Interface Inc (TILE) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1 2013 Interface, Inc. Earnings Conference Call. My name is Matthew and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-answer session towards the end of this conference. If at any time during the call you require assistance, please press star zero and an operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes. And now, I would like to turn the call over to David Faucher, Vice President, Senior Counsel and Assistant Secretary. Please proceed, sir.

Thank you Matthew. Good morning and welcome to Interface's conference call regarding first quarter 2013 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 in 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 up 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 statement; including risks and uncertainties associated with the economic conditions in the commercial interiors industry, as well as the risks and uncertainties discussed under the heading Risk Factors in item 1A of the company's annual report on form 10-K for the fiscal year ended December 30, 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 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. The reconciliation of these non-GAAP measures to the most comparable GAAP measures are contained in the company's results released in 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 rebroadcasted without Interface's express permission. Your participation on the call confirms your consent to the company's taping and broadcast of it. Now I'd like to turn the call over to Dan Hendrix.

Good morning and thank you for joining us. I'll get straight to the quarter. You probably know that the first quarter is seasonally our slowest quarter, and while that was true for some of our markets we are pleased to report that our Americas division jumped out with a record number of first quarter sales. We also saw a double digit percentage sales increase in Southeast Asia and our FLOR sales were up 24%, so there's good news coming from a majority of our global business. The bad news is that those increases were offset by weak sales in Europe due to continued economic uncertainty there combined with unusually bad weather in the UK at the end of the quarter. Typically, we see sales increases in the UK from January to February, and then from February to March, but this year March sales did not materialize as expected. That said, our European division still maintained a healthy operating margin for the quarter. We also continued to be impacted by last year's fire at our Australian plant. I'll talk more about that in a few minutes.

Gross margin finished ahead of the first quarter last year, but was below our target, mostly due to under absorption of fixed costs associated with lower volumes. SG&A expenses were in line with our expectations, but missing the top line caused the level to rise as a percentage of sales.

Now let me talk a little bit about each of our regions beginning with Americas. I gave you the highlight, a record first quarter sales. The corporate office segment, which is about half our Americas business was up an impressive 21% over the first quarter of last year, substantially outperforming the market. We also experienced growth in non-office segments with increases in hospitality, government and healthcare partially offset by declines in education and retail. Geographically, most of the growth was seen in the U.S. and operating income finished ahead of prior year. From a product perspective, we're in an excellent position with four out of our top ten bestselling products having been introduced in the last two years with last year's Urban Retreat product also about to break into the top ten. This is unprecedented and tells us that our product offering is resonating very well with the marketplace.

Our business in Europe was characterized by a slow start in January followed by most countries strengthening as the quarter progressed with the exception of the UK, which accounts for about 35% of our sales in Europe. One bright spot in Europe was an improving sales trend throughout the quarter in Germany finishing with a strong March. Another was sales in the European hospitality segment, which grew 14% over the prior year in markets such as Eastern Europe, Scandinavia, the Middle East, Russia and India showed significant improvement and continued to represent our best opportunities for growth in that region.

The first quarter sales in Southeast Asia tells a good story with double-digit percentage sales growth. Well performing segments here included corporate office, hospitality, education and operating income is up substantially compared with the prior period. Sales in China declined slightly year over year mostly due to the timing of production for major new construction projects in the region. We expect China billings to see a bounce in the second quarter, and this is further evidenced by the order trends in the first three weeks in April.

Finally, Australia, we're still facing the headwinds from the fire with sales down 13% versus the prior year period which was pre-fire. However, we're making progress in stabilizing our supply chain and reducing lead times in Australia while operating on an import-only model in advance of commissioning our rebuilt plant later this year. And we expect Australia's second half of the year to be better than the first half.

Shifting focus to the FLOR consumer business, sales were up 24% mostly due to the expanded FLOR store channel. During the quarter we opened a new store in Austin, Texas bringing our total to 19 stores, and overall the stores in aggregate remain profitable. Growing FLOR is our biggest investment year over year and we are seeing the benefit of that spend.

