Interface Inc (TILE) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Interface fourth quarter 2015 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, David Foshee, Vice President of Interface. You may begin, sir.

Thank you, operator. Good morning and welcome to Interface's conference call regarding fourth quarter 2015 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 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 is. An archived version of this conference call will also be available through that website.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 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 28, 2014, 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 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 broadcasting of it.

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

Thank you, David. The fourth quarter capped off an absolutely phenomenal year in which we posted all time records for net income and earnings per share. For the full year our sales were up 8% on a currency neutral basis, our gross margin was up 430 basis points, operating income was up 300 basis points and our net income and earnings per share were up 75% on a adjusted basis. I am very proud of our Interface associates and what we were able to accomplish this year.

These improvements took an incredible amount of teamwork, dedication, hard work, tenacity and it demonstrates the strength and talent of our people and organization. In the fourth quarter we saw a softer top line versus the prior year, which was disappointing but not discouraging. As you will recall, in 2014 we experienced some yarn supply issues and customer initiated delays in the third quarter, which caused us to push some sales from the third quarter into the fourth quarter resulting in a tough comparable for us in the fourth quarter of 2015. Also due to our 2015 fourth quarter ending January 3, we had both the Christmas and New Year's holidays hitting in the fourth quarter of 2015, which negatively impacted December sales compared with the prior-year period.

In addition, as in recent quarters, currency translation also took a heavy toll on our sales figure versus the prior year. The good news is despite the softer top line we more than made up for it with increases in our gross profit margins allowing us to deliver both improved income and earnings per share. The lead story of the quarter is that our gross margin expanded 620 basis points versus the fourth quarter last year. Driving us to 39.8% which is an all time record for Interface and pretty (inaudible) for our industry as a whole this demonstrates how far we have progressed over the past 12 months, operationally we're stronger than we've ever been and we believe there is still more room for gross margin improvement. SG&A expenses came in higher than we had targeted for the quarter due to a combination of increase incentive based compensation resulting from our improved performance and pulling forward in the fourth quarter some marketing issues that we originally planned for 2016 in order to drive our top line sales.

Notwithstanding the elevated SG&A due to our gross margin expansion we were able to deliver an operating margin of 11.2%, which is an improvement of 140 basis points over the fourth quarter last year. Cash flow was another highlight for the quarter, as we paid down an additional $20 million in debt, while still growing our overall cash balance and exit the year with $76 million on the balance sheet. Our balance sheet is the healthiest it's been in decades which give is us the flexibility to make investments in programs such as stock repurchases and growth initiatives as those opportunities present themselves.

Although demand softened during the fourth quarter and order activity has been somewhat choppy during the first part of this year we're still optimistic about our prospects for 2016. Let me give you a little color on how orders are shaping up this year January started out slow, and we had four weeks in January this year compared with five weeks in January last year, putting us behind as we started out the year. We canvassed our sales force and the overwhelming feedback was that this slow down was the result of project delays, not cancellations.

In February order activity started to pick up again. Orders turned positive on a currency neutral basis in each of the past two weeks, and last week orders were positive on both a currency neutral and U.S. dollar basis. Also, turning our favor we expect foreign currency impact to continue to subside, and our new product introductions and market initiatives should take hold in improved demand.

We also believe macroeconomic data, while still somewhat shaky in parts of the world, points to continuing recovery in our key markets, particularly in the U.S., the U.K., and Australia. The earnings powers we've created through our enhanced operational efficiency greatly expanding gross margin and solidified balance sheet, we believe we can deliver improved earnings even if we encounter only modest sales growth for this year.

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 highlights for the fourth quarter. As reported in U.S. dollars, sales for the fourth quarter of 2015 were down to $246.6 million, versus $272.1 million in the fourth quarter of 2014. As in previous quarters, currency was a significant factor in this decline. On a constant currency basis our sales for the quarter were $262.7 million a decrease of only 3.5%. The strong U.S. dollar led to an approximate $17 million negative sales impact for the quarter, and also negatively impacted operating income by approximately $1.9 million.

