Interface Inc (TILE) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Interface 2009 third quarter conference call. My name is Jeff, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Thank you, operator. Good morning, and welcome to Interface's conference call regarding third 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 of the Investor Relations section of Interface's website. An archived version of this conference call will also be available through that website.

Before we begin the formal remarks, please note that during today's conference call, management's comments regarding Interface's business which are not historical information are forward-looking statements. Forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from any such statements, including risks and uncertainties associated with the economic conditions in the commercial interiors industry, as well as risks and uncertainties discussed under the heading Risk Factors, in item 1-A 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 and 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 would like to turn the call over to Dan Hendrix. Please go ahead, sir.

Thank you, and good morning to everyone. We are pleased with our performance in the third quarter, as we continue to see steady sequential improvement in our business, despite the challenging environment that persists across the globe. I would like to start by pointing out a few highlights of the quarter.

Sales were up a bit on a sequential basis compared with the second quarter. Consolidated orders also rose sequentially, notwithstanding the seasonal educational order stream that came through in the second quarter. Gross margin improved sequentially, and operating income was up sequentially when you adjust the second quarter number to exclude a few outlying items that had a positive effect. And although Europe continued to struggle, its orders exceeded billings for the quarter. As a result within the context of the slower economy, we were able to deliver a good quarter.

We continue to see the benefits of the investments we have made in our market diversification strategy as non-office segments in general held up during the quarter. As you know, we have been pursuing business in non-office segments for several years now, in an effort to reduce our dependence on the corporate office market, in particular the US office market. Most of the help in the third quarter came from the Education, Retail, and Government segments. Conversely, the office market remained weak globally, with Europe down the most, followed by Asia-Pacific, and then Americas.

On the cost side, commodity pricing has been relatively constant compared to the second quarter. We were successful in holding down our SG&A at a level that we believe balances the current operating conditions, with the importance of investing in our long-term growth strategy. I wouldn't be surprised to see SG&A creep up a bit, as we continue to invest in sales and marketing globally.

Geographically North America has been remarkably resilient in this down cycle, mostly because it is further along in the segmentation strategy, therefore less dependent on the office market.

That being said, our market diversification strategy continues to gain traction across all geographies, and a geographic diversity is helping us defray the most severe effects of the economic downturn in certain parts of the world, such as Europe.

In the emerging geographic markets, where we are more dependent on the office market, we continue to see weakness, while Australia, which is now our third largest market is showing signs that it is beginning to turn. In Asia we are seeing some bright spots, as the order pipelines are beginning to firm in China and southeast Asia. But they are being somewhat muted by the office segment there, which continues to be challenging, due to lower levels of spending by multi-national corporations that have not yet returned to the market. Most of our business in those regions is coming from local customers, which is a good thing, as opposed to multi-nationals. With things looking up in China, we are planning on opening a carpet tile manufacturing plant there, with plans to have it commissioned in the third quarter of next year.

Bentley Prince Street continued to make steady progress, narrowing its loss compared with the second quarter as we have adjusted its product mix, reduced inventories, and increased efficiencies. With sales coming in a bit below $25 million, we did not break even yet, as we had hoped. Our floor residential business was profitable for the quarter, and we plan to continue investing in this direct market approach through the Web and catalogs to grow this business.

With the encouraging signs in our business that I pointed out earlier, we have hopes for recovery, but it's perhaps too early to call a bottom. Our strong competitive position should allow us to see the benefits of any economic recovery, as we take advantage of the opportunities that develop and benefit from the operating leverage inherent in our business. During the ups and downs of the operating environment, carpet tile has continued to take share in the overall market, and we are the market leader in carpet tile. While we are still cautious about what we cannot control, and in particular demand environment in the corporate office segment, we do believe we are in a strong position to lead a market recovery when demand levels rise.

With that I will turn it over to Patrick, to provide you with more details on our financial position and results

Thank you, and good morning everyone. I will now take a few minutes to walk through the financial highlights from the quarter. Sales from the third quarter of 2009 were $208.4 million, compared with sales of $278.4 million in the third quarter of 2008, a decline of 21.6%. Approximately 3% of the sales decline was related to fluctuations in currency exchange rates. Continued weakness the corporate office market segment globally as well as the European and emerging markets also contributed to the year-over-year sales decline.

Gross profit margin was 33.2%, compared with 34.1% in the third quarter of last year. SG&A expense in the third quarter of 2009 was $53.5 million or 24.5% of sales, compared with $63.9 million or 22.9% of sales a year ago.

Operating income in the third quarter of 2009 was $18.9 million, compared with $31 million in the third quarter of 2008. As a percentage of sales, operating income was 8.7% compared with 11.1% in the third quarter of 2008.