Looking ahead, Americas is on track for a very strong year from both a sales and operating income perspective. The macro data in the U.S. along with a positive book-to-bill ratio remain encouraging for the rest of the year. Orders in the Americas are up 17% in the first three weeks of the second quarter outpacing the order trend we saw in the first quarter. The business climate in Europe will not be resolved quickly or easily, which means we need to do a good job minimizing the impact of the depressed Western European markets while pursuing the opportunities to grow in pockets like Eastern Europe, Scandinavia, Germany, the Middle East, Russia and India. And particularly in segments like hospitality, we're holding a tight line on costs in the region and being very judicious about where we spend based on our highest potential for growth.

So we really feel good about the majority of our business, primarily in the Americas and Asia. The climate in Americas reminds me of upturns in '94 and 2004. We know from experience that we are especially well positioned for the bounce back. The question marks that remain are what will happen in the economy in Europe, particularly the UK and how quickly can we normalize our business in Australia. With that I'll turn it over to Patrick.

Thank you and good morning everyone, I'll now take a few minutes to walk through the financial results for the first quarter. As a reminder, given the sale of Bentley Prince Street in 2012, results for Bentley Prince Street for the 2012 first quarter and all prior periods have been classified as discontinued operations.

Sales for the first quarter of 2013 were essentially even with that of the first quarter of 2012, and on a consolidated basis there was not a significant currency impact for the first quarter. Despite the lower than expected sales, we managed to improve our gross profit margin versus the first quarter of 2012 by 30 basis points. As Dan mentioned, we expect margin expansion to continue during 2013. We saw record first quarter sales in our U.S. modular business primarily drive by our corporate office, hospitality, government and healthcare markets, partially offset by declines in retail and education markets. As previously mentioned, Europe continues to be a challenge. We experienced a 10% sales decline in local currency and down 9% as reported in U.S. dollars. With the exception of hospitality, this decline was across nearly all of market segments. As Dan mentioned, there's no quick fix in this region but there are areas of promise in Europe, particularly with regard to emerging markets and segmentation opportunities.

Our Asia Pacific division saw sales decline 8% during the quarter mostly due to the effects of the Australian fire. There were, however, positive areas in Southeast Asia where we saw double digit percentage sales growth and Australia was able to maintain a respectable profit margin despite its lower sales level. We expect to see solid top line growth in the Asia region, particularly in China, going forward.

For the first quarter on a consolidated basis gross margin increased to 33.9% compared with 33.6% in the first quarter. The year-over-year increase in gross margin the result of higher fixed cost absorption on higher volume production in Americas, but was partially offset by lower margins in our European operations due to lower production associated with lower sales volume in the region. Raw materials were effectively flat in the first quarter of 2013 versus the same period in 2012. In the first quarter of 2013 SG&A increased to $57.3 million from $53.9 million last year. As a percentage of sales SG&A increased 150 basis points to 27.2% compared with 25.7% a year ago. The increase in SG&A is due to a continued roll out of the FLOR stores, accounting for $1.7 million of the increase as well as increased sales team addition in the Americas, accounting for $1.3 million of the increase. While SG&A in terms of absolute dollars was in line with our expectation, we were not able to generate adequate top line growth in the quarter to support the additional spending levels. Because the majority of the increase in SG&A relates to our fastest growing segments, we feel that these investments will provide long term gains.

Operating income in the first quarter of 2013 was $14 million or 6.7% of sales compared with operating income of $16.6 million or 7.9% of sales in the first quarter of 2012 excluding restructuring and asset impairment charges of $16.3 million. Including all those charges, operating income for the first quarter of 2012 was $300,000. Interest expense was $6.2 million in the quarter versus $6.5 million versus last year. Depreciation and amortization was $6.7 million in the first quarter 2013 compared with $7.5 million in the first quarter of last year. CapEx in the first quarter was $14.9 million compared with $10.4 million in the comparable period in 2012. For the full year we expect our CapEx to be in the range of $40 million to $45 million.

Quickly to the balance sheet, we exited the quarter with $65 million in cash compared with $63 million at the end of the first quarter last year and $90.5 million at the end of 2012. Inventories were $157.5 million at the end of the first quarter compared with $144.7 million at the end of the first quarter of 2012 and $141.2 million as of the end of 2012. DSOs during the first quarter were 53.7 days compared with 54.7 days in the year ago period and inventory turns were flat at 3.7 times first quarter this year and first quarter last year.

