Interface Inc (TILE) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Interface earnings conference call. I will be your operator for today. At this time, all participants are in a 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, Miss Jessica Greenberger of FD. Please proceed.

Thank you, operator. Good afternoon and welcome to Interface's conference call regarding fourth quarter 2009 results. Joining us from the Company are Daniel 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 after the close of market today, 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 An archived version of this conference call will also be available through that website.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 interior's industry as well as risks and uncertainties discussed under the heading Risk Factors in item 1-A on 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 district 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 on Form 8-K filed with the SEC earlier today, each of which can be found on the investor relations portion was 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 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 would like to turn the call over to Dan Hendrix. Please go ahead, sir.

Thank you, and good afternoon to everyone. A little over a year ago, as the economic crisis was hitting around the world and across our industry, we set out to achieve a few key goals for 2009. We sought to implement cost-setting restructuring measures, scaled our business to reduced demand environment and protect the profitability of our business. We also set out to take market share and built upon our leading position in carpet tile, strengthen our balance sheet by refinancing the maturing debt we were facing and report meaningful profitability in 2009. I'm pleased to report that we were successful in delivering on each of these goals. Overall, we finished 2009 with a strong fourth quarter against the backdrop of a challenging environment.

On a sequential basis, sales increased again up 6% compared with the third quarter, and consolidated orders rose both sequentially and year-over-year. We continue to realize manufacturing sufficiencies from our restructuring initiatives and as a result, our fourth quarter gross margin expanded compared both to the third quarter and compared to last year. Operating income also continued to improve both sequentially and compared to adjusted operating income in the fourth quarter of last year. Asia-Pacific was up in sales sequentially over the third quarter and was also our first geographic region to report a year-over-year sales increase since the downturn began.

Our US business continues to be remarkably resilient during the downcycle as sales in the non-office market segment such as government, healthcare and retail have held up fairly well compared with the softness of the corporate office market. We are now focused on replicating our end market diversification success in the US and other regions. We are ramping up our investment in this strategy in Europe, where most of the sales come from the corporate office segment. In Australia, which is now our third largest market, the manufacturing issues we faced previously are now behind us and performance was solid. In Asia, results were strong, as I mentioned, driven by by both government, hospitality and education segments. You'll recall that last quarter, we mentioned we were beginning to see firming pipeline in China driven by local customers rather than multinationals and the non-office segments there. We are pleased to report this is translated into strong results during the fourth quarter and we continue to see opportunities in China as a bright spot going forward. We're moving along with our plan to open the carpet tile manufacturing plant there with a schedule that has a beginning production in the third quarter of 2010. We're also ramping up our in-market diversification investment in Asia as well.

On the cost side, we continue to carefully balance prudent cost control with the necessary reinvestments to execute our longer-term strategy of growth. As expected, SG&A crept up a bit in the fourth quarter as we invested in sales and marketing globally, focused on expanding our in-use market diversification strategy in Europe and paid some bonuses against our plan. At Bentley Prince Street, we have adjusted its product mix, reduced inventories and increased efficiencies, but the demand environment for our high end broadloom carpeting remains very challenging. As you might expect, high in products are among the first cut in the downturn. Our four residential consumer businesses had another profitable quarter with our web and catalog sales driving its performance, and our store in Chicago has been encouraging. As a result, we plan to continue investing in these direct marketing channels to continue to grow the business. We feel better in 2010 than we did this time a year ago when we were looking ahead to 2009. We're not ready to call the turn yet as the commercial outlook remains weak in the non-office segments, even in Americas remain choppy. We can now point to some encouraging signs, including a firming in order patterns in the past couple of quarters and sequential trends in our results. China's on track, and there is energy around the emerging market that makes us excited about the opportunities that lie ahead.

We've streamlined the business, strengthened the balance sheet and accomplished the goals that we is the out to achieve in 2009. So entering 2010, we feel like we're well-positioned to outperform the industry and continue leading the carpet tile category. At this time, I would like to give you a quick update on Ray's medical condition, following Ray's initial diagnosis in Atlanta. He went to MD Anderson Cancer Center in Houston for further evaluations and a second opinion. The doctors were able to confirm that Ray has stage 4 liver cancer and last week, Ray began a course of chemotherapy treatment here in Atlanta. With that, I will turn it over to Patrick.

Thank you, and good afternoon, everyone. I will now take a few minutes to talk through the financial highlights from the quarter. Sales for the fourth quarter of 2009 were $230.9 million, compared with sales of $247.2 million in the fourth quarter of 2008, a decline of 6.6%. Currency fluctuations contributed a benefit of approximately $12 million of sales in the period.

