Interface Inc (TILE) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2012 Interface, Inc. earnings conference call.

My name is Gary, and I will be your operator for today. At this time, all participants are on listen-only mode.

We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) I will now hand the call over to Matt Steinberg. Over to you.

Thank you, Operator. Good morning and welcome to Interface's conference call regarding first quarter 2012 results. Joining us from the company are Dan Hendrix, Chairman and Chief Executive Officer, and Patrick Lynch, Senior Vice President and Chief Financial Officer.

Dan will review the 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. A copy of the earnings release can be downloaded off the Investor Relations section of Interface's website. An archive 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 10K for the fiscal year ended January 1, 2012, 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 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. These documents 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 of 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's always good when I start by telling you that what I talked about on our last call has come to pass. Namely, a robust project pipeline for the Interface commercial business began to translate into orders. The positive order trends we saw at the end of the first quarter and the first few weeks of the second quarter are very encouraging. Despite a choppy beginning of the year, and although things are still tough in Europe, along with what I would call guarded optimism around market conditions, we have continued with restructuring and manufacturing improvements that are starting to take hold and enhance profitability. I'll get to that in a minute.

Well, let me start by giving you the big picture. We finished the quarter with orders of $249 million, essentially flat versus the prior year and ahead of first quarter sales, which translated into a $13 million increase in our backlog since year end. Orders bottomed out in February, down 9%, but we experienced a strong rebound in March, and this has set up for an improved top line in the second quarter.

From a sales perspective, we had strong comparables in the first quarter last year that we were not able to replicate in the current environment. Still, sales are relatively stable in the Americas and in Europe. Our US hospitality business was a bright spot, up 40% year over year on a relatively small comparison.

Asia-Pacific is where we saw a substantial slide, primarily in Australia where last year we had both a new construction boom and government stimulus spending in education that weren't present this year.

We made good progress on gross margin during the first quarter, up 100 basis points sequentially versus the fourth quarter, the result of higher selling prices and better manufacturing efficiencies. Our raw material costs rose another 2% sequentially and even further elevated on a year-over-year basis, but we implemented another price increase globally in March, ranging from 3 to 5%, to offset the higher costs.

I am very pleased with our continuing attack on SG&A expenses, which were down $6 million sequentially versus the fourth quarter. At this point, we're getting pretty thin on SG&A expenses, and we will continue to keep a tight control on them in the upcoming quarters while balancing against the investments we need to make in growth opportunities, such as additional floor stores, emerging markets, and segmentation.

Another bright spot was cash generation, up more than $12 million in the first quarter, which is usually a heavy cash use for us as we funded bonuses, insurance premiums, and build inventories. In fact, this is the only time that I can remember generating cash in the first quarter of the year. By way of comparison, we used $30 million in cash during the first quarter last year.

We're excited by the continued strong performance of our FLOR consumer business with sales up 41% year over year. Overall the business broke even for the first quarter compared with an operating loss in the prior year, and the FLOR retail stores were profitable this quarter on a stand-alone basis. We opened four new FLOR stores over the past month. Stores that aren't reflected in the first quarter numbers, bring our total stores to 11.

We have not encountered any major shortcomings in the FLOR store rollout and will remain on track to have a total of 19 stores by year end with future plans for locations in each of the top 30 markets in North America.

Our first international stores are scheduled to open in Toronto and Vancouver later this year. We are very pleased with FLOR's progress and performance, and the consumer business will continue to be an integral part of our strategic investment initiative. Success in the consumer market is indicative of the [secular] shift to carpet tile and is fundamental to our growth strategy.

We're also pleased with the results of Bentley Print Street despite a relatively small operating loss on lower production volumes. Orders during the first quarter were above the critical $25 million point, so we expect it to move out of the red in the second quarter.

In Europe, we successfully completed a consultation period with our employees and their representatives regarding the shutdown of operations at our Shelf facility, and the closure is now underway. When fully implemented, this action will generate an additional $9 million in annual cost savings. We're currently on track to realize some of these benefits in the second quarter, and we should realize the full benefits beginning later this year.

(inaudible) for the second quarter, consolidated orders are down 3%, our strongest comparison quarter last year. Orders in the US and Australia are up double digit percentage, but Europe orders are down double digit percentage as the sovereign debt issues continue to weigh heavily there.

As I mentioned earlier, we're starting to see market conditions improve in the US and Australia after a difficult second half of 2011 and a tough start to 2012. We are pleased to see the restructuring actions and manufacturing improvements enhance profitability. We will continue to focus on improving gross margins through price increases, careful spending, further improved operations, the Shelf plant closure, and increased absorption from higher production volumes. We are optimistic that a combination of our restructuring actions, investment initiatives, the secular shift to carpet tile, and the general improvement in the marketplace will drive improving results through the second quarter and beyond.