Gross margin was again the driving force for the quarter with a phenomenal operational performance driving expansion of over 600 basis points to 39.8% versus 33.6% in the fourth quarter of 2014. The same factors drove this improvement as we've seen throughout 2015. Higher selling prices, improved product mix, lower raw material prices, and a full realization of the benefits from our significant restructuring actions in 2014.

As we look into 2016, we currently expect to realize an additional $7 million to $8 million of raw material savings over the course of the year from the input price declines we are already aware of. Europe delivered sales growth of 7% in local currency with the corporate office market growth of 4% being out paced by a very solid 19% increase in the non corporate office markets. Leading the way in the non office segments was a very stock quarter for retail, which nearly doubled its sales in over 20% growth in education. Unfortunately, these gains were offset by negative currency impact so as translated into U.S. dollars, our European sales were down approximately 6% for the quarter.

These currency impacts in Europe are starting to lessen as the first quarter progresses and these lower exchange rates begin to anniversary. In the Americas we saw a decline of approximately 8% on a constant currency basis, when the negative currency impact in Brazil and Canada is factored in, the decline was approximately 10%. The decline in the Americas was driven by both the corporate office market decline of 12% and a non office market decline of 7% in the aggregate. As Dan mentioned we believe a large part of this decline is due more to project delays than cancellations of our business.

On a bright spot in the Americas was the success of our FLOR business. While its sales experienced a slight decline of only 2%, FLOR was able to turn a profit for the quarter as compared to a loss of over $500,000 in the fourth quarter of 2014. This turn around was primarily seen at the gross margin line, which benefited from lower input prices and better operational efficiencies for the quarter. Currency again was a significant negative impact in the Asia-Pacific region, with a flat sales performance in Australia and local currency and a decline of 9% in Asia, leading to an overall U.S. dollar decline of close to 16%. This was driven by the climb of 6% in the corporate office market and a decline in the non office markets as well, particularly in education and healthcare.

On the other hand, the overall trend in this region is a bright spot. However, as the positive quarter-to-date growth has accelerated during February, showing an 8% increase in quarter-to -date 2015. SG&A expense increased to the quarter 28.6% of sales versus 23.8 of sales for the fourth quarter of 2014, as in the third quarter of the primary reason for this increase is higher incentive based compensation expenses as a result of improved performance. Also impacting our SG&A spend was a pulling forward of a few fourth quarter items in the marketing initiatives that were originally planned for 2016. Absent these increases, our SG&A expense remained relatively consistent as a percentage of sales for the quarter and we'll continue to manage our spend in this area, invest in only areas of significant return potential.

Due to factors discussed previously, operating income in the fourth quarter of 2015 was $27.7 million or 11.2% of sales, compared with operating income of $26.7 million or 9.8% of sales in the fourth quarter of 2014. Another highlight in the quarter was our continued cash flow generation and significant pay down of our debt, our cash position for the full year increased by over $20 million, even after repaying about $48 million of borrowings under our revolving credit facility. Additionally, in December we repurchased an additional 150,000 shares of our common stock and our capital structure is as sound as it's ever been with our debt level net of cash on hand below $140 million.

As throughout 2015, our fourth quarter 2014 refinancing continues to yield benefits, with interest expense below $1.5 million for the 2015 fourth quarter, as compared to over $4 million in the corresponding period in 2014. Depreciation and amortization was $7.6 million in the fourth quarter of 2015, compared with $8.5 million in the fourth quarter of 2014. Capital expenditures for the fourth quarter were $3.5 million compared with $6.7 million in the comparable period of 2014 and for the full year of 2015 our capital expenditures were $27.2 million compared to $38.9 million in 2014.

And with that, I will open the call for questions. Operator?

Thank you. (Operator Instructions). And our first question comes from the line of Brandon Rolle from Longbow Research. Your line is now open.

Hi, good morning, this is Brandon Rolle on for David McGregor. I was just hoping that you would be able to walk us through your major U.S. verticals and talk about what you're seeing in mixed dynamics in each. Thank you very much.

