Interface Inc (TILE) 2010 Q4 法說會逐字稿

Please stand by for realtime transcript.Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Interface earnings conference call. My name is Alicia and I will be your coordinator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) I would now like to turn the call over to Ms. Jessica Greenberger of FD. Please proceed.

Thank you, operator. Good afternoon, and welcome to Interface's conference call regarding fourth-quarter 2010 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 after the close of Market today, please call the 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 An archived version of this conference call will also be available through that website.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 1-A of the Company's annual report on Form 10-K for the fiscal-year ended January 3, 2010, 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 today. These risks 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 re-recorded or rebroadcast without Interface's express permission. Your participation on the call confirms your consent to Company 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 afternoon to everyone. I'd like to start out by giving you a quick overview of 2010. From an execution standpoint, I think it was one of Interface's best years. We made a lot of progress in a number of key areas despite operating in what was still a very challenging environment. Emerging markets came roaring back. They bounced back in 2010 almost as much and as quickly as they dropped off in the prior year.

The corporate office market recovered gradually over the course of the year, with most of the acceleration happening in the second half of the year. We achieved further penetration in the non-office commercial segments. In fact, our non-office commercial sales in 2010 were back up to near-record levels. We've crystallized the strategy for our FLOR consumer tile business, posted on direct marketing through catalogues, the Internet and our FLOR resale stores. And we've built and opened a new carpet tile plant in China and made additional investment in sales, marketing and in-market diversification. All of these factors dovetailed nicely with our long-term strategy and positioned us to apply our competitive strengths to take advantage of current market dynamics.

Now, on to the fourth quarter, where the positive momentum continued in our business and once again, we saw significant year-over-year increases in overall sales, margins, adjusted earnings, and in our market share. Our sales increase in the fourth quarter was due largely to three factors. First, we capitalized on the increasing demand from the emerging markets, primarily India, China, Latin America, and Russia. Second, we experienced the continuing recovery in the corporate office market globally and for mature markets in particular, where the focus continued to be on office refurbishment as opposed to new construction. And third, we continued to benefit from the investments we made in our end-market diversification strategy, as our non-office commercial segments grew, as well led by hospitality, retail, and education. Another highlight of the fourth quarter was the opening of our second FLOR store located in Santa Monica, California. We have plans to open five more stores by mid-2011, and I'll talk more about that a little later.

Our revenue growth drove -- drove gross margin expansion, and a combination of increased sales and enhanced manufacturing efficiencies, led to a 46% increase in operating income on a 15% increase in revenues year over year. We were able to deliver these increases while also investing in sales and marketing during the fourth quarter. Looking regionally, our age-specific division once again delivered excellent results, with healthy sales increases and operating margin increases year over year. The sales environment in the emerging markets, as I mentioned, was increasingly robust, particularly in India and China, with the demand for our products coming from the investments being made by both local and multinational companies. Over the past years, we've made some significant investments in building our sales presence in China, and we continue to make good progress there. Our sales level and growth prospects support the investments we have made in our new plant, and we've become fully operational around the first of the year.

In the past, we've been meeting the demand in China with carpet source from our Thailand plant. Through the first quarter, we'll be ramping up production in China to serve the greater China market, where our Thailand plant will continue to service Southeast Asia, India and Middle East. We expect this new production plan to be much more efficient and enhance our made-to-work capabilities in China. We're very optimistic about our opportunities in this market.

Our Americas modular business had another nice top-line performance, marking its fifth straight quarter of year-over-year sales improvements. The corporate office segment continued to recover, although I think there's still a lot of pent-up demand in that market. And our non-office commercial segments in the Americas also performed well, particularly hospitality, REIT sale and education, along with modest growth in the government business. With our sales growth outpacing the broader commercial market, I think it's clear that we're taking some share in the United States. As I mentioned earlier, we're also moving forward with our strategy to grow our consumer business in the Americas with planned rollout of additional FLOR stores. While the FLOR store in Chicago continues to exceed our expectations, we have a store in Santa Monica now open. Our consumer business to date was primarily driven by our success in the web and catalog channels.

We've continued to invest in sales and marketing initiatives at FLOR to capitalize on the market opportunity we see here. And importantly, we feel that our investments in new store openings are low risk with the potential to significantly drive performance in our consumer business going forward. We believe that the consumer business is highly scalable, as has the upfront cost to open new locations are relatively low. We're now targeting to have a total of seven stores open by midyear. As you may know, the consumer market for soft floor coverings is substantially larger than the commercial market.

