Interface Inc (TILE) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Interface, Inc. earnings conference call. My name is Sheila and I will be your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over now to Mr. David Foshee, Vice President. Please proceed, sir.

Thank you, operator. Good morning, and welcome to Interface's conference call regarding first-quarter 2014 results. Joining us from the Company our Dan Hendrix, Chairman 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 to Q&A.

A copy of the earnings release can be downloaded 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 An archived version of this conference call will also be available through that website.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 formal remarks, please note that during today's conference call, management 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 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 29, 2013, 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 is 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 re-recorded or re-broadcast without Interface's express permission. Your participation on the call confirms your consent of the Company's (technical difficulty) and broadcasting of it.

Now I'd like to turn the call over to Dan Hendrix. Please go ahead, sir.

Thank you, David. Good morning, everyone. I'd like to start with a quick overview of the dynamics of the first quarter. As you know, the first quarter is seasonally slow for us, so we're not surprised to see a sequential contraction versus the fourth quarter. That being said, January and February were unusually slow starts for the year, due to a few different factors.

First, severe winter weather across the Midwest, South, and Northeast had an impact. We lost five production days at our US plant, and some of our sales reps lost several days in the field because they couldn't reach our customers. As we mentioned in the February call, the weather also slowed foot traffic at our floor stores because somewhat of a malaise in consumer spending.

Second, the start-up of our plant in Australia had a significant impact. As we transition from importing products into Australia from our plants in Thailand and China, to commencement of operations at the new plant near Sydney, our shipments declined. Also following the 2012 fire, our delivery lead times from Thailand and China into Australia and all of Asia were considerably drawn out. And after 18 months of these reduced customer service levels, it was reflected in our demand. But even though shipments were down, orders in Australia were up substantially in the first quarter, which shows that we are re-capturing the market share.

Lastly, the Chinese New Year had a more pronounced effect this year. If you followed our progress in China since we opened the plant a few years ago, you know that more and more of our sales are coming from local customers, as opposed to multinational corporations. This result that the Chinese New Year had a greater effect on our business. Our business recovered well in March, but it wasn't enough to get us all the way back to where we expected to be for the full quarter.

If you [look] below the surface, the undercurrents of our business remain strong. Two big points jump out at me. First point, Europe had the breakout quarter we were expecting. We had strong results across virtually all market segments and countries, with the exceptions of France and Russia. Each of our primary markets in the UK, Holland, and Germany had substantial growth. In fact, Germany turned in its best quarter ever.

Second point: orders during the quarter were strong, with a steep progression from January through March, so we're optimistic about a quick return in the second quarter to our recent growth trajectory. Based on our order levels, alongside our growth platforms, I feel confident that the topline increases are coming. And I still like our prospects for the year.

In the Americas, our non-office sales are robust; the overall project pipeline is going nicely; and we believe we are solidly outperforming our competitors. For our business in Europe, [2012] holds a lot of promise. It's been several years since we've seen growth like we had in the first quarter, and indications are that the improving trend will continue and perhaps accelerate over the balance of the year.

We have our new plant in Australia up and running, and we're recapturing market share, as evidenced by the strong order growth in the first quarter. Southeast Asia also has a strong pipeline of activity. And our expectations for the full year performance haven't changed in this region, despite the slow start. China is still a question mark that depends largely on the level of government-directed activity.

We also have opportunities below the top line. We look for gross margin to expand moving forward, as we implement further lean manufacturing practices; complete the ramp-up of our new plant in Australia; and experience larger sales volumes. While we don't expect to cut very much SG&A at this pivotal time, we do expect to contain it while growing into the current spending level.

I'm also very pleased with our product innovations and direction. Our designs on the tapestry manufacturing platform are unparalleled, and our plank products are having a big impact with the design community. We remain the industry leader in sustainability, which is a major advantage for us in the marketplace. While I'm disappointed in the first quarter, I'm certainly not discouraged by it. I see a lot of positive trends, market opportunities, and value drivers in our business that have me optimistic for the balance of the year.

With that, I will turn it over to Patrick.