Yeah, well, I think -- if you looked at the whole year, the office market was what drove a lot of our growth in the U.S. business, next hospitality and then the next, education. Our biggest vertical is office, then education, then hospitality. And I do believe we have an up side in education this year. A lot of the school districts that have not been funded, now are funded and we're putting a lot of emphasis on the K through 12th year.

And our next question comes from the line of Mike Wood from Macquarie Securities. Your line is now open.

Hi, good morning. You've been through in your history both, you know, some long downturns and just some temporary soft patches. I'm curious if you can talk about the feedback you're getting from your core office, other commercial customers, and thinking about, you know, how they're evaluating remodeling projects and what it tells you about which one of those environments that we're currently in.

Yeah, I've been through, I guess I've been here 30-something years so I've seen a lot. I would say we just had our European sales meeting and our America sales meeting and the attitude was that there's a lot of work out there, and that's sort of validated by our pipeline. We have a project pipeline of about what's coming in the next 30, 60, 90 days, and it -- the good thing is, we're not seeing projects cancel. But they are being delayed, and that's that renovation cycle, remember 80% of our business is renovation and so there is this ability to delay the projects, but they feel pretty good, our sales force, around the activity that they're seeing. And the architect billings index is you know, it's still hanging around 50%, which is a good sign.

Great. Can you give us some more about the marketing initiatives that you, you know, pulled forward into the fourth quarter, and, you know, is the right way to think about this for 2016 is that marketing initiative spend would come down and comp accrual comes down next year and could absolutely SG&A dollars be lower in 2016 versus 2015?

The things that we were pulling forward, I don't want to give our competitors too much data, but we think there's some really pretty good growth markets for us that we need to invest in. Germany being one, and the U.K. being another one. We think there's a lot of opportunity to continue to drive the carpet tile sector shift. And then we're adding salespeople in the United States and we're trying to accelerate that going into 2016. So we could actually drive the top line as well.

Mike, In terms of the absolute SG&A piece of the question, I think it's going to be largely predicated on what happens with the top line through the balance of the year. You know, we're going to continue to monitor that. We've been pretty judicious in the past, and currently, you know, have certainly slowed internal spending associated with that, but we'll see how the next couple months plays out and then make some determinations from there in terms of what the cost plan looks like, but, you know, we'll try to continue to drive that down into the, you know, 26% kind of range as well going forward.

Okay. Thanks, guys.

And our next question comes from the line of Kathryn Thompson from Thompson Research. Your line is now open.

Hi, thanks for the questions today. My first is on gross margins. Could you break out the impact from local raw materials, price, some of the lean manufacturer and process initiatives you've been working on for the better part of 12, 18 months, and volume. So if you could have just a better understanding of the -- to what degree each of those buckets contributed to gross margins.

Sure. You know, in the quarter we were pretty successful on price, as we had been through the balance of 2015. We were pretty effective and pretty aggressive price increases across a lot of geographies, you know. So we contributed about 250 to 300 basis points to the gross margin expansion in the quarter related to price. Just a little bit under 200 basis points related to, you know, raw materials savings in the quarter, and the balance really is largely the lean manufacturing initiatives and better efficiencies because my production volumes in the quarter versus last year were effectively flat so not a whole lot of fixed cost absorption in the quarter related to additional volumes. So -- versus last year. So those are the major components in Q4.

And pulling the string once again on that raw material tail-end, could you remind us what the total net benefit was on a dollars basis or basis point basis was retail wise? How should we think about that for 2016?

Yeah, for the full year in 2015 we realized somewhere between $16 million and $17 million full year benefit on lower raw material prices across all categories. And right now related to some recent price concessions that we got in Q4 and here in early Q1, looking at an additional $7 million to $8 million for a full year benefit right now in 2016, incremental over 2015.

Okay. You gave some color in terms of the order progression in the prepared commentary. I appreciated that. But when you look at the -- if you look at all of 2015, Q2, Q3, it was an incredible basically choppy in terms of just pure comp progression. Q4 seemed to be a little bit different because it really was a deceleration as the quarter progressed. How should we -- when we're once again looking into 2016, what gives you confidence that we're just dealing with another choppy market, as we've been dealing in 2015, versus something that's more fundamental, and also what would be the signs that things really would be turning south on a more fundamental basis? Thank you.