Moving on to Europe, we're continuing to benefit from a rebound in the corporate office market in the UK and Germany, and as a result, both sales and profitability increased double digits year over year in local currencies. Across Europe, we've also been increasing our market efforts to capitalize on the strength in the demand in the non-office segments, and we're having success there as well. At Bentley Prince Street we're seeing somewhat of a rebound in demand for the high-end carpet. We've been creating a nice niche in the high-end market for the carpet tile, which now represents about 40% of Bentley Prince Street's business. The broadloom side of its business remains challenging, although it held its own in the fourth quarter.

Combined with the actions we've taken to control costs and increase efficiencies, Bentley Prince Street has been having an improving top line across all price points and the result has been profitability. Our focus at Bentley Prince Street is on continuing to grow the top line, taking advantage of the release of pent-up demand in the corporate office market. During the fourth quarter consolidated orders grew 12% against the fourth quarter last year, which was our toughest comparison that we face. In addition, our backlog increased by $16 million since the beginning of the year. In the first few weeks of 2011 the momentum in orders has continued. With the secular shift toward carpet top continuing and corporate office market recovering quicker than expected, strength in the non-office commercial segments, a vibrant environment in emerging markets and upbeat reports from our sales field, we feel much better about the business going into 2011 than we did at this time last year.

We plan to continue investing in our sales people, in our FLOR consumer business in China and other emerging markets, and in non-office sales diversification in markets outside the US. While we expect there will be challenges on the path forward, we are optimistic about the opportunities ahead. At this point, our long-term goals and our strategy to achieve them are clear. We are leading the secular shift in moderate carpet globally and we're well under way in making the necessary investments to continue to do so.

With that, I'll turn it over to Patrick.

Thank you and good afternoon, everyone. I'll now take a few minutes to talk through the financial highlights from the fourth quarter. Sales for the fourth quarter of 2010 were $265.3 million compared with sales of $230.9 million in the fourth quarter of 2009, an increase of 14.9%. Currency was essentially neutral year over year. As Dan mentioned, our sales performance was driven by increasing demand in the emerging markets, the continued rebound of the corporate office market globally, and growth in our non-office commercial segments, led by hospitality, retail, and education sectors. Gross profit margin was 35.3% compared with 33.9% in the fourth quarter of 2009, reflecting the benefits of our restructuring initiative and the increased absorption of fixed manufacturing costs due to higher sales volumes. The gross margin expanded and was achieved on the year-over-year increase in raw material costs of approximately 4%. We expect that will continue in 2011.

SG&A expense in the fourth quarter of 2010 increased to $64.3 million from $58.2 million last year, with the biggest components of the increase being $3 million in incremental incentive compensation, and $500,000 relating to the startup of our China plant. The increase also reflects additional investments in our non-office segmentation strategy, sales and marketing globally, and our consumer strategy in the United States. As a percentage of sales, SG&A expense declined to 24.2% compared with 25.2% a year ago, reflecting our ability to leverage our ongoing investments over increased sales.

Our operating income performance also continued to demonstrate the leverage in our business model. On a 14.9% increase in sales, operating income in the fourth quarter of 2010 improved by 46.4% to $29.5 million compared with operating income of $20.1 million in the fourth quarter of 2009. As a percentage of sales, 2010 fourth-quarter operating income was 11.1% compared with 8.7% in the fourth quarter of 2009. Interest expense in the fourth quarter was $7.8 million compared with $9.4 million in the fourth quarter of 2009. This reduction is due to the repayment of $14.6 million of the senior notes in the first quarter of 2010, as well as the refinancing of most of our senior and subordinated notes during the fourth quarter of 2010. We expect annual interest savings of approximately $8 million going forward into 2011 as a result of this refinancing.

Excluding the expenses of $43.3 million previously-announced and completed bond refinancing, adjusted income from continuing operations for the 2010 fourth quarter was $14.3 million, or $0.22 per share. This compares with income from continuing operations of $6.6 million, or $0.10 per share in the fourth quarter of 2009. Including the bond refinancing expenses, our fourth-quarter 2010 loss from continuing operations was $12.4 million, or $0.20 per share. Depreciation and amortization was $8.6 million in the fourth quarter of 2010 compared with $6.4 million in the fourth quarter 2009. Capital expenditures for the full 2010 were $31.7 million compared with $8.8 million in 2009. For the full year 2011 we expect capital expenditures to range from $35 million to $40 million.

Now I'll take a few minutes to review some of the details of our individual business segments. Our modular carpet segment continued its strong performance in the 2010 fourth quarter. Sales in the segment were up $23.1 million, or up 14.9% from 2000 -- $208.1 million in the fourth quarter of 2009. Operating income for the modular carpet segment in the 2010 fourth quarter was $30.2 million, or 12.6% of sales, compared with $23.7 million, or 11.4% of sales in the fourth quarter 2009.