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

Thank you, and good morning, everyone. I'll take a few minutes to speak about the financial results for the first quarter.

Sales for the 2012 first quarter decreased 5.2% to $232.8 million from $245.4 million in the first quarter of 2011. Our sales performance reflected a gradual improvement in the US modular markets as the quarter progressed, [some] pockets of growth in Europe and our price increases beginning to take hold, offset by lower sales to other parts of Europe and Asia Pacific resulting from continued general economic uncertainty and softer government and new construction spending in Australia.

As Dan mentioned, we improved our gross margin by 100 basis points sequentially versus the fourth quarter, primarily as a result of higher average sales prices and improved manufacturing efficiencies. On a year-over-year basis, gross margin declined by about 2.7 percentage points to 32.7% compared with the first quarter of 2011. This decline in gross margin was primarily the result of lower fixed cost absorption and lower production volumes as well as higher raw material costs which remained up about 5% to 6% year over year.

Our margins were also impacted by under-absorption of fixed costs associated with lower manufacturing volumes at our China plant which is now running well, but remains slightly below breakeven in the quarter as production volumes were affected by the impact of Chinese New Year. We also brought inventory up by about $6 million in the quarter as a result of building safety stock in connection with the closure of the operations in our Shelf facility.

SG&A expenses in the first quarter 2012 were in line with our expectations, decreasing to $59.4 million from $65.4 million last year. As a percentage of sales SG&A decreased over 110 basis points to 25.5% compared to the year-ago period, reflecting our efforts to reduce expenses to better reflect the demand environment following our restructuring efforts in the 2011 fourth quarter.

We continue to expect to generate annualized SG&A expense savings of about $9 million from these efforts and another $2 million in annualized cost savings on the cost of goods sold line from the restructuring in Q4.

During the quarter we progressed with additional restructuring actions concerning the closure of the manufacturing and warehouse activities in Shelf, in the UK. As a result, we incurred restructuring and asset impairment charges of $16.3 million or $0.19 per share after tax. Pretax annualized savings from this action are expected to be $9 million, and we should begin realizing the full benefits later this year.

While we've made excellent progress on the cost savings front, we will continue to focus on aligning our cost structure with evolving market conditions and initiate additional cost reduction action as these opportunities arise.

Excluding the restructuring and asset impairment charges, operating income for the 2012 first quarter was $16.8 million or 7.2% of sales. Including these charges, operating income was $500,000 or 0.2% of sales in comparison with operating income of the 2011 first quarter [which was] $21.5 million or 8.8% of sales.

Interest expense in the first quarter remained flat at $6.7 million compared with the first quarter 2011. Going forward, we expect to realize $1 million in annualized interest savings from the previously announced redemption of the final $11.5 million of our 9.5% senior subordinated note that we completed April [the 9th].

Excluding the restructuring and asset impairment charges discussed above, net income in the 2012 first quarter was $6.3 million or $0.10 per share compared to net income in the 2011 first quarter of $9.8 million or $0.15 per share. Including all charges, net loss was $5.9 million or $0.09 per share for the first quarter 2012.

Depreciation and amortization was $7.5 million in the first quarter compared with $12.6 million in the first quarter last year. Capital expenditures in the first quarter of 2012 were $10.4 million compared with $10.3 million in 2011. For 2012, we continue to expect expenditures to be around $30 million to $35 million.

I'll take a few minutes and review some of the details of our individual business segments. Our modular carpet segment had sales in the 2012 first quarter of $210.1 million, down 4.2% from the year-ago period. Sales remained flat in the US, but were slightly lower in Europe primarily as a result of uncertain macroeconomic environment. However, we did generate better than expected results in France and Spain, and Germany remained a good market for us. Asia-Pacific declined as a result of softer market conditions, tough comparisons in Australia, and choppy conditions in India.

Operating income for the modular carpet segment for the 2012 first quarter was $1.1 million or 0.5% of sales, down from $25.3 million or 11.5% of sales last year. Operating income for the first quarter of 2012 includes the aforementioned restructuring and impairment charge of $16.3 million or 7.8% of segment sales. All of this restructuring charge was within the modular carpet segment. Bentley Prince Street generated $22.7 million in sales in the 2012 first quarter, down from $26.1 million in the first quarter of 2011. They also reported an operating loss of $600,000 in the quarter compared with an operating loss of $200,000 in the prior year period.

