Interface Inc (TILE) 2014 Q3 法說會逐字稿

Welcome to the third quarter 2014 Interface, Inc earnings conference call. My name is Lisa and I will be your operator for today. (Operator Instructions). I would like to turn the call over to your host for today, Mr. David Foucher. Please proceed.

Thank you, operator. Good morning and welcome to Interface's conference call regarding third-quarter 2014 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 An archived version of this conference call will also be available through that website.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's comments regarding Interface's business, which are not historical information are forward-looking statements. Forward-looking statements involve a number of risk and uncertainties that could cause actual results to differ materially from any such statements, including risk 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 1-A 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 earnings 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 that may not be re-recorded or rebroadcasted without Interface's expressed permission. Your participation on the call confirms your consent to the Company's taping and broadcasting of it.

Now, I would like to turn the call over to Dan Hendrix. Please go ahead.

Thank you, David. Good morning, everyone. Between our preliminary release and our final earnings release yesterday, we've covered a lot of ground so I know you're familiar with the story. But let's start with a quick summary.

Our top line was lighter than expected for three primary reasons.

First while our order level for the full quarter was good at $263 million, it had a building trend over the course of the quarter. Based on the lighter order intake at the beginning of the quarter, our manufacturing throughput was less than optimal.

Second we had some disruptions in the [our] supply that constrained our output. Lastly, while our backlog is very healthy at 33% since the beginning the year, some of those orders were pushed by customers into the fourth quarter and we weren't able to ship them. These factors resulted in a manufacturing throughput shortfall that put pressure on gross margin particularly in the America's business.

As these dynamics were playing out during the quarter, it caused us to take a much harder look at our cost-cutting initiatives and substantially expand our announced restructuring plans. At the end of the analysis, we incurred a restructuring and asset impairment charge of $12.4 million, which is much higher than the $3 million to $5 million estimate that we gave you at the beginning of quarter.

We have several initiatives underway to address the challenges we saw in the third quarter and I'd like to outline those for you now.

First, we reduced our manufacturing costs in a number of key respects. These include head count reductions, reengineering our products and processes, improving efficiencies, and raw material pricing. As an example, we have production automation coming online to take out some of the complexity and costs associated with our popular plank products.

Second, we're substantially cutting our SG&A expense. A large majority of our restructuring is focused on SG&A and as a short-term payback period. Based on our amped-up restructuring activity, we expect SG&A to come down to around $250 million for 2015.

Thirdly, we expect higher throughput in the fourth quarter based on our large backlog, good order trend over the last eight weeks, particularly the US and Australia which are our two largest markets. At FLOR, we've restructured the management team and as with our other businesses, this will be accompanied by cost-cutting initiatives. We also are refocusing the identity of FLOR business around sustainability to attract new customers and energize the existing customer base. In addition like last year, we expect our fall sales to have a positive impact on the FLOR revenue during the fourth quarter.

Overall our restructuring plan is expected to yield annual cost savings of about $14 million. In addition to the plan, we renounce refinancing our debt which is scheduled to be completed December 1 is expected to result in a $12 million to $13 million annualized interest savings, based on the current rate levels. These are substantial savings that should flow through to our bottom line. We'll begin to realize some of the benefits during the fourth quarter but we won't begin to realize the full benefits until next year.

Based on our strong demand over the past two months in our two largest markets of the US and Australia, our restructuring refinancing plans and all the manufacturing improvements underway, we should be in a much improved operating and capital structure as we close the year and enter 2015.

With that, I'll turn it over to Patrick

Thank you and good morning, everyone. I'll take a few minutes to walk through the financial results for the third quarter.

Sales for the third quarter 2014 were down less than 1% to $252 million, compared to $254.5 million in the third quarter of 2013. On a consolidated basis, there was not a significant currency impact in the sales for the quarter. Due to the items Dan has already identified earlier, we saw gross margin decline of 33.1% for the third quarter of 2014 versus 36.1% in the third quarter of 2013.