Yeah, you're right, I mean, we did see a progression in the order decline during the quarter. You know, we did see an uptick here in the last couple weeks in February that has given us a little bit of confidence, coupled with the canvassing of the sales force in terms of, you know, their order activity and pipeline and sampling activity that we have going on inside the business. I mean, I guess it's not like 2008 2009, in the sense of, you know, where cancellations in projects coming off the board and architect and design firms, you know, were considerably slashing costs and headcount reductions and so forth. That's not the environment that we're currently experiencing. You know, certainly there is a pause with the uncertainty and the -- you know, certainly the global equity markets that have certainly shaken everyone's confidence here a bit, but we do feel better over the last, you know, couple of weeks and do feel, you know, that confidence is coupled with the conversations that we've been having with the sales force.

Great.

Kathryn, I would add to that, you know, seasonality-wise the first quarter is typically our slowest quarter. And so you see a pattern from a seasonality standpoint. In 2015, actually, broke that pattern and we continue to drive through after the fourth quarter, but if you looked at 2014 or 2013, we're actually up the first seven weeks against those years. So that gives me some comfort that the seasonality has really kicked in this year and the sales force are pretty bullish, and I'll tell you, the salespeople will complain when their business is slowing down. And we haven't heard that coming out of our European or U.S. salespeople. And we're pretty bullish on Asia-Pacific. So I'm not at all discouraged right now about the first seven weeks of the start of the year and I am encouraged by the last two weeks in February.

So you don't think the -- cycle is over.

I might just want to comment real quickly, too, also on kind of the progression in Q4 versus really the comp that we had in 2014 versus 2013, I mean, we were up against an October comp of 8% and November comp of up 10%, and December up 2% and then January, the first seven weeks in 2015 versus 2014 was up 20%. So, and that even excludes the extra week. So we had that pause, you know, in July and August in 2014 which really pushed a lot of momentum into Q4 in 2014 and then early 2015 as well. So I just wanted to highlight that point as well.

Very helpful. And I guess just by final, just to make sure we're on the same page, you don't think that the non-res cycle is necessarily over based on your commentary, is that correct?

No, I do not. I do not. Based on our project pipeline and based on where the architect designers still have more work then they can actually get done, and if you look at the new construction data in commercial, it points to a pretty good year this year.

Okay. Perfect. Thank you.

And our next question comes from the line of Stephen Kim from Barclays. Your line is now open.

Hey, guys, it's John filling in for Steve. I just want to touch on SG&A, just because sales were so robust this past year in 2015. You add a bit of SG&A over the course of the year to not miss any sales. If we were to find ourselves in a more flat environment, are there any levers you can pull to maybe take down the SG&A to help on margins in addition to the work you're doing on the gross margins?

Yes, there are. You know, a lot of our SG&A spend is somewhat variable so, yeah, you could -- we could pull -- there's quite a few levers we could pull and we've actually pulled them in the past, so I don't think we're going to be shy about pulling levers if we see a flattening sort of environment.

Got it. And then secondly, just on the leverage side, I mean, you're in a position today where, you know, as long as I've covered you, you haven't been, I mean, you -- you're presented with a lot of options as it relates to what to do with frankly your under levered position right now. Is maybe accelerating the share repurchase program that you have authorized and maybe upsizing that something that's on the table right now or are you taking more of a wait and see approach?

I would say that, from a share repurchase, I'm going to be pretty aggressive, from an opportunity standpoint. You know, I think my stock is cheap, actually, and if -- if we have a lot of cash on our balance sheet and obviously liquidity and we'll take a serious look at share repurchases this year.

Got it. Thanks for that.

And our next question comes from the line of Matt McCall from BB&T Capital markets. Your line is now open.

Thank you, good morning, guys.

Good morning.