Thank you, and good morning, everyone. I'll take a few minutes now to walk through the financial highlights for the first quarter. Sales in the first quarter of 2014 were up 4.1% to $219 million, compared with $210.4 million in the first quarter of 2013. On a consolidated basis, there was not a significant currency impact on sales for the quarter.

Gross margin expanded 20 basis points to 34.1% in the first quarter versus 33.9% in the comparable period. This increase was due to continuing manufacturing efficiencies in our European and Americas businesses, but was almost entirely offset by the anticipated variances of our new manufacturing facility in Australia, which started production in January. We expect these operations to normalize in the second quarter of 2014, and expect to see the margin improvement in the region as a result.

In the Americas, sales increased to approximately 5% due to the continued success of our segmentation strategy. We experienced healthy increases in hospitality, retail, education segments; in fact, all non-office segments were up in the first quarter of 2014. Despite harsh winter conditions impacting the FLOR store sales, we saw an increase in FLOR store sales of 6% in the first quarter of 2013 (sic - see press release, "2014"), with momentum accelerating during the quarter. These increases were slightly offset by a modest decline in the corporate office market segment.

We are truly excited about the acceleration in sales in our European business. We indicated that we're starting to see a turn in the fourth quarter, and our first-quarter performance certainly reflected that. Sales in Europe were up 15% in US dollars, or 11% in local currency. Essentially all market segments were up in Europe during the quarter, with corporate office, government, and retail leading the charge.

The corporate office segment was up 13% in US dollars, or 8% in local currency. Government was up 26%, or 21% in local currency. And the retail segment was up 38% in US dollars, or 32% in local currency. Our order momentum in Europe showed double-digit increases each month of the quarter, and this trend has continued, with April showing fantastic order growth as well.

Turning to Asia-Pacific, we experienced a decline in sales of approximately 17% for the quarter. The decline was primarily within the corporate office market segment. Geographically, the decline was most strongly noted in Australia due to the January start up of our new manufacturing facility, as well as fairly strong currency headwind in the quarter.

With that being said, we think there is significant opportunity in the Australian market. Our local manufacturing will allow us to regain share and fully execute on the plan in this area. As evidence, first-quarter orders in Australia were actually up 26% in Australian dollars.

Due to the macroeconomic concerns and the Chinese New Year holiday, the rest of Asia-Pacific region experienced a decline as well, but it was not as acute as in Australia. We are encouraged with the order pipeline in Australia, and we expect better performance in this region throughout the course of 2014.

In the first quarter of 2014, SG&A increased to $62.7 million, up from $57.3 million in the first quarter last year. As a percentage of sales, SG&A increased 140 basis points to 28.6% versus 27.2% last year. The increase was due to higher selling and marketing expenses associated with higher selling volumes and planned marketing initiatives.

Due to the factors discussed above, operating income in the first quarter of 2014 was $12 million, and 5.5% of sales, compared with $14 million or 6.7% of sales in the first quarter of 2013. Interest expense was $5.5 million compared with $6.2 million last year. Depreciation and amortization was $8.8 million in the first quarter, compared with $6.7 million in the first quarter of 2013.

Capital expenditures were $9.1 million in the quarter, compared with $14.9 million in the comparable period last year. And for the full year, we continue to expect capital expenditures to be in the range of $40 million to $50 million.

Quickly, to the balance sheet, we exited the quarter with $62.5 million in cash, compared with $65.1 million at the end of the first quarter of 2013. Inventories were $170.5 million at the end of the quarter, compared with $157.5 million in the first quarter of last year. Our average DSOs were 53.2 days versus 53.7 in the year-ago period, and our inventory turns were 3.6 times compared with 3.7 times last year.

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

(Operator Instructions). Josh Borstein, Longbow Research.

The first one, just if you can re-visit your gross margin expectations for the year, considering how you have a better-performing Europe, but at the same time, some issues with the new plant in Australia. I know you previously talked about 100 basis points gross margin improvement. Is that still achievable?

Yes, we certainly believe that the 100 basis points for the full year is certainly achievable. The progression that we saw in Q1, we still had increases both in our Americas and our European businesses in the first quarter. I believe the US business was up 60 basis points, and our European business was up 180 basis points in the first quarter, in margin, largely offset by the Asia-Pacific rebalancing of the three manufacturing facilities. But I think that situation will be largely rectified in the second quarter, so we still feel pretty confident about the full-year 100 basis point margin expansion, year-over-year.

