

As evidence of our progress, non-office market segments in the second quarter represented about 66% of our America's modular sales whereas non-office segments accounted for only 36% of America's modular sales in 2001 when we began this initiative. Additionally, the secular shift toward carpet tile is continuing as it takes share of the overall carpet market in both the office and non-office segments which I think says a lot about the long-term potential of our Company.

We successfully scaled down our SG&A to a level that we believe matches current operating conditions while still enabling us to invest in a long term growth strategy. This commitment to cost reduction combined with improved operational efficiencies and somewhat lower raw material costs drove our sequential improvement in operating income.

Obviously the other key to navigating the current market beyond aggressive cost controls and solid strategic positioning is ensuring adequate liquidity and maintaining a strong balance sheet. From this perspective, as previously announced, we successfully refinanced nearly all of our debt that was scheduled to come due in 2010. This was a big step in improving our financial position and as a result we have no significant debt maturities coming due in the next four years and $90 million of cash on our balance sheet.

Geographically we're seeing success in non-office segments in the United States, although the corporate office market here continues to suffer. And while our segmentation strategy is gaining some traction in Europe, conditions there and in emerging geographic markets where we are more dependent on corporate office sales, continue to struggle.

Australia's been holding up reasonably well particularly in local currencies on a sequential basis. Asia in general continues to drag due to reduced spending by multinational corporations. However, we are seeing signs of stabilization in China and actually an improving second half there and in Southeast Asia. The pipeline for construction projects in China is actually robust.

At Bentley Prince we began to see the actions we've taken to adjust product mix, reduce inventory and increased efficiencies take hold. We saw sequentially operating improvements in this business throughout the quarter. If Bentley Prince Street's third quarter sales hold steady around $25 million for the quarter, I think it has a very good shot at breaking even next quarter.

Looking ahead, while we are pleased with the operational progress that we made during the quarter, we're not changing our expectations for Europe or the emerging markets except for China. And particularly the corporate office segment is expected to remain challenging throughout the second half of the year. Overall the sequential trends are encouraging signs and we continue to be hopeful about the opportunities that we're creating through investments in non-office segments.

We believe we took the right actions to manage our costs at the right time to protect the profitability of our Company. With further investments in market diversification efforts, we believe we are well positioned to grow our share to the current market environment and we should eventually see the benefits at a meaningful leverage in an economic recovery. At this point though we are cautious about predicting when that will happen.

With those comments, I'll turn the call over to Patrick to provide you with more details on our financial position.

Thank you and good morning everyone. I'll now take a few minutes to talk to the financial highlights from the quarter. Sales for the second quarter of 2009 were $211.3 million compared to sales of $295 million in the second quarter of 2008. A decline of 28.4% against what Dan has mentioned was a very tough year-over-year comparison.

Approximately 6% of the sales decline was related to fluctuations in currency exchange rates. Continued weakness in the corporate office segment globally and further deterioration in the European and emerging markets also contributed to the year-over-year sales decline. On a sequential basis sales increased 6% from the first quarter of 2009.

Gross profit margin was 32.7% compared with 35.7% in the second quarter of last year and 31.7% in the 2009 first quarter.

SG&A expense in the second quarter of 2009 was $52.3 million or 24.7% of sales compared to $71.9 million or 24.4% of sales a year ago and compared with $54.4 million or 27.3% of sales in the 2009 first quarter.

Excluding the unusual items, which we detailed in our press release and I'll discuss them again in a moment, operating income in the second quarter of 2009 was $16.8 million compared with $33.4 million in the second quarter of 2008 and $8.8 million in the first quarter of 2009.

Including these items, operating income for the second quarter of 2009 was $20.9 million. As a percentage of sales, operating income excluding the unusual items was 8% compared with 11.3% in the second quarter of 2008 but was an improvement from the operating margin of 4.4% in the 2009 first quarter.

Interest expense in the second quarter was $7.7 million down from $8.1 million in the second quarter of 2008.

Excluding the unusual items, net income attributable for Interface for the 2009 second quarter was $5.1 million or $0.08 per diluted share compared with $15.9 million or $0.25 per diluted share in the year ago period.