As Dan mentioned, continued weakness in the corporate office segment globally and soft demand across European markets were the primary drivers behind the year-over-year sales decrease. Gross profit margin was 33.9% compared with 31.4% in the fourth quarter of last year, reflecting the benefits of our restructuring initiatives. SG&A expense in the fourth quarter of 2009 was $58.2 million or 25.2% of sales, compared with $59.2 million or 23.9% of sales a year ago. Dan already covered the reasons for the percentage increase.

Operating income in the fourth quarter of 2009 was $20.1 million compared with the adjusted operating income of $18.4 million in the fourth quarter of 2008. As a percentage of sales, 2009 fourth quarter operating income was 8.7% compared with an adjusted 7.4% in the fourth quarter of 2008 and compared with 8.7% in the 2009 third quarter. Interest expense in the fourth quarter of 2009 was $9.4 million compared with $7.4 million in the fourth quarter of 2008. And as we have previously discussed, in 2009, we successfully completed $150 million aggregate principle amount bound offering of the 11.38% senior secured notes due in November of 2013 and used the proceeds to fund the tender offer of our 10.375% senior notes. In February 2010, we repaid the remaining $14.6 million of those 10.375% senior notes. Also, we previously announced the earlier redemption of $25 million of our 9.5% senior subordinated notes, which will occur on March 8, 2010. We expect these actions to save approximately $4 million in interest expense annually, beginning in the second quarter of 2010.

Income from continuing operations of the 2009 fourth quarter was $6.6 million, or $0.10 per diluted share compared with adjusted income from continuing operations in the year-ago period of $3.6 million or $0.05 per share. Unadjusted loss from continuing operations in the year of-ago period was $78.9 million, or $1.29 per share. Net income attributable to Interface for the 2009 fourth quarter was $5.8 million, or $0.09 per diluted share compared with adjusted net income attributable to Interface of $3.2 million, or $0.05 per diluted share in the year-ago period. Unadjusted net loss attributable to Interface in the year-ago period was $79.3 million, or $1.29 per share. Our 2008 fourth quarter results included several previously-announced adjusting items totaling $82.5 million after tax and $1.34 per share. Including these items, we reported in that period an operating loss of $53.8 million and a net loss attributable to Interface of $79.3 million, or $1.29 per share. Depreciation and amortization was $6.4 million in the fourth quarter 2009 compared with $6 million a year ago. Capital expenditures in 2009 were $8.8 million compared with $29.3 million in 2008. For the full-year 2010, we're forecasting capital expenditures to be in the range of $25 million to $30 million.

Continuing with how we have been talking about business for the past couple of quarters, we'll take a moment to walk through the sequential trends, which we feel are important to gauge the business in this current environment. Sales increased 5.7% for the fourth quarter of 2009 over the third quarter of 2009. Gross margin increased 80 basis points over the same period, and SG&A expenses as a percent of sales increased only slightly despite increased investment in our end-market diversification strategy. Also on a sequential basis, operating margin held steady and income from continuing operations improved 15% compared with the third quarter of 2009 results.

Now I will take a few minutes to review some of the details of our individual business segments. In the fourth quarter 2009, sales in the modular carpet segment were $208.1 million, down from $218.5 million in the fourth quarter of 2008 and up from $194.1 million in the third quarter of 2009. Operating income for the modular carpet segment in the 2009 fourth quarter was $23.7 million, or 11.4% of sales compared with $12.8 million, or 5.9% of sales in the fourth quarter of 2008 and $20.3 million or 10.5% of sales in the third quarter of 2009. The 2008 fourth quarter figure included restructuring charges of $10.7 million or 4.9% of segment sales related to the modular carpet segment.

Bentley Prince Street sales were $22.8 million in the forth quarter of 2009 compared to $28.7 million in the fourth quarter of 2008 and $24.3 million in the third quarter of 2009. Bentley Prince Street recorded an operating loss of $1.7 million in the quarter of this year compared with losses of $63.9 in the year-ago period and $1 million in the 2009 third quarter. Its operating loss net 2008 fourth quarter included a goodwill impairment charge of $61.2 million and a restructuring charge of $100,000. The progress we made in streamlining Bentley Prince Street's underlying manufacturing operations since the year-ago period has been significant. With the low demand for IN, broadloom continues to impact sales for the segment.

Turning to the balance sheet, we generated solid cash flow as a result as a result of our initiatives to control cost and realize operating efficiencies. We exited the year with $115.4 million in cash on our balance sheet compared with $71.8 million at the end of 2008. Inventories were $112.2 million at the end of 2009 compared with $128.9 million at the end of the 2008 and $119.7 million at the end of 2009 third quarter. Average DSOs during the fourth quarter were 50 compared with 56.5 in the year-ago period and 51.5 in the third quarter of 2009. Inventory turns from the fourth quarter were 5.2 times compared with 4.9 of the fourth quarter 2008 and 4.8 times in the third quarter of 2009.