Okay, great. And so the plant in Australia, I know you had talked about margins normalizing by 3Q. Are you actually ahead of that timeframe now, or are things on plan with your expectations?

I think we were a little bit slow to start in the first quarter. But I think March, we turned the corner; and I think we're on track for -- certainly by the end of the second quarter, we'll be in good shape across Asia-Pacific.

Okay, great. Thanks. And then just one follow-up. On the order patterns, I know you discussed a little bit of them. Could you talk about, in your major geographies, what you saw in terms of order patterns?

For the quarter?

Yes.

Sure. For the full quarter, America's business was up 8.5%; European business was up 11%; and then Asia-Pacific rallied the last six weeks of the quarter, and got back to essentially flat. Very strong last six weeks of the quarter across Asia-Pacific.

Great. Thanks very much, and good luck.

Kathryn Thompson, Thompson Research Group.

Thanks. The first question is on SG&A, two-part. Do you -- you had set an initial bogie of hitting 25% in fiscal 2014. Is it still achievable? And could you also talk about components of higher SG&A? Because on a percentage basis, it was a bit higher; so if you could go through the components of what drove higher SG&A the quarter.

Sure. I think the trajectory of the top line, and the momentum that we are currently experiencing, we think we'll obviously grow into this SG&A level and work really hard to get to the 25% SG&A levels for the full year -- by the end of the year, at least. In particular in the first quarter, yes, there was an additional $2 million-plus in selling costs. There was a little bit less than $1 million of additional marketing cost in Q1, and then the balance was in the administrative area.

It was really trying to balance those spending initiatives that we signed off on, and we had the budget season late December, early January; and then had a really unexpected softness in the top line in January and February that pulled back fast enough to impact Q1, was kind of a challenge.

So maybe could you help me better understand what administrative -- what's involved in that? Is it more of a one-time? Is this an ongoing cost?

Yes. It was a combination of a number of initiatives: some e-commerce platform, depreciation, few things like that in the areas that we had spent -- that sell into, into Q1. There was a little bit of restricted stock true-up expense we had to take in Q1. But fairly normalized levels going forward, in the administrative area.

So how should we think about SG&A going forward?

In terms of absolute dollars, probably a $65 million to $68 million kind of run rate, and we'll see where the trajectory of the top line goes.

Okay. And also could you give clarity on pricing in the quarter? (multiple speakers) if you could do it by region?

Yes, I do. Average selling prices were up in every geography. Average selling prices in the Americas were up over 3%. European, in euros, were up 4%; and Asia was up 5%. Australia, in Australia dollars, was up 2.6% year-over-year. In every category, the average selling prices were up.

Okay. Thank you so much.

Mike Wood, Macquarie.

Can you also just -- following up on that last question. Typically, your SG&A would sequentially go down in first quarter. And you had mentioned these initiatives that you put in place. But, still, the ramp that you're talking, that 65% to 68% level, is certainly more than the selling commissions would imply that you should be spending. So, what does the payoff look like from these initiatives -- e-commerce, et cetera -- that you expect?

Well, certainly, those initiatives that we put in place is going to deliver our expectations of somewhere of a 8% to 10% topline growth, is what our expectations are around. And our SG&A did come down for the first by -- there was $4 million or $5 million of -- but, sequentially, going forward, there will be an increase as the top line grows through the balance of the year.

Okay. And I know the FLOR stores you had mentioned have had relatively mixed performance by location. What's your current strategy, in terms of opening additional stores or evaluating potentially moving or closing others?

Yes, I don't think our strategy has changed at all. First quarter was really hard to evaluate due to the weather conditions, and truly what you have there. A lot of the better weather-related stores did quite well in Q1. But our strategy hasn't changed, in that we're still contemplating three stores in the back half of the year.

Okay. Lastly, can you just give us the actual April order growth?