With that, I'll open the call up for questions. Operator?

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your Touch-Tone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Press star one to begin. Please stand by for your first question.

And your first question comes from the line of Kathryn Thompson from Thompson Research Group, please proceed.

Hi, thanks for taking my questions today. You in the past had targeted improving gross margins by about 100 basis points year over year in 2013. In light of results (inaudible), do you still think that's achievable and if so, what would give you confidence with that? Thank you.

Yes, I still think it's very achievable. Where you get the comps on that is we think the top line is going to grow and we're going to get absorption of our fixed cost base. Yes, I believe that we will have the 100 basis points when we sit here in the fourth quarter.

And pulling the strings a little bit farther on that, based on order trends that you're seeing right now, so in March and into early April, could you talk a little bit about the momentum and the type and even if the order rate is from different margin profiles, so for instance are backlog orders from projects that are more refurb versus new or it would have a different margin profile?

No, I would say that where the order growth is coming from is from our Americas business. We're just seeing a pretty healthy activity with the A&D and those orders are coming through. And the margin profile of our American business is very profitable. I don't think we can say major projects versus refurbishment. I'd say the mix is still about the same. If you go to Asia, which we're seeing some pretty good growth, a lot of that probably is around some new construction, but the margin profile in our Asia business is also pretty good.

Okay. Any thoughts in terms of by region? I know you talked about the Americas and Asia still being strong, but any specific numbers about order trends from the first three or four weeks of this quarter?

We did say that Americas business was up 17% in the first three months I mean, excuse me, three weeks and we did say Asia was very strong, and they're up double digit as well. So that continued in those regions. I will say that in the European business we did a get a little bit of benefit in shipping because of the weather in the UK and our European business actually is not nearly as negative as it was in March.

Great. Thank you so much.

Thank you.

Thank you for your question. Your next question comes from the line of David MacGregor from Longbow Research, please proceed.

Hi, this is Josh voicing in for David MacGregor, thanks for taking my questions. Given the fact that you've been adding some feet on the street in developing your FLOR stores, can you help us out and discuss where you think SG&A is headed either as a percentage of sales or as an absolute number here in 2Q?

Yes, I mean, I think you'll see some sequential increase in SG&A through the balance of the year as a variable piece of SG&A rises with our intended top line growth through the balance of the year. You'll see it trending to 60 probably here shortly and then low 60s for kind of the balance of the year. Really as a percentage of sales, largely dictated on where we think the top line is going, but we continue to try to drive it sub 26, sub 25 kind of range is where we ideally like to be, but that's largely predicated on where the top line is headed.

In terms of FLOR store and SG&A, a lot of that is already done. The increases in SG&A should be minimal on the FLOR store for the balance of the year. We are only planning on adding two additional stores from here in 2013. We added Austin in Q1 and have targeted Miami and Minneapolis for the balance of 2013, so you shouldn't see a significant stair step in SG&A related to the FLOR stores in 2013.

And I would say we're not comfortable with a 25% SG&A line. We think it needs to be below that level, and we're going to drive the top line to drive that down or we'll have to readdress our SG&A if we don't.

Great. I appreciate the color on that. And just you had talked about FLOR a little bit. Can you tell us what the same store sales were for FLOR and maybe even offering even margin if possible?

Sales for the seven stores that we've had for longer than a year were up about 17%. You have to kind of exclude Dallas on a year-over-year basis, we were in the process of moving from one location to another, but for the seven that we've had for a full year, they were up 17% and were profitable.

I think it was 11%.

11% as a group in the quarter.

And that's ones that have been there a year, right.

Okay, great. Thank you for that. And then just a last one from me, on raw materials you had mentioned they were flat year over year on the quarter. What do you see for raws looking out over the next quarter or two?

Environment, I wouldn't say meaningful moves either way at least in the near term.

Okay, and no price increases from your vendors? I know last quarter you had said you normally have a 30 day window on that, but nothing has come across as of yet?

Yes, that's correct. I'm not sure you heard us, sir.

Okay. I appreciate it. Thank you and good luck.

Thank you for your question. Your next question comes from the line of John Baugh from Stifel Nicolaus, please proceed.