Including the unusual items, net income attributable to Interface for the 2009 second quarter was $3.7 million or $0.06 per diluted share.

The Company's second quarter results included the impact of the following pretax items - income of $5.9 million from patent litigation settlements, $1.9 million in restructuring charges and $6.1 million in expenses related to our $150 million bond offering of the 11 3/8 notes due in November 2013.

Depreciation and amortization was $5.8 million in the second quarter of 2009 compared with $5.5 million a year ago. Capital expenditures in the second quarter were $1.8 million compared with $8.1 million in the second quarter of 2008. For the full year 2009 we expect capital expenditures to be close to $15 million.

Now I'll take a few minutes to review some of the details of our individual business segments. In the second quarter of 2009 sales in the modular carpet segment were $186.6 million, down from $259.3 million in the second quarter of 2008 and up from $176.4 million in the first quarter of 2009.

Operating income for the modular carpet segment in the 2009 second quarter was $17.5 million or 9.4% of sales, down from $35.3 million or 13.6% of sales in the second quarter of 2008 and up from $6.7 million or 3.8% of sales in the 2009 first quarter.

The 2009 second quarter figure includes restructuring charges of $1.6 million or 1% of segment sales. Related to this segment for the first quarter, figure includes restructuring charges of $5.3 million or 3% of segment sales.

Bentley Prince Street sales were $24.7 million in the second quarter of 2009 compared with $35.7 million in the second quarter of 2008 and $22.9 million in the first quarter of 2009. Bentley Prince Street recorded an operating loss of $2 million in the second quarter of this year compared with operating income of $200,000 in the year ago period and an operating loss of $3 million in the 2009 first quarter.

Its operating loss in the 2009 second quarter including restructuring charges of $300,000 or 1% of segment sales. In the 2009 first quarter included restructuring charges of $400,000 or 2% of segment sales.

Despite Bentley Prince Street's operating loss for the second quarter, its underlying manufacturing performance has improved considerably from January to June so we're encouraged about its prospects for the second half of the year.

Turning now to the balance sheet, we generated solid free cash flow during the quarter driven by our initiatives to improve operating efficiencies and exited the second quarter with $90 million in cash on our balance sheet.

Inventories were $122.9 million at the end of the second quarter compared with $152 million at the end of the second quarter of 2008.

Our average DSOs during the second quarter of 2009 were 58.6 compared to 57.8 in the year ago period and 58.2 in the first quarter of 2009.

Inventory turns were 4.4 times compared with 5.2 times in the second quarter of 2008 and 4.3 times in the first quarter of 2009.

As Dan mentioned, we took significant steps towards our goal of improving our overall financial position during the period by addressing our near term debt maturities. We successfully completed $150 million aggregate principle bond offering of 11 3/8 notes due in 2013 and we used the proceeds to fund the tender offer of our 2010 notes, of which all of about $15 million were tendered.

Going forward, the net impact of these transactions will be an increase of interest expense of about $1 million per quarter beginning in the third quarter of 2009. We now have no significant debt maturities coming due until November 2013. From a liquidity perspective, our primary focus continues to be on balancing cash flow generations with investing in our business to assure that we are well positioned to execute our longer term strategic plan.

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

Operator?

Yes. (Operator Instructions) Your first question comes from the line of Sam Darkatsh with Raymond James. Please proceed.

Good morning Dan. Good morning Patrick. How are you?

Good morning.

Good morning.

First a housekeeping question. The patent settlement, is that a one-time payment to you or are there ongoing royalties -- (multiple speakers)?

It's a one-time, Sam.

One time, okay, thank you. Secondly, talk about what's to come sequentially Q3, Q4. I'm guessing you're going to get restructuring savings. It sounds like Bentley Prince Street is on the road to break-even on a similar run rate. Talk about what is -- assuming similar revenue run rate that you saw this quarter, what's likely to benefit you sequentially.