In the America, sales were essentially even for the quarter versus the third quarter of 2013. The corporate office market was up less than 1% while increases of 53% in the hospitality segment and 89% in the multi-family residential projects were offset by declines of 6% and 2% in the retail and government market segments, respectively.

Europe experienced sales decline of just under 4% for the quarter. The decline was most acute in the government market segment which accounted for the majority of the decrease. Corporate office experienced an approximately 1% increase, compared to the third quarter of 2013. Asia-Pacific was a bit of a mixed bag for the quarters a Australia continued to rebound during the quarter while Asia experienced a sales decline in most markets. Now, for the region, the overall increase was 3%, which was a 13% increase in Australia, offset by a 6% decline in Asia. In Asia-Pacific, we experienced an overall increase in the healthcare, in education market segments.

As it relates to SG&A, we stayed relatively even, compared to the prior year for the third quarter 2014, SG&A was 25.4% of sales versus 25.1% in the third quarter of 2013. The majority of our restructuring savings we incurred during the quarter will flow through to the SG&A line and we expect to see a declining level of SG&A through 2015. Dan mentioned the $250 SG&A target for 2015. I think we're well positioned to achieve that after the restructuring initiatives we've implemented.

As described in the press release, we incurred a pretax restructuring and asset impairment charge in the third quarter of about $12.4 million. The charges comprised approximately $9.5 million of cash expenditures for mostly severances and approximately $2.9 million of non-cash charges for the write-down on current value of some impaired assets. Now, the restructuring plan is anticipated to be substantially completed by the end of 2014 and is expected to yield annual cost savings of approximately $14 million beginning in early part of fiscal 2015.

Now due to the factors identified above, operating income in the third quarter 2014, excluding the restructuring in asset impairment charge was $19.6 million or 7.8% of sales, compared with $27.8 million or 10.9% of sales in the third quarter of 2013. Including the restructuring and asset impairment charge, operating income for the third quarter 2014 was $7.3 million or 2.9% of sales.

Interest expense in the third quarter was $5.6 million, compared with $6.3 million in the third quarter last year. Depreciation and amortization was $7.1 million this year versus $8 million in the third quarter last year. Capital expenditures in the quarter were $10.1 million, compared with $14.1 million in the comparable period in 2013. For the full year 2014, we expect capital expenditures to be in the range of $40 million to $45 million.

Quickly to the balance sheet, we exited the quarter with $68.5 million in cash, which reflects an increase of $18.5 million,as compared to the end of the second quarter this year.

Inventories were $162 million versus $162.8 million at the end of third quarter last year. DSOs were 51.8 days, compared with 48.2 in the year-ago periods and inventory terms were roughly the same year-over-year at 4.1 turns.

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

(Operator Instructions) Matt McCall, BB&T Capital Markets.

Thanks. Good morning, guys

Good morning.

Hey, Matt.

So, the focus on the gross margin and the cost to good savings that you talked about, Dan, the head count reductions, the reengineering [and] just specifically [truth] about the timing of those savings. And then from a reengineering front, what does that mean? What are you doing and then again, what's the timing of any savings?

Well, I don't want to give away some trade secrets but I will say that on the reengineering, we are taking some weight out of our products that we think we can actually save some pretty good money by doing that. We're also putting in line boxing,related to our plank business. We made a decisioning to out with planks early because we wanted to capture the market with planks and then we've been engineering how to automate that process. That will be in January of 2015.

Okay. And then when you talk about the savings you broke down I think in the prerelease, the total savings you're expecting. I thought more of it was SG&A than gross margin. Did I miss understand that?And then other savings that you're targeting, how much is SG&A, how much is our cost of goods?

Well, the amounts identified in the restructuring charge, about $9.5 million of the $14 million is going to flow through to the SG&A line. The balance is through cost of goods sold for the restructuring.

Now there are in addition to that, there was a number of cost reduction initiatives that were implemented in the manufacturing process that were not eligible for restructuring accounting and those have been implemented as well as we head into 2015.

Okay. And so what should we have assume from a timing perspective on recognizing these savings?