Interest expense in the third quarter was $9.5 million, up from $8.2 million in the third quarter of 2008. As we mentioned last quarter, we successfully completed a $150 million aggregate principal amount bond offerings of the 11.375% notes due in November 2013, and used the proceeds to fund the tender offer for our 2010 notes. We expect interest to normalize at around $9 million a quarter once we have repaid the remaining $15 million of the 10.375% senior notes due in February 2010.

Net income attributable to Interface for the 2009 third quarter was $5.5 million, or $0.09 per diluted share, compared with net income attributable to Interface of $8.4 million, or $0.13 per diluted share in the year-ago period, which include a previously announced after-tax loss from discontinued operations of $5.2 million, or $0.08 per diluted share.

As we mentioned last quarter, we believe sequential comparisons to the prior quarter are also important in the current environment, to better understand underlying business trends. For the third quarter of 2009, on a sequential basis over the second quarter of 2009, sales increased 3.3%. Gross margin increased 50 basis points. SG&A expenses held relatively steady as a percentage of sales. Also on a sequential basis, operating margin increased 70 basis points, and net income improved 7.8%, compared with the second quarter of 2009 results, adjusted to account for one-time items.

Depreciation and amortization was $6.9 million in the third quarter of 2009, compared with $5.7 million a year ago. Capital expenditures in the third quarter were $2.5 million, compared with $6.6 million in the third quarter of 2008. For the full year 2009 we continue to expect capital expenditures to be in the range of $15 million to $18 million.

Now I will take a few minutes to review some of the details of our individual business segments. In the third quarter of 2009, sales in our modular carpet segment were $194.1 million, down from $243 million in the third quarter of 2008, and up from $186.6 million in the second quarter of 2009. Operating income for the modular carpet segment in the 2009 third quarter was $20.3 million, or 10.5% of sales, down from $30.3 million, or 12.5% of sales in the third quarter of 2008, and up from $17.5 million, or 9.4% of sales in the 2009 second quarter. The 2009 second quarter figure includes restructuring charges of $1.6 million, or 1% of segment sales related to the modular carpet segment.

Bentley Prince Street sales were $24.3 million in the third quarter of 2009, compared with $35.4 million in the third quarter of 2008, and $24.7 million in the second quarter of 2009. Bentley Prince Street recorded an operating loss of $1 million in the third quarter of this year, compared with operating income of $725,000 in the year-ago period, and an operating loss of $2 million in the 2009 second quarter. Its operating loss in the 2009 second quarter included restructuring charges of $300,000, or 1% of segment sales. Despite Bentley Prince Street's operating loss for the third quarter its underlying manufacturing performance has made substantial progress year-to-date, and continued to improve during the third quarter.

Turning now to the balance sheet, we generated $16 million in cash flow during the quarter, driven by our initiatives to improve operating efficiency, and exited the third quarter with $106 million in cash on our balance sheet. Inventories were $119.7 million at the end of the third quarter, compared with $145.5 million at the end of the third quarter 2008, and $122.9 million at the end of the 2009 second quarter.

Average DSOs during the quarter, third quarter of 2009 were 51.5 days, compared with 55.1 days in the year-ago period, and 50.2 days in the second quarter of 2009. Inventory turns were 4.8 times, compared with 5 times in the third quarter of 2008, and 4.6 times in the second quarter of 2009.

From a liquidity perspective, we are exiting the third quarter in a solid financial position, with no significant debt maturities coming due until November 2013. Our primary focus continues to be on balancing cash flow generation with investing strategically in our business. This financial prudence will ensure that we are well positioned to execute on our longer-term strategic plan.

With that, we will open the call up for questions.

(Operator Instructions). Our first question comes from the line of Matt McCall with BB&T Capital Markets.

Good morning, this is Sean Connor for Matt. Can you comment on the pricing environment and cost environment, do you see any cost benefit or price/cost combo benefit?

Yes, our pricing has been pretty steady around the world, and we really, in my comments, we have not seen raw material price increases actually anywhere in the world either. It was pretty well quiet on that front.

Okay. Okay. You talked about that the residential business was profitable this quarter. How big is the business now?

We will end the year close to $25 million in sales.

And can you comment on the individual growth rates at the global non-office segment versus --?

No, we don't actually comment on that.

Okay. And then you mentioned that SG&A is going to creep up. Right now, I guess we are running at around a $53-ish million run rate at the current revenue trends. How much higher do you think it could get?

I am not sure, what I have told our guys is that we want to invest in Asia, particularly China, and we are looking at investing in some of the segments in the United States that we think we need to go after and penetrate more. It is maybe a $1 million to $2 million increase.

Okay. And then Patrick, is the CapEx budget for next year still around $30 million?

Well, it is early days yet. We are in the process of developing that. But my sense is right now, it will probably be in the $25 million range for next year. 25 to 30.