Turning quickly to the balance sheet, we had a strong cash generation quarter exiting the period with $63.1 million in cash compared with $39.7 million at the end of the first quarter of 2011 and $50.6 million at the end of fiscal year 2011.

Inventories were $171.9 million at the end of the first quarter compared with $166.1 million in the fourth quarter of 2011 as anticipated from the closure of the manufacturing and warehousing activities in our Shelf facility.

Our average DSOs for the first quarter were 54.7 days compared with 54.8 days in the year-ago period and inventory turns in the quarter were 3.7 compared with 4.3 last year partly due to the building and the safety (inaudible) at Shelf.

Looking ahead to the remainder of 2012, the domain picture is improving, but still remains cloudy overall. As evidenced by order rates, we have seen improving conditions in the US, Australia, China, while Europe remains choppy and Asia ex China remains challenging.

Having said that, we undertook several initiatives to improve our cost structure to better align our business with market conditions and improve our margins in the eventual recovery, enhance the profile of our balance sheet and continue to generate solid cash flow. And we'll continue to invest if our FLOR retail business and other initiatives that fit our strategic growth goals.

With that, I'll turn the call back over to the operator for your questions.

Thank you. Ladies and gentlemen, your Q&A session will now begin. (Operator Instructions) You have a first question coming from the line of Kathryn Thompson of Thompson Research Group. Over to you, Kathryn.

Hi. Thanks for taking my questions today. First, I just want to focus on the margin. Could you quantify on a percentage basis or at least put some parameters around the impact of raw materials in the quarter versus lower utilization, capacity utilization, in the quarter? And also, given higher relative raw input cost, what could we expect going forward on an annualized basis?

Yes. I would say that in the quarter, we're probably about 100 basis points on a year-over-year basis decline was related to the raw materials and delta of the balance was made up of the lower production volumes of Q1 versus Q1 last year. Right now the raw material price front seems to be fairly stable. So at this time we don't anticipate going out with any additional price increases at this time, but we'll see how it shakes out over next couple quarters.

Other than the price increase you have, including the 5% you have in Q2, correct?

No, that was in March.

Well, March. Okay.

That's where we stand now.

In your prepared comments, you had some numbers around sales growth by your major markets, US, Europe, Asia. Could you maybe distinguish a little bit more, or at least give a little bit more specificity, around more specific sales trends in those markets? When you said Asia is down significantly, are we talking about down 10%, down 20%? You said US and Europe were doing a little bit better, maybe talk a little bit more specifics in those markets, too.

Kathryn, this is Dan. I would answer that from a trend standpoint of what we're seeing the US has really had a very strong seven weeks, eight weeks, when we talk about March and the first three weeks in April, and so has Australia. Australia is doing very well, and Australia, as you know, represents 10% of our business. When Patrick mentioned Asia, he was really talking about Southeast Asia. We had a slow start in Southeast Asia. I will say that the Southeast Asia business has been picking up lately. For some reason in January -- I'm not sure what Chinese New Year did to us, but the China business and Southeast Asia business had a very slow start. Europe is where we -- where I have concern as far as what's going on with the sovereign debt issues. Europe has been soft really since January. And, you know, Europe is one thing we've got our eye on. But the other markets seem to be -- the activity is really good, and we're starting to see some pick-up there.

Remind us of what percentage of sales Europe is.

Yes, about 35.

That's all I have for right now. Thank you.

Thank you.

Okay. Thank you for your question. Next question comes from the line of [Mike Woods] of McGuire Capital. Over to you.

Hi. Thank you. All right, can you pinpoint also in terms of what you felt the change was in the order trends that happened in mid February?

Well, I think the -- if you remember going back to the call, we talked about that the activity was really good, but corporations just weren't letting go of the orders. I think that's still the case in Europe. There is a pretty good activity project pipeline, but we're not seeing corporations actually place the orders today. In the United States and in Australia particularly -- I'd say the Americas business and Australia -- the activity is pretty robust and we're starting to see the orders come through. And I think that's consistent with what the industry is seeing, particularly the furniture guys. You know, business is pretty good in (inaudible).

Got it. And next quarter you have tough comparisons on your order side. It's one of your toughest comps. Could you help us with some direction in terms of giving the positive trends that you've seen whether or not we can actually have, you know, positive order growth next quarter?

I'd hate to give you a forecast on that. We don't typically do that. I would just say that the activity feels a lot better than it did in February when we were on this call, and I anticipate an improving second quarter over first quarter.

Okay, thanks. And just finally, can you give us some color on the dual class share structure which collapsed? You talked about that in your 8-K filing in early March. What actually triggered that?