Thank you good morning. Could you comment on Australia where you are with business interruption insurance and how that's going to influence maybe the margin for the balance of the year?

Yes, I don't know that the insurance proceeds or how that's going to play out really will impact the income statement from continuing operations. I think any insurance recoveries that we get from this point on really will most likely flow through the loss on the Australia fire line or gain. They'll flow through there, so the continuing operations will be as it's occurred. We have excluded and captured on the balance sheet any of the incremental or kind of one off costs, out of pocket costs that we've incurred and that's been captured on the balance sheet, so that the income statement reflects kind of current operations as is and how they are truly operating today. We have filed for, made claims for lost profits to date and most likely when those claims are settled will flow through the income statement, but broken out separately on a separate line item.

Okay, thank you. And then in Europe, I know you went through a restructuring last year with business being difficult and it's still challenging. Are there thoughts, Dan, around doing anything additionally at this point or do you think you can grow these pockets or regions as you talked about and work your way out that way?

Well, I think in areas that are depressed, John, that we continue to reduce costs in those areas and in areas where we think we can grow we're going to make some investments, but not big investments. I mean, our absolute G&A costs, SG&A costs in Europe were down year over year if you go to first quarter last to this quarter. So we'll continue to work at that. We haven't planned any structural changes yet in the sales force or any of that. We think we're going to try and work our way through it right now.

And on FLOR, I assume your gross margin percentages are much higher and your SG&A percentages are much higher than your core business. First of all, is that assumption correct, and then sort of now that's it getting to be a little bit more meaningful, how does that impact or so how much of the 100 basis point expectation for gross margin would just be the influence of FLOR flowing through?

I would say that it won't -- it's a positive impact to it as we grow the top line, but the biggest influence on that is going to be the volume increases I think we're going to get out of our Americas business. If you look at what the trend is in the double digit growth there's a lot of flow through that happens in Americas and so the gross margin expansion, I think, will occur throughout the year mostly in the Americas business, which FLOR contributes to. But I think it's more going to be a function of growing the top line and being very efficient in the plants and letting that fall through to operating income.

Okay. And my last question, quickly, is I think you mentioned book to bill. I didn't see an orders figure. Was that a comment across the company or just the Americas and what was the figure? Thanks.

Comment about the company, I think it was an $8 million or $9 million difference.

Yes, we had gross orders, $222.5 million versus sales at $210 million in the quarter.

Thank you.

Thank you for your question. Your next question comes from the line of Mike Wood of Macquarie, please go ahead.

Hi, good morning. Can you provide a little bit more color around the UK weather issues? Do you feel like the orders got pushed out? You had mentioned in your remarks that there were some shifting resumption that occurred that would be helpful if that continued into April.

If you looked at the UK, we were short in the UK $5 million or $6 million from and if you looked at year over year on what we expected we were probably short more like $8 million. And March just didn't materialize and there was -- I'm not going to blame, obviously, the whole thing on weather but it did prohibit some shipments and we got the benefit of some of those shipments in the first three weeks. The UK business is actually up the first three weeks in the UK in April.

Got it. In Australia, can you just talk about what potential impact the fire issue might have on your market share longer term? I think you previously disclosed and so flagged it's probably around 45% of your market share in Australia. How quickly can you recover back to that level and where might you stand right now?

It's sort of hard to say where you stand right now. We obviously have lost some market share related to some smaller business that require inventory in short lead times. I do believe when the plant starts up that we're going to have the most competitive model in Australia and that we can get back to those 45% levels. To get a handle on what's happened in the last six months, it's kind of hard to do that because those numbers sort of come out every year, but we clearly are losing some of the short order, I mean, small orders, short lead time business that other people are servicing. I will say now that we have a pretty large inventory position in Australia in the import model as far as on-time delivery is now servicing our customers. Our challenge is to go back and get those customers and start servicing them out of inventory, which I believe we can do.

Okay, thank you.

Thank you for your question. Your next question comes from the line of [Saad Habib] from VEW, please proceed.

Hi, Dan, Patrick, good morning.

Hi.

Morning.

I have a bigger picture question about operating margins. And I will share I'm a little bit frustrated with the margins for this company. For a dominant producer like you guys with all these great innovative products, is there a way to kind of get to a mid-teens operating margin with like a two to three year time horizon?