Turning to Bentley Prince Street, demand for high-end carpet has continued to improve and the progress that we've made in streamlining this segment's underlying manufacturing and operations and adjusting our products mix since the year-ago period has been significant. Sales were $26.2 million in the fourth quarter of 2010, also up 14.9% from $22.8 million in the fourth quarter of 2009. Bentley Prince Street's operating loss improved to $700,000 in the fourth quarter of 2010 compared with a loss of $1.7 million in the prior-year period.

Now, turning to the balance sheet, we exited the quarter with $69.2 million in cash compared with $115.4 million at the end of the fourth quarter of 2009, and $80.9 million at the end of the third-quarter 2010. The decrease in cash relative to the prior periods is the result of the recent refinancing transaction and related tender for our senior secured and senior subordinated notes in the fourth quarter of 2010. Inventories were $136.8 million at the end of the fourth quarter compared with $112.2 million at the end of the fourth quarter of 2009.

Our average DSOs during the fourth quarter were 49.6 days compared with 50 days in the year-ago period, and inventory turns in the fourth quarter were relatively flat at 5.1 times compared with 5.2 times last year. With our solid fourth-quarter financial performance we're exiting the year in a strong financial position. We strengthened our balance sheet, improved revenues, and realized significant operating leverage in our business. We have no significant debt maturities until 2018. We've focused our investments on initiatives that enhance our ability to execute our long-term strategy, and very pleased with the impact they are having on our business.

As we begin 2011, we are well positioned financially to continue to execute on our initiatives, such as those focused on our new carpet tile plant in China, sales and marketing related to our non-office strategy globally and expanding our presence in the consumer marketplace. We also remain focused on continuing to improve our profitability by leveraging our cost structure on increased sales. As a result of the prudent actions we took during the downturn, we believe that we are now in a strong financial position to execute against our strategic plans and to capitalize on the future opportunities that support our growth.

Now, I'll turn the call back over to the operator for your questions. Operator?

(Operator Instructions)And the first question comes from the line of David MacGregor with Longbow Research. Please proceed.

Yes, good afternoon, guys.

Hey, David.

Good afternoon.

You put up a 20% incremental margin on the quarter and I'm just wondering, as we think about 2011 -- maybe the first half of 2011, is that a pretty good approximation of where you think you'll be? Do you think you'll be a little above that, a little below that? Could you just help us with that?

I think 20%, 25%'s our goal right now as we come out of this.

20% to 25%, so a little below where we are here?

Yes, we're going to make some investments and I hope I've got that message across, that I think the opportunity for modular carpet globally is big and it's going to be a category, so we need to make the right investments to drive that top line. There's a lot of leverage in it, David. You can get carried away and go to 30%.

I understand that. I'm just trying to get some sense of where you're thinking about the first half.

I'd say that 20%, 25% is sort of our stated objective and I think that's in the cards to do.

Okay. Can you just remind us again, and I realize there's probably a lot of things that go into this, but the breakdown between non-office and office? I realize --

The office actually picked up a little bit. It used to be around 45%. It was 49% for the year, because we had a pretty good run in the office piece, and then the non-office I think is around 35% or 40%.

35% to 40%. And as you talk about making these investments, I guess a lot of these investments are in the non-office space?

Yes, they are, a lot of them are, for sure.

Okay. The last question, just on China, I realize it's early in the ramp over there, but any surprises or anything that changes your view on how your enterprise there will play out?

I think that -- our goal was to be able to start it up and run one shift to have an efficient plant and we're ramping it up to do that, which should be one shift by the second quarter. I think the marketplace is still very robust for us and just make the service model of two weeks is going to really help us in that marketplace. It's the most demanding service marketplace in the world, actually, for us.

How--

We have to be there to compete there, I believe. We really haven't had a lot of surprises. It's always tough when you commission a plant, you get through all of that and you have surprises over here on the good side and surprises on the bad side, but overall, it's about what we expected.

Good luck.

Thank you.

And the next question comes from the line of Glenn Wortman with Sidoti & Company. Please proceed.

Yes, good evening, everyone.

Hi, Glenn.

Just looking at the operating margin, which fell a little bit sequentially, looks like just due to the higher SG&A, how should we think about SG&A going forward here in 2011?

I think that we're going to look at it as driving it to 24% and then driving it further down. I think we had a pretty good investment we made in the fourth quarter. It'll be higher in the fourth than it was in this first quarter here, but I think you've got the range of 24% and driving it closer to 23% as we ramp up the top line.