Well, in the near term, the production levels in Q4 will probably have the biggest benefit to gross margins on a sequential basis with improving order demand profile in September here and in October, particularly in the Americas, that will have the bigg est benefit so our expectation is that margins will be better in Q4 than they were in Q3. The reengineering and processes and automation activities that Dan identified earlier, those are underway hopefully completed by the end of 2014 and start to see the benefit of that early part of 2015.

Okay, okay, perfect. And then the final one on the September and October order trends, you said Americas was specifically strong. Can you talk about the make-up of that order pattern? Is it a good order pattern and then that the mix is going to benefit you corporate offices maybe strengthing? Can you just talk about how it should play out and how it's going to impact margins?

Yes. The one thing that we're saying, Matt, is that in the US busines we're up pretty substantialply in the last eight weeks. And a lot of that is attributable to the office building starting to come through.

Can you throw a number on the office growth?

Yes. The Americas in total -- well, I don't have the office in particular versus the other segments but Americas through the first three weeks in Q4 is up 22%.

And a lot of that is office?

A lot of that is office. I look it up -- we get -- our top ten orders -- and a lot of it is office now.

Perfect, okay. Thank you, guys.

Glenn Wortman, Sidoti & Co.

Yes, good morning, guys.

Hey.

Yes. I'm actually -- just a little bit clarity here. So the savings that you expect from these reengineering processes, are those included in the restructuring savings that you've outlined or are they in addition to?

They're --

They're in addition.

They're in addition to, okay. And then your outlook for SG&A for 2015, $250 million, what levels of sales is embedded that forecast?

Aren't embedding -- we're not putting out sales forecasts on that. We're just going to say we're going to have an absolute SG&A number of $250 million and then if we get the sales growth then we'll have a lot bigger contribution order.

Okay. And then with oil prices coming down here over the past month or two, are you expecting to see any cost relief in coming quarters?

We have not seen that yet. Our yarn supply is tied more to capital (inaudible) and benzine as the building blocks and that has not come down a lot yet.

Okay. Thanks for taking my questions.

Yes, sure.

(Operator Instructions)

Mike Wood, Macquarie.

Hey, guys. This is Adam in for Mike. We understand the gross margins the Americas are below 30% in the quarter but how much of the weakness came from the yarn issue and what should they return to in 4Q and where are the sort of actions you're taking to get to that mid 30% gross margin goal in the Americas?

Yes. I mean that in particular I think we identified earlier would really be the benefit. The big issue really in Q3 was production levels were down over 15% on a year-over-year basis. I would expect that sequentially production levels will be much higher in Q4 and that will rectify I think a lot of the issues that we had in the margins in the Americas business in Q3.

Okay, great. Thanks.

Josh Borstein, Longbow Research.

Hi, guys. This is Andy on the line for Josh. In regard to the restructuring actions, we were wondering if you could just walk a little bit through what part of the business those actions are going to be taken and whether it's FLOR or Europe or other parts of the business and what kind of what actions -- what you'll be targeting with those actions?

Well,it's primarily head count reductions. It's about 100 people that are affected across the organization. You know, in rough percentages, about 45% of it is in our European business. Roughly 20% across Asia-Pacific and then the balance is across our Americas business to include the FLOR business as well.

Okay. That's helpful. And then the customer deferrals that you've talked about in Europe, can you discuss a little bit what you're seeing in the different markets in Europe, whether it's the UK, Germany, France, where the biggest issues are?

Well, we certainly have seen a softening order pattern in the early part of Q4 across our European business. I wouldn't necessarily tie it to the deferral issue that we had in Q3. It's just a softening order pattern here in the early part. Most of it -- the softness seems to be in the UK, Ireland piece of the business early on. We're down about 20% year offer year for the first three weeks. About 17% in local currency on a year-over-year basis in Europe.

Okay, great. Thanks for taking my question.

There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Dan Hendrix for closing remarks.

Thank you. Thank you for listening to the conference call and we'll speak to you in February.

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