I would say that most of our savings related to a lot of the restructuring initiatives we saw in the second quarter. We'll get some benefit out of the restructuring in Europe in the third quarter. Pretty much all of that's been baked in. You will see some -- we'll see some benefit from Bentley Prince Street. I think we lost $1.8 million in the second quarter. If we run $25 million in that business I do believe we'll be around break even so you'll see an incremental pick up there.

Okay -- (multiple speakers)

(multiple speakers) -- the SG&A number at $52 million. I'm pretty comfortable with that number. We're going to continue to invest in some of the non-office segments, particularly in the US and in Europe, so I don't really see that going down much further. I think we'll see it sort of stabilize between $52 million and $53 million.

And the sequential restructuring savings, Dan? I'm sorry, if you said it I missed it.

There will be a little bit coming through in the third quarter. We got a lot of the benefits except for the Europe restructuring in the second quarter. So our run rate as far as what's happened with the restructuring and in the SG&A reductions and the manufacturing reductions that we took I think we'll run a little bit better from a manufacturing efficiency standpoint but I don't see us -- I see us maybe taking gross profit above $33 million from $32.7 million and I see us holding SG&A pretty much in the same range as it is now.

Two more quick questions then I'll defer to others. Talk about the office and European end markets. Are you seeing signs of stabilization? Are they still deteriorating? What types of things are you looking at that will -- or that we should look at that will give us a sense of what's to come over the next 6 to 12 months?

I would say that Europe is the toughest market that we have globally. The office market for us around the world was down about 33% this quarter. Europe was a little bit more than that. So we've got to really go after this segmentation piece but I don't really see Europe improving in the next six months.

I do see Asia-Pacific improving in the second half of this year and I would say from the US business that we are holding our own. We're probably taking a little bit of share based on some of the data that's coming out and I think we'll continue to do that in the US marketplace.

So you think the US office market has bottomed at this point?

Which one?

The US office corporate?

I'm not sure about bottoming. That's a really tough thing to call but I would say that we're holding our own in that marketplace today.

Last question. The order book at $220-some odd million, you've talked about -- first off, that's encouraging that even if it's dropping off roughly, it's the same as shipment so it doesn't look like there's an overall further deterioration. Help me understand. You've talked in the past about how seasonally education is more prevalent here in the second quarter. Is -- and you've talked about how oftentimes in the second quarter there's a bit of a bubble on the order book from education. How should we look at the order book as it relates to mix?

Yes, it's pretty tough to call what's going to happen with the mix because we're having a lot of success not just in education in the United States but in other markets so we did benefit in the second quarter from the education business from an order standpoint. But actually our shipments from an education standpoint second and third quarter are pretty comparable. So I'm hoping that we're going to offset the bubble in education with the other segments in the United States that we're doing well in.

And we don't really have the bubble anywhere else in the world except in the US, so there's a bit of buying season in the second quarter that hopefully we'll offset with some other penetration but it's something that we'll have to see.

How would you quantify the bubble or the education --?

I would say that we incrementally had about $10 million probably in orders in the second quarter --

Okay.

-- that impacted it.

Okay. Thank you both.

Thank you.

Your next question comes from the line of Keith Hughes with Suntrust. Please proceed.

Thank you. I had a couple of questions. Patrick, the currency impact, was it about $18 million in the quarter?

That's -- yes, that's right.

And that was all in modular, correct?

That's correct.

And so that, if I adjusted it, would be down roughly 20% year-over-year, 21%. In the first quarter I think you were down in the low teens currency adjusted. Is that right?

Yes, sounds about right.

Something like that. So I guess incrementally what was the difference between first and second quarter?

It was Europe.

Europe. Okay. And what was non-office down worldwide?

Currency adjusted it was down about 6%.

Six?

Six.

6%. And how much did currency -- excuse me, how much did raw materials help you out in the quarter?

$6 million.

$6 million.

That's year-over-year.

Year-over-year. That's what I wanted, okay. Let me see. And in terms of raw material pricing and carpet pricing, can you give us any sort of trends you've seen recently there?

You know, I would say that we track that religiously within our businesses and I think we're holding our own around the world. I haven't seen a deterioration in our pricing as an overall unit at all.

Are you seeing any kind of talk of a nylon hike in the second half of the year?