Okay, and then just thinking about 2011, well, first, you mentioned a little bit about --?

One thing that people -- I know they get focused on it, but we didn't really pay a lot of bonuses in 2009. We have an $11 million bonus that hit in -- compared to 2009 versus 2010 and we pretty much cap our bonuses at the level they are in 2010. You're not going to have that hard of a hit in 2011 versus 2010.

Okay. And just thinking about potential growth here in 2011 -- well, first, can you talk a little bit about how things have gone so far in January and February? And then just for the full year, given -- talking about pent-up demand in corporate office and maybe some geographic --?

I would say that January started out slower than we liked, particularly in the US with the weather. And then February actually has been really strong for us. The other markets, Europe and Asia-Pacific, look really good. And I think that what happened in 2010 is probably what's going to hopefully happen in 2011. You're going to see the pent-up demand in the office market come through. We're going to have continued success in the non-office piece, which we put on that double digit every year that we've actually entered this non-office piece, except 2009 and it bounced back to record levels in 2010. But if you look at where the growth's going to come from, I think it's going to come from emerging markets from a percentage standpoint. I think the office is going to continue and I think we're going to have a lot of success, particularly in healthcare and hospitality, and education in the US.

So for the full year, do you think double-digit top-line growth is in the cards again in 2011? I know it's a little early, but just given you're various --?

We don't really do that, but I think all the Street has us pretty much around that 10% level.

Okay. Then just one more question just on -- can you talk about commodity inflation and any potential price increases you guys --?

Yes, I think we're going to have a price increase in the first quarter. We're seeing probably 5% kind of price increase and I think Patrick mentioned we had raw material price increases around 4%. I would say that we'll go out with something in March from a price increase standpoint in the US and we've already raised prices in Europe.

Okay. All right, thanks for taking my questions.

Thank you.

And the next question comes from the line of Keith Hughes with SunTrust. Please proceed.

Thank you. You talked about how good the emerging markets were. How much does the percentage of revenues in the year to emerging markets make up of the tile sales?

They're 10%. Tile sales are probably more like 12%.

12% tile sales, okay.

That's probably doubled over the last three years.

That was my next question, how much is that up? And I assume in 2011 that should be -- from a geographic standpoint, the revenue leader again.

Percentage wise, yes.

Okay.

In dollars wise I think the corporate office market and the non-office commercial will probably be bigger dollars.

And Patrick, you had mentioned raw material prices were up 4% in 2010, is that right?

That's right.

And you're expecting another 4 here in 2011?

That's right.

Okay. And I guess final question on cash flow, now that you've got the balance sheet fixed, would you consider getting back in the market, buying back shares with future cash flow?

I would say that that's not out of the cards, Keith, at all. I think we're very comfortable with our capital structure and I think we're going to have -- we're going to be able to generate cash to fund investments that we're making that Patrick mentioned to the $35 million. That's not out of the cards to consider. It used to be, but it's not now.

All right.

We're very comfortable with where we are from a capital structure standpoint.

All right, thank you.

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

Thanks, good afternoon, guys.

Hello.

So let's see, Dan, it's interesting that you're highlighting education as one of the areas of -- or most -- of highest possible growth next year. I think government, education, those are two that often come up in my conversations that may be potential sources of risk next year. Can you elaborate a little bit on that and maybe discuss the government opportunity in 2011?

I would say the government is -- we break out education from government. But I would say that I think from a penetration of tile into the education market, that it will offset the overall market decline, if there is one, for soft floor coating. We're having a lot of success in education and carpet tile has pretty low penetration of that market. We had a lot of success in higher ed and we had K-12, too. We grew that business globally this year. I still think it's a big opportunity because of the dynamics around modular versus what's on the floor today.

And so the education was both higher ed and K-12? That was the strength --?

Higher ed was better than K-12 in 2010.

Okay. And then looking back at the past year your order pattern's been a pretty good indication of shipments in the next quarter, and I guess in keeping with the theme of not giving guidance, but asking for guidance, what's the -- is there any reason that we can't use the order pattern as a good indication of what shipments -- or what revenue should look like in Q1?

Yes, I think that typically runs about 95%, somewhere in that range, so I think that that's -- if you look back and look forward, that's pretty much been the historical model there.

Okay. And, Patrick, you mentioned the gross profit impact of raw materials. When I look sequentially down about ten-basis points Q3 to Q4 and higher top line, was there raw material impact in Q4 versus Q3? Was there sequential impact? I didn't get the 4%, what that was referencing.

I think that was for the year, is 4%, Matt.