From a liquidity perspective, we made significant progress restructuring the balance sheet over the course of the year, and we feel that we enter 2010 in a solid and much improved financial position. We remain focused on generating cash flow and managing costs while also investing in the business to best navigate the current demand environment and implement our longer-term strategic plans. With that, we'll open the call up for questions. Operator?

(Operator Instructions) Your first question comes from the line of Keith Hughes with Suntrust. Please proceed.

Thank you, just a couple of quick ones, Patrick. The currency effect, was that all in modular?

Yes, it was.

Okay, and the $1.9 million of eliminations, was there anything unusual in that? Made unusually high in the quarter?

Nothing in particular.

Okay. And the bigger picture, question, Dan, when you look at the order book that is coming out of office and non-office and all the geographies, are you starting to, at least in the office business, which has been the worse, find a bottom, you think, in orders?

Yes, I would say from a comparison standpoint, obviously, the fourth quarter last year was pretty poor. But the office business sequentially, particularly in the US, picked up from third to fourth.

And how about in Europe?

In Europe, we're getting it from segmentation. We haven't found the bottom in Europe. But we are getting traction in the segmentation strategy in Europe to offset some of that.

And are you able to tell the underlying demand in non-office in the United States? I know you're picking up share there. But what is the status beyond your share gains?

I would say that our government and education business, we had a very good year in that and followed by retail and healthcare and hospitality is, as everyone knows, is really -- I don't think has found the bottom yet.

How big is government and education as a piece of the pie now?

It's pretty big. We don't give out that data point out, but it's become obviously a big part of the business globally.

Is that the next biggest non-office?

Oh, yes.

Okay, all right, that's all for me. Thank you.

Your next question comes from the line of David McGregory with Longbow Research. Please proceed.

Yes, good afternoon. You caught my attention with the observation about the Chicago retail. And you said it was going well, and I thought you say that you intended to keep investing there.

Actually, the comment was investing in the online catalog and the retail piece. But our Chicago store is doing very well.

So, are you prepared at this point to talk about a second location or plans for further retail investment?

I think we'll look at possibly two or three more locations in 2010.

In 2010?

Yes, it's a small investment actually,and it does drive the catalog business to have that location.

And can you talk about the markets?

No, we haven't picked those yet, but we're looking at it. We're trying to get the model correct with the Chicago store from a profitability standpoint. And when we have that model correct, which I think we'll have it pretty comfortable by the end of the second quarter, we'll look at the next location.

Okay.

I'm extremely pleased with what is going on with the Chicago location.

Yes, it sounds pretty encouraging. Can you talk about the 80 basis points of gross margin lift, and maybe in terms of what you're able to accomplish in mix or in raw material costs inflation, deflation?

To me, we obviously had an increase in the top line and got the flow through for that increase. We have not really had raw material pressure increases within our business in the fourth quarter, and we had an increase in sales that flows through the gross profit line. We took a lot of those actions in the first quarter to get the efficiencies in those plants and our Australian plant, which I mentioned is now operating at a pretty high level of efficiency, and that also helped.

Okay, and any perspective you can provide on potential raw material concerns for 2010?

I think we will see raw material price increases particularly in yarn happening in either the second quarter or late first quarter. And if we see, that we would anticipate going up. But we're fighting like (expletive) and holding line on all that.

You're pretty confident in your ability to pass that through?

We historically have done it since I have been here for 27 years.

Right. Okay, thanks very much.

Thank you.

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

Thanks, good afternoon, guys. First, just want to pass on our thoughts and prayers with Ray. Hope things go well there.

Yes.

Let's see, you mentioned the SG&A line a couple of times impacting your Company, and I understand the investments. Maybe help us understand how to look at that line as we go into 2010. Is there a dollar level to look at? Is it maybe better to talk about the incremental margin from here on any change on the topline? How should we view that in understanding those additional expenses?

I would say that the level we had in the fourth quarter is probably a level that we're somewhat comfortable with going forward. There also was a currency impact to that. A lot of the analysts don't really factor in the euro dollar, and so there was north of -- closer to $2 million in currency impact in that number in fourth compared to third. But I would say the level that we have got, we're going to invest in sales people and key markets, particularly in Asia and China and India. And we're going invest in sales people in the certain segments in the US. I think we have an opportunity to go out and grow the top in those categories, and so we're going to do that. But I think you can look at this level in the fourth quarter, and it will be plus or minus $1 million from that level going forward quarterly.