I have not heard that. We will fight that. I haven't heard that. It's pretty much still a supply and demand thing as well.

Okay. Thanks a lot guys.

Sure.

Your next question comes from the line of Lee Brading with Wells Fargo. Please proceed.

Hi guys.

Hey.

Hey Lee.

I was wondering if you could break out a little bit the Bentley Prince Street side. I know you had some modular there. I was just kind of curious on the performance on the modular versus the ---.

The broadloom was down about 38% I think and modular's down 25%.

Great and then you guys have given free cash flow expectations in the past. Do you still kind of see -- I think you mentioned in the past $35 million to $50 million for this year? Does that seem still on track?

I think so.

All right, great.

We had a very good second quarter in cash flow.

Yes. Then revolver availability I don't think you gave that. Where do you stand on that right now?

It's about $94 million globally, about half of that is in the US and the other half is under the European facility.

Great. Thanks very much.

Sure.

Thank you.

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

Good morning, everybody.

Hey Matt.

Let's see. Okay, I want to follow up on a couple. Raw materials, helpful on the $6 million. If you hold trends flat, hold pricing flat, what's that look like in the back half?

I think it looks like $12 million to $13 million back half.

So about the same on a run rate on a quarterly basis?

Yes. We get most of that in the first quarter as far as all the price reductions, so we get the benefit in the second.

Okay, so keep that consistent. Okay. And then on the -- you've talked about the non-office but specifically some of the end markets, can you -- I think last quarter you talked about retail being a little --

Yes, I would say that if you looked at it, it's retail, it's education and it's healthcare, and government. Those are the ones that we're doing pretty well in.

Education.

Hospitality is pretty poor.

So poor, no traction.

I think the market is -- we're looking at a pretty down market in hospitality right now.

Right. And as we look at the back half, I think you've mentioned [CVS] and some opportunities there in the past. As we look at the back half across those end markets, is there anything that jumps out as a --?

I think the government piece and the retail piece will continue to do well.

Okay.

Our retail is in stores. It's not residential.

Yes, yes. Well since you brought up residential, residential profitable in the quarter?

A little bit of a loss but it's -- I think for the year we're going to get there.

We're investing in some things there, trying to grow the top line.

And how big was that US and Europe this quarter?

It's still around $40 million, $50 million.

Total? Okay. Thank you, guys.

Thank you.

Thanks.

(Operator Instructions) And your next question comes from the line of Mike Terwilliger with Bank of America Securities. Please proceed.

Hey guys, it's Mike Terwilliger here. How are you?

Hi Mike.

Hey, largely asked and answered, but I wanted to drill in a little bit on the projected cost savings. I believe when you guys were doing the deal you were talking about hoping to achieve $47 million of annual savings. Where are you on that? I mean, it sounds like you got the bulk of it, maybe a little bit more to go in third quarter but how far do you think you are in achieving those?

Well we had about -- I think we're well on track to realizing most of that throughout the rest of the year. We had a good second quarter. We estimated that about $13 million of that savings came through in Q2 and then the $6 million in raw materials was in addition to that, which we had originally identified $47 million as part of the restructuring and then an additional $25 million is part of the raw material savings. And so we saw about $13 million related to the restructuring and our calculations would come through in Q2.

Sequentially it should be about the same for the back half of the year on a quarterly basis, maybe an additional million. Dan had alluded to earlier related to some of the European sales force reorganization that we had done in Q2 that generated the restructuring charge in Q2, so it might be slightly a little bit more that will come through in the second half of the year on an incremental basis.

Okay, great. Thanks for that explanation. And finally, as you identified, great cash flows this period. It looks like you're going to be positive for the year. Any thoughts about what you would be doing with that cash balance, perhaps pay down the revolver or --?

We don't have anything else sitting on the revolver so we're going to be selective in buying back some of the bonds.

Okay.

Opportunistic as you say.

Very good. Okay, thanks for the help guys.

Sure.

There are no further questions. I would now like to turn the call back over to management for closing remarks.

Well thank you and welcome to some of our new bond holders on the call and we hope to report a good third quarter. Thanks.

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