We did have the passing of Ray Anderson, and if the B stock gets below 10%, then all the B converts to A and you have one class of stock. And it was a pretty [expanded] margin anyway. There's 300,000 shares that would trigger that going into this year, and so we had 300,000 shares that got converted from B to A which triggered that.

Okay. Thank you.

Thank you.

Thanks for your question. Next question comes from the line of David MacGregor of Longbow Research.

Over to you.

Yes. Good morning, everyone. Can you talk about your backlog, and how is the mix in that change quarter over quarter different from what you were booking, say, a quarter ago?

Oh, I mean, our backlog built by $13 million in Q1. So we're starting to get kind of positive kind of book-to-bill ratio, which is nice to see here in Q1. You know, the bulk of that strength really is coming out of the Americas group currently.

Americas. Is that mostly corporate?

It is corporate. You know, with drilling down in subsegments, the strength around technology, energy in particular, are two areas that are pretty strong. And, you know, franklysome financial services to be honest.

Financial services. Okay. And how would it sort of translate in terms of opening price point versus premium price point [product]?

Wow. I would say the average selling price within the backlog is higher than it was to start the year as we're starting to realize the price increases. But I'm not sure if you -- we don't drill down between what is high-end premium products -- we could -- and what is low end. I don't look at it that way.

I'm just trying to get a sense of the price point in that increment. It sounds like --

I just -- that you're seeing an average price increase in that backlog which is nice to see that we're starting to realize our price increase.

Right. Is it just the price increase? I mean, excluding the price increase, would it be relatively flat or are you seeing -- I'm just wondering if people are buying up margin or whether people are still being fairly cautious in terms of their purchasing.

I'd say you have both things going on there, David.

Okay.

But, you know, we've introduced our new tapestry product line which is the higher-end premium, and that's doing very well. So I think you've got a mix of it. You know, the education business starts kicking in in the second quarter, and you'll see average prices come down with that mix. But, yes, I think we're selling premium products as well as we're selling products that are value products. (Inaudible) things are going on.

That's good to hear. Last question just on the European business -- I realize business conditions are weak over there and pricing has got to be very challenging, but you're probably incurring raw material cost inflation there as well. So I was just wondering what extent you feel that you'll succeed with pricing in the European market?

Yeah, that was obviously a big challenge for us in 2011, particularly late in the year last year was trying to push through some raw material price increases in the face of -- to moderating demand environment. And actually looking at, you know, where we are on average price increase in Europe on a year-over-year basis, they've actually done a really nice job. Globally we're up about 4% on a year-over-year basis on average selling price, and Europe has done a nice job here in Q1 raising prices which is kind of a key strategy for us going into 2012.

Right. Right. Thanks very much.

Sure.

Thank you. And next question comes from the line of -- is it John Baugh of Stifel Nicolaus?

Thank you, and good morning. I was really pleased with that cash flow number on the first quarter and was curious as to how the year might play out, whether there were some unusual things in there that may reverse or are we just going to generate a lot more cash this year than we typically do?

You know, I think we obviously with the moderating demand environment -- you know, the business did slow down in Q4 and the first six or seven weeks of Q1. We typically generate a decent amount of cash out of working capital, and did a nice job in Q1 managing inventories, you know, mostly flat with the exception of what we had to do in Europe around the plant closure. But, you know, I think for the balance of the year, we'll try to keep inventories relativity stable and continue to squeeze working capital where we can. So I think it should be hopefully a better than average year in terms of cash flow generation in 2012.

So do you care to put a number on that, Patrick, like, pushing 50 or something or --

No. I would say north of 30, 35, maybe. We'll see how it shakes out, but we're off to a good start here at least in Q1, which is nice.

Yeah, John, this is Dan. You've been following us since, what, 1984, and this is the first time that I can remember first quarter we actually generated cash.

I agree with that. Yes. You made some comments about orders, and you went quickly, and I didn't get them all. I think it started with orders in Europe were down double digits in the quarter, and then you commented. Could you just go through those numbers again?

What I was commenting on was -- well, I'll let Patrick answer that one actually. He's got the orders from --

Sure. I mean, I think what we were, you know, just trying to provide a little color around the first three weeks of April where as in total we're down 3%, but off to a pretty nice start here in the Americas, up 15%, 16%, and then Europe is, you know, down about 20%, and Asia Pacific is roughly flat. So, you know, it's kind of a mixed bag, but really encouraged by what we've seen in the Americas over the last eight or nine weeks. But kind of dark clouds currently around the demand environment in Europe.