Okay. So --

I would say that the fourth quarter's a tough operating environment for us, because you have a lot of holiday seasons in there, particularly in Europe, and in the US, as well. You've got more holidays in that quarter and so the manufacturing typically doesn't run as efficiently as it does in the third quarter.

Okay, all right. So how should we approach the year -- what else do we need to know for modeling Q1 and Q2 next year about those (inaudible).

Well, I think you're -- Q1's always the toughest quarter, as you know. Seasonally it's the weather, lot of construction doesn't happen in Q1. As I say, January comes every year. Seasonally, our first quarter is our worst quarter and typically our fourth is our best quarter from the top line, but from a manufacturing standpoint, we run a lot of inventory -- we run inventories up and then bring it down and so forth. I was trying to answer your question third to fourth, but seasonally it builds as it historically always has.

Okay, all right. Thank you, guys.

First is the best and fourth is -- first is the worst and fourth is the best for us.

Building through the year?

Right.

Right. Okay, thank you.

You're welcome.

And the next question comes from the line of Eric Glover with Canaccord. Please proceed.

Hi, good afternoon.

Hello.

What should we be looking for in terms of interest expense for 2011?

Yes, about $24 million or $25 million for the full year.

Okay, great. And second question is, can you talk about the Company's transition to the use of recycled fiber in place of virgin fiber, specifically like what percentage of your nylon, raw materials is coming from recycled content at this point and where do you think it's going to go in 2011?

I would say that if you looked at it overall, about 37% of our raw materials are recycled today and a lot of that's the backing, as well as the face fiber. We're ramping up the face fiber, recycle content. We've got some suppliers that have new capacity on stream for post-consumer recycled content, so that will grow -- that will continue to grow, particularly in Europe and in the US. But to give you exact numbers, I really don't want to give out all that to our competitors.

Okay. What's -- just general terms, what is the cost differential between using recycled fiber and virgin fiber?

At $90 a barrel, the recycled fiber that we buy is about cost neutral.

Perfect, thanks a lot.

Thank you.

And the next question comes from the line of Sam Darkatsh with Raymond James. Please proceed.

Good afternoon, this is Josh filling in for Sam.

Hi, Josh.

Most of my questions have been answered and I appreciate all the color. In the last quarter you mentioned a little bit of more color about pent-up demand and I think you meant that could last at least six months, if not more. Do you have any more insight as to how long that will benefit and maybe even could you quantify how much of your current sales are coming from the release of that pent-up demand?

Well, I would characterize it a little differently. We've had, we've had two downturns in this decade that we just went through and typically you have -- when you have a downturn, it goes for about 30 months and then turns up and you've got a pretty good tailwind for six, seven years. This one got interrupted going into the fourth year, and it was the deepest downturn that we've had. So I don't -- six months, I'm not sure if I ever mentioned six months of pent-up demand. I'm counting on pent-up demand being out there for the next foreseeable future and particularly in the markets that got really hit hard, the mature office markets. So I think the pent-up demand -- a lot of people didn't get to their offices that typically refurbishes them every eight to nine years, they didn't get to it so now they are going on 15 years, a lot of them, and their balance sheets are about as healthy as they've been in a long time. And so corporations are starting to spend money on upgrading their offices and I think they're actually starting to create some white collar jobs and so they're competing for talent, as well. So my hope is that that pent-up demand's a lot longer than six months.

Okay. Thank you very much.

Thank you.

Thank you.

(Operator Instructions) And the next question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed.

Good afternoon, this is actually Jamie Baskin on the line for Kathryn. I know you said January was a little weak because of weather but -- and February strengthened. Could you actually quantify February, how strong had that been? And I guess looking at your backlog -- your reported backlog, what kind of visibility does this give you going forward?

Well, the backlog -- typically our backlog is only like nine weeks, so our backlog is healthy. It helps us run the plants and so forth but we're a made-to-order business pretty much, and so it moves up pretty good. But January was single digits and February's back to where we've been.

Okay, and then just my final question. I know in your release you highlighted the biggest percentage gains in hospitality, retail and education. Could you clarify if any of the strength is driven by new construction, or is it just primarily R&R?

Depends on the market you're in.If you're in the mature markets in the Europe and US and not the emerging markets, 90% of that's refurbishment. If you're in the emerging markets about 80% of that's new construction. Most of the non-office is in the mature markets for us. That was all refurbishment.

Great, that's all I had. Thank you.

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I would now like to hand the call over to management for closing remarks.

Yes, well, thank you for being on the call, and I'll tell you, I feel a whole lot better about 2011 than I did about 2010. So hopefully we're going to have a great year and thank you for being shareholders.

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