Yes, yes. I think if you have a recovery, particularly in the U.S., which we're talking a lot about that, but the margins in the -- operating margins in our U.S. business which is about half, typically are, if you go back to '06, '07 even '08 are in that teens area that you're talking about, 13, 14. The biggest pressure are that we're fighting is in Europe as far as what's going to happen there. We're typically around, in the good times, we're in the same area that you're talking about, but now that we've had sales depressed where we are, we're seeing around 7% in the market today and that's about 28% of our business. So our challenge to get back to that is to get back to what happens in Europe. But yes, the profile or our company if you get back to $1.1 billion then we'll be back to those levels that you're talking about.

Got it. And then in terms of the delay in manufacturing initiatives and things of that sort that we're being implemented in the U.S. is that an ongoing process? Is that nearing completion, sort of what's the time horizon on that?

I would say that the delay in manufacturing is a journey and I think we're well underway and part of my optimism that we're going to get the 100 basis points that Kathryn asked about is the fact that [lane] is talking hold in the operations in LaGrange and we expect to see some benefits particularly in the second half of the year.

Got it. Okay, thank you so much.

Thank you. Your next question comes from the line of Sean Wondrack from Deutsche Bank, please proceed.

Good morning, Dan and Patrick. This is Sean Wondrack (inaudible). My first question has to do with some of your comments surrounding Asia Pacific and China. Can you dig in a little bit to the Chinese situation? You said that sales were down slightly but EBIT was up substantially despite the lower sales. What's driving that?

I would say that a couple things are driving it. One is that we are getting the benefit of some production that we're servicing in Australia, so you're getting the benefit of some flow through in that business. We've also been raising our prices in China, in that market place going to higher margin out of the commodities part of that business. To me, China there's a lot of new construction that's on the horizon in the next three years that we have visibility into, and right now our China business is really tied to new construction. Our challenge is going to be how do we get into the refurbishment market, because in China there's really not a market because buildings that have occurred are less than 10 years old, but we do believe there will be a refurbishment market as well. And in China, our domestic business used to be very depending on multi-nationals, domestic (inaudible). Optimistic about China being a big carpet selling market in the next 10 years and we're there to play in the market.

Okay, great, that's helpful. When you look at your individual regions, could you tell us what capacity utilization is in the Americas versus Europe versus Asia Pacific? Where are you at capacity wise?

If you looked at the U.S. business we've got new capacity coming on stream.

Actually up. 85% capacity U.S. but we're going to (inaudible) 75% level, but the biggest investments of the (inaudible).

Okay. And in Europe?

I would run it about 60% capacity in Europe. Right now we're running around 60%, 70% capacity in China and in Thailand we're running 100% of capacity. Basically, we're running 24/7. That will be alleviated when we open our plant in Australia in the fourth quarter, so you'll get back to a lot more normalized capacity in the Asia Pacific region.

Okay, great. And I would imagine for every five points or so in the Americas, that's going to drive a lot of profitability down into the EBIT line as you continue to push capacity higher? I think I'm cutting out. Thank you.

Thank you.

Thank you.

Thank you for your question. Your next question comes from the line of Judy Merrick of SunTrust, please proceed.

Thanks. This is Judy in for Keith Hughes. And just to clarify, in Europe I think you said the category that showed some promise was that hospitality?

Yes.

And is that across Europe or is that just mostly in the Eastern Europe and Scandinavia, is that were you've seen strength or improvement?

Across Europe. We are making investments around with global hospitality, the brand's called Interface Hospitality and we're having a lot of success in the Americas business and we're taking that globally, and so we're in early stages of the global hospitality push, but we're seeing benefits of that.

Okay. And were there any other categories in Eastern Europe were you had stabilization or areas of strength or is it mostly just in that category?

I would say that if you go to the non-Western markets, we're okay. It just happens to only represent only 25% of Europe.

Got you. Okay, great, thank you.

Thank you for your questions ladies and gentlemen. I would now like to hand the call over to Dan Hendrix for the closing remarks.

Thank you for listening in on the call. And if you didn't get it, I'm fairly bullish about the second half of the year and thank you for listening.

Thank you for joining us gentlemen. This concludes your presentation. You may now disconnect. Have a good day.