April order growth, on a consolidated basis, was up 3%. And that was broken down by geography. Americas is down 5%; Europe, up 36%; and Asia-Pacific, down 12%. I do want to highlight, though, in the Americas number, we do have Easter in the first three weeks this year that we --during the last week of the first quarter, last year. So it's a little bit apples and oranges.

Okay, thank you.

John Baugh, Stifel.

Just staying on the SG&A theme for second, I think the SG&A component in Europe, Dan, is high, relative to where the revenues have been. And we finally saw some nice progress on the revenue front. Is that still the case, or did that --? Where, geographically maybe, did the SG&A fall? And are we going to see if these orders continue in Europe, and the revenues are strong, a lot of leverage in that area?

All right. Well, if you looked at our SG&A profile, Europe SG&A is 30%. It's had the biggest decline from the 2007, and we have not fought back there. We've actually cut some pretty good costs there to keep it 30%. And we're holding the line on the SG&A in the European business. One thing I've made a decision is to weather it, and not restructure or de-layer the European business, because we are -- have a major market share in most every European country.

So the little SG&A issue that we deal with is in Europe, and then it's also in the FLOR stores. The FLOR stores obviously have a 50-plus SG&A percentage, and we're trying to fuel the growth there to grow into that one as well. So I got two pockets that I'm dealing with. And I think we're going to grow the European business, and drive that back down to the 25% level.

So were the SG&A increases -- some of these selling and marketing things you referenced -- were they Americas-focused, or where were they?

Well, you have -- we had a lot of salespeople during the year, last year. So you have the new salespeople that we didn't have at the beginning of the year. We also opened three more FLOR stores last year that weren't in the first-quarter numbers. So FLOR accounted for part of it, and new salespeople accounted for part of it.

And then, as Patrick mentioned, we had a new e-commerce website that we launched that had some additional cost in it. Almost about $11 million in that. And so I think that those platforms are going to get growth. Our e-commerce platform, I think, is best-in-class. We've got a lot of great activity around that, and a lot of great metrics around that. And it's all around how to design your floor, how to design product. And the A&D community really have gravitated to that website.

Okay. And then on the Americas and the performance there, there was quite a dichotomy between non-office and office. Is that, Dan, a function of that you are just so mature in office that that's just not going to grow? Obviously we don't want to see it shrink. Or are there particular things going on within office or non-office that are really driving things, or with your product or sales emphasis, et cetera?

No, I would say that the office market really has been pretty flat. If you look at the numbers in our industry for the first quarter, in units, it was down about 4%; and, in dollars, it was down 0.4%. So I don't think that the market -- the commercial market has had any lift yet. But we're very encouraged by the activity. We keep talking about activity. I think the furniture industry is also talking about activity. I think the BIFMA numbers look pretty flat, as well.

I just think we're going out and taking share in the non-office segments, and have a lot of traction in education and hospitality, particularly. And so our expectation is the office market will rebound, but I don't think we're losing share in the office market. I just think it hasn't really rebounded yet.

Okay. And where is, in the non-office areas, the greatest opportunity, in your mind? And I'd love some color on the public spend piece that affects you. It seems like you're gaining share, and offsetting maybe the macro headwind there.

Well, Dan can talk about what the prospects are that lead to the greatest opportunity. But just to give you a little color in particular, in the first quarter, retail was up 17%. The education market was up 12%; and then our hospitality business was up 26%, I think, in the first quarter. I think those were largely in line with the same areas that we've had the greatest opportunity for us.

What was government, Patrick?

Up 3%.

Okay, great. Thank you.

Keith Hughes, SunTrust.

Yes, following up on your office comments, Dan, as you look at your order book in office, is that showing any signs of life in the next couple of months, in terms of future shipments?

I would say that if you looked at the pipeline of the office business, which is -- we register projects 30, 60, 90, and 180 days in our pipeline. And I would say that the office part of that is showing signs of life. We're expecting some pretty good activity coming out of the office, going forward.

And, Patrick, any raw material price hikes in the future of measurable quantities?

There were none in the first quarter, and there are none on the near-term horizon.

Okay, thank you.

There are no more questions at this time. (Operator Instructions). We have no more questions at this time.

Well, thanks for listening in to our second-quarter conference call, and we'll talk to you next quarter.

Thank you.

Thank you. So, ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.