Got you. And then you commented on the first quarter year-over-year raw materials hurting about 100 bips on gross margin. What with pricing going through in March, I'm curious how the delta, if you included pricing with raw material increases in Q2 year over year, how that plays out and the net impact on gross margin percentage.

Assuming a pretty stable environment, I'm encouraged to think that we'll get to neutral here in Q2 and not have that drag in Q2.

Okay. Okay. And then the FLOR performance is impressive. Is that being driven by the retail, or is there something going on with the catalog Internet on the core business, if you will?

It's both, John. The catalog business was up 13% in the quarter, and that's starting to grow, and I think we're getting the benefit of stores driving some of the business, the catalogs, when people can go in the store and see it and feel it, and then they go order it online. The next biggest piece, obviously, is the retail stores are doing well.

Okay. And has there been any thought, Dan -- you mentioned Toronto and Vancouver, but I mean what about the Londons and Parises of the world? Is there a thought to take the store concept to international at this point?

Yes. I think you'll start seeing us do that in 2013.

Great. Thanks. Good luck.

Thank you.

Thank you. And next question comes from the line of Matt McCall of BB&T Capital. Over to you.

Okay. Thank you. Good morning, everybody.

Good morning.

So, Patrick, I think -- did I hear you right? Did you break out a $9 million projected savings from the UK facility? Was that the number you threw out?

That's right. That's fixed overhead savings that we anticipate related to the Shelf closure.

Okay. So I think that's up from the --

(Inaudible) we had 8, 8.5 I think when we [left off.]

Oh, okay. Okay. And then this year you're going to recognize how much?

We'll probably see 3 or 4 this year. It's gone very well thus far in terms of the process and the consultation period. So we're a little bit ahead of where we had originally anticipated. We'll see maybe $3 million or $4 million this year.

Okay. And then I think you -- in Q4 you broke out the $4 million of price cost pressure. It seems like that number has been cut in half sequentially here in Q1. What's the total pressure that you faced last year price versus cost from raw material inflation?

I'm reaching from memory here. I haven't looked at that number in awhile. But I would say it was north of 12 that we had last year in total, but I have to come back and confirm that with you.

Okay. So is the way to look at that if you're going to get the parity in Q2 that you sell $2 million this year and maybe the net savings on a year-over-year basis is 10 or is that too much?

It's probably too much. But I have to -- I'd have to scrub down and think through that.

Okay. Okay. Okay, and then you broke out interest expense. You talked about the $11 million restructuring, the $3 million, $4 million from UK, price, cost. Anything else that we should think about outside of the normal leverage that you'll get from volume that's going to help margins this year?

I think you hit it, Matt. I think the price increases, we're going to realize that, offset material Increases. And I think the plants are going to run better than they've been running, particularly the US, the last two quarters. So we're going to get some manufacturing efficiencies. And you got the absorption. You know, we're ramping up production in the second quarter over the first quarter. So you'll see the absorption there.

Okay. And on that last one, I think also in Q4 you talked about manufacturing inefficiencies costing you about $4 million. Where did that stand? I know you talked about production volume, but where did the actual inefficiencies play out in Q2? Are those back to --

I think we're going to see a much improved manufacturing efficiencies in Q2 versus Q4.

And versus Q1?

You'll see an improvement over Q1 as well.

Okay, got it. Thank you.

Yes.

(Operator Instructions). We have our next question from the line of Keith Hughes of SunTrust.

Over to you, Keith.

Thank you. As you look to the second quarter, are the production rates going to pick up or slow down from what we saw in the first?

They're going to pick up, Keith.

And from an inventory perspective, would that still allow you to bring the inventory down from where we --

Our goal is to continue to bring the inventory down during the next three quarters to get our turns back over 4.

And, Patrick, the interest expense savings, can you just repeat that number on a quarterly basis?

It's about $250,000 per quarter. The $1 million dollars just related to the $11.5 million of the 9.5% bonds we brought in.

And final question -- in Asia I know you've have tough comps with Australia. Are those about to end soon?

In Australia, yes. We are currently running at a double digit order trend in Australia.

And how many months have you been doing that?

The first three weeks.

Yes, just for the first three weeks in April.

Okay. That's all for me. Thanks.

We just anniversaried that.

We have no further questions at this time. So I would now like to turn the call back over to the management for any closing remarks. Thank you.

Well, thank you for being on the call, and thank you for being shareholders, and hopefully we'll report a very good second quarter. You guys have a great year.

Thank you very much. Ladies and gentlemen, that now concludes your conference call for today. You may now disconnect. Thank you very much.