All right. Great. Thank you, guys.

Okay.

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

Good morning, I missed almost all your comments just because we couldn't get in on the call; just FYI. I don't know what the issues were there. But anyway. Curious on the segmentation strategy in Europe, if you could update us on sort of what the mix is there, and what you are doing precisely with either product or salespeople, and you know, where you might be in one years, three years, and five years out with that implementation? Thanks.

I would say that we are having actually some success, John, in the UK, and in France, and in Holland, particularly. That's our four biggest markets there.

And what we're doing is we are following the same model in the United States, we are making it product specific, we are making it marketing material specific, as well as we are incenting the sales force to go after the segmentation pieces.

It is about 35% non-office, and 65% office there. And if you looked at what we are holding our own on, it is in the non-office piece there, and the office piece is what is actually being hit.

Okay. Where do you peg those numbers three years, five years out, similar to the US?

I would say in three years out we would be 50/50, trying to drive it to 60/40, actually.

Okay.

We are about, as we talked previously, we are about 2.5 to 3 years behind the US in that.

Okay.

But we are having some pretty good traction there.

Okay. And then sort of hopping back over here, and again, I didn't hear your opening comments, so I apologize if I am asking something you already touched on, but how is the US office piece looking to you right now? And what is the crystal ball for next year for that segment of the business?

Well, I would say the office piece here is obviously the one that is hit the hardest. It was interesting that we actually saw sequential improvement from second to third quarter in our office piece in the United States, and I think some of that is the discretionary spend dollars are starting to come through with some of the refurbishment projects.

Whether that is sustainable or not, I really don't know. But I think next year the office market is going to be tough as well.

Where will you exit the year segmentation versus office? In just the US market?

We will probably be somewhere around 65/35.

Okay. And I heard some discussion about SG&A. Is that product? Is that people? Is that, where might those investments be? I heard Asia, China --?

It will be people in Asia, and it will be people and marketing in the US. We just think we have an opportunity to penetrate more of the non-office segments, so we just don't want to sit and wait for recovery. We want to go out and actually penetrate those markets.

Okay. Than lastly on this CapEx number for next year, what is included on that, and if you comment on sort of China and India potentials.

The China investment will be about $5 million of that number. And there we are actually investing in some new technology around tufting; and the United States will be another piece of that number, and then maintenance is around $8 million.

Okay. So it is tufting, US, China, nothing on India, the rest US?

Yes, nothing on India. Pretty much maintenance in Europe.

Okay. Great. Thank you.

(Operator Instructions). Our next question comes from the line of Keith Hughes with SunTrust. Please proceed.

Yes, thank you. I also had a hard time getting on. The competitive landscape in Europe, given how difficult business is there right now, have you seen any changes? Is there any kind of publicly announced financial distress among players? Any sort of comments along that would be helpful.

Yes, I would say it really hasn't changed much, Keith. There are some weak competitors in Europe, and we expect pretty much one of them to read about one of them going into receivership, but that has not happened yet.

But I would say it is pretty tough sledding with some of the competitors there, because they started this downturn with pretty much breakeven businesses, because they have got a lot of broadloom assets that are residential and commercial, so it is tough. But one of them we are expecting to hear something about pretty soon, but it hasn't happened yet.

If you look, I know it varies by country, but just in general, what do you think your market share is in Europe now? This would be office and non-office combined --

I don't think we have data points on office and non-office, it is very difficult to get competitive data on that part. But overall there's a couple of research resources out there. We are around 35% of that market.

All right. Thanks, Dan.

Thanks.

John Baugh with Stifel Nicolaus. Please proceed.

Yes, just a follow-up on, to the extent you want to comment on it, your strategy about your debt, and how you may retire that. Could you give any color, over the next year or two, how you see that playing out? Will you buy back the bonds? Will you wait for them to retire, and what the sort of net interest expense number may do over time? Thank you.

Well, sure, I think my comments will be consistent with what we have said historically, in terms of targeting bonds and timing, and we will continue to be judicious about deploying that cash against the bonds. We will be opportunistic in terms of pricing.

We do have the $15 million stub piece that is due in February 2010; that will help interest expense by about $400,000 a quarter, when that is redeemed in February 2010.

But we will continue to monitor the bond prices, and be opportunistic on the opportunities that present themselves to us, but it is a very key focus of ours, to continue to deleverage, and deploy that cash to deleverage over the next couple of years.

So minimally, Patrick, we will pick up $1.6 million on interest expense '10 to '09.

Yes, starting in February, right.

Okay.

And John, I would anticipate, as Patrick said, we will look at how to take some of those bonds out when the price is right.

Okay. All right. Thank you.

Thank you.

Okay. At this point, I would like to turn the call back to management for closing remarks.

Thank you for listening to the call, and we will talk to you next quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.