Okay and then -- okay. So, carrying that through to the gross margin, what kind of incremental change are we -- should we expect on the new cost model?

Well, I would say that the 25% to 35% flow through, you can still model that in in the modular business.

That still will happen.

All right, and then, we have talked a lot about the project pipeline, I think you mentioned a health -- you had a good year in government, healthcare, retail. Is that pipeline as healthy as you would have anticipated at this point? Are you pleasantly surprised, disappointed and as excited about that specifically in those segments?

I would say that the pipeline -- I don't even care about it, because I don't want to get too much optimism in what's going on. But to me, the activity, and we measure activity by sample orders and products in the US and in Asia is better than it's been. So I'm very encouraged by that, and I would say the pipeline in Europe, I think we're bouncing on the bottom and haven't seen a significant improvement in Europe. The office piece of the US, I think we're starting to see a little bit of refurbishment starting to come through in that piece.

And then last question, Patrick, working capital expectations, every dollar of sales, can you give us a few view what that will look like?

Yes, plus or minus $0.10 or $0.15 per sales dollar as the sales line trends is kind of what we manage towards.

Okay. And then on the pricing, Dan, did you say you're seeing pricing increase?

We're feeling pressure, there is discussion around it.

Okay.

And we're just going to fight it and not accept it and see what happens.

Okay.

But if we have a price increase, we'll go up.

Okay, thanks, guys.

Thank you.

Your next question comes from the line of Glenn Wortman with Sidoti. Please proceed.

Yes, good afternoon, everyone. Can you give us what your thoughts are on the residential piece heading into 2010? Do you expect that market to be up significantly? How should we be thinking about that?

I would say that I think we're at some inflection points in that business, and I'm not sure if it's going to be 2010 or 2011, but there is a lot of activity that we have going on in there that is going to pay dividends, and we're -- we didn't discuss it, where some of the investments is going is in that strategy. But I think that the online catalog piece of this and the retail store piece of this has some upside to it, and I think we're going see some growth there.

Okay, and then in Asia, are you guys getting share there, and how are things setting up for the start up of your new plan in the second or third quarter?

We're clearly regaining share there, I would say that, and it's through the local distribution that we have tapped into. We were really tied to multinationals. If you go into the beginning of 2009, and we saw that business decline significantly, the multinationals just shut off the pipeline and quit investing in that part of the world, and we've switched it to the domestic customers. And so the comparisons are pretty easy comparisons in the fourth quarter, but I would say that we're gaining share of the domestic guys now, and I'm very encouraged about what is going on. And not just China, but Asia in general. India seems to be coming back as well as southeast Asia.

All right, thank you very much.

Okay, thank you.

Your next question comes from the line of [Sam Kim] with Credit Suisse. Please proceed.

My questions have been answered, thank you.

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

Hi, this is Jeff calling for Sam. Thanks for taking my questions.

Sure.

I just had two questions about strength, basically across your geographies. My question is were orders up sequentially in each of your three big geographies?

That's a good question, because I don't have that off the top of my head. Maybe -- Patrick's trying to look it up.

And then related to that, can you give us --

I know -- I think they were all up --

Can you give us the sequential growth in Americas' orders?

If you look at the Americas' orders, they were more in the flat range because we had the cyclicality of the education business coming through in the second and third quarter. We don't get it in the fourth. Then it was offset by the office piece. So I would say that the US, sequential was not up, but we always see that just because of the seasonality of the business.

Okay, but outside of the seasonality, maybe a slight improvement after adjusting for that?

If you adjust for the education piece?

Probably.

Okay, and then just my other question was with non-office growing so much faster than office in Europe, can you give us that mix now?

It's 75/25.

Great, thank you.

Thank you. We have a follow-up question from the line of David MacGregory with Longbow Research. Please proceed.

Yes, just back on China. Can you talk about how quickly you expect to built capacity utilization there, and what's the incremental depreciation and amortization expense?

I would say that -- well, our plan was to have capacity or enough business when we start to plan up, the plan is profitable. The overhead that we're going to generate will be close to $2.5 million in additional costs, so you'll have to absorb that through the growth of that business. But from a plant profitability standpoint, China, we've got the capacity to make that plant profitable right away. But we're taking that from Thailand to do that. So the incremental cost is about $2.5 million.

$2.5 million. Any sense of what that might represent, that operating rate might represent in terms of capacity utilization?

It will be in the 30%.

30s, okay, thank you very much.

At this time, there are no further questions. I would now like to turn the call back over to Management for any closing remarks.

Thank you for listening to the call, and I hope to report a continued improvement in the first quarter. Thanks for being shareholders.

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