So, Patrick, the SG&A question, there have been a couple of them already, are you thinking about it from a standpoint of targeting a percent of sales? How do we think about it? Because the top line, I think I'm hearing is kind of flattish or something like that, all in, and if that's the case, are we targeting a percent of sales? I know you talked about 26% in the past. Is it that plus or minus? How do we look at it?

Their, Matt, I think we're going to, you know, monitor the top line. I think it's a little early here in 2016 to make too dramatic a call, but, you know, we certainly have cooled some of the spend initiatives and we're going to, you know, try to target, you know, 26-ish percent raining for the full year on SG&A and continue to try to expand margins, you know, beyond the 38.3% that we had for the full year. I think volumes potentially could be flat and we do have some decent tailwinds in raw materials right now in terms of our ability to leverage some gross margin.

And that actually leads to the second question. You almost hit the 40% target, Dan, I think you've talked about for a while now, and I don't know if this is on schedule or ahead of schedule. I know that the raw has helped. But given that you're going to have $7 million to $8 million more, how do we think about the gross margin progression in a flat environment next year?

Well, I think -- well, in 2016, I think we were -- I was very pleased, we were very pleased with the fourth quarter gross profit margins on flat production, so we actually got it done within the plant and within the selling mix. You know, I think is the target and I think we've accelerated it, we had a two-year horizon on that and we're probably going to beat that horizon.

So is that a 40% number -- is that a full year run rate or quarterly run rate? How do we think about 40?

Well, I mean, I think it would be probably again it would be our seasonally back half of the year we would see probably, you know, the highest gross margin levels, but, I mean, I think we'll -- you know, hopefully for the year 2016 we'll be north of the 38.3% that we did. There might be 50, 70 basis point improvement for the full year just based on kind of what we see today.

Okay. And then just, any change to the tax rate? I think at 31.5 this year?

I think that's a fair -- yeah, low 30s, effective tax rate for the full year.

Okay. Thank you, guys.

Thank you.

And our next question comes from the line of John Baugh from Stifel. Your line is now open.

Thank you. Good morning. And just a follow-up on the capital structure question. Isn't there, I don't know, a ceiling or a debt to EBITDA or debit cap number you said you'd be opportunistic and aggressive. I don't know if there are any acquisitions you're contemplating, but any kind of feel for where you might be willing to lever up the balance sheet?

I mean, I think we're comfortable with, you know, anything around two and a half, to be honest with you, John. I mean, we're under -- we're at one or less than one right now, but I think, you know, historically we've said two is sort of our comfort zone but, you know, to lever your balance sheet and make it work for you, I'm -- I think two and a half is a pretty good number in this environment.

Great. And then you mentioned --

And we have -- and, John, we also have very light covenants on our bank deal as well.

You mentioned pricing. Maybe you could touch on markets where you're taking pricing. Were those due to FX issues or just you felt you could take pricing? And just to be clear, that's not mix; that's just a raw price increase?

Correct, yeah. We had to get aggressive in certain foreign countries -- Canada, Australia in particular, during the course of the year, to offset some of those currency headwinds, so that was a good bit of the price. But we were also kind of opportunistic in the U.S. around some of our plank products and others to raise prices throughout the course of the year. So it was mostly foreign currency related but also being opportunistic around some of our, you know, our product offerings.

And my last question was just maybe for you, Dan, about project delays and you said you canvassed your sales force, and you mentioned obviously the choppy markets and I guess the last few weeks have been better in the financial markets, and, you know, all of a sudden orders are better. I don't know if that's correlated. But I'm just curious as to the -- when an order is delayed or a project is delayed, what -- how easy is that for the end user? You know, what feedback from the sales force, oh, yeah we were expecting to get this order for so many yards and it didn't come through because of x?

Well, the way it normally works is, we have a project pipeline where all the salespeople enter all the projects that they're actually working on or bidding on, and they put it in buckets of 30, 60, 90 days or greater than 90 days. And we track that progression. And when you have refurbishment project, they can decide they're going to delay that project and not pull the trigger on it so that project gets pushed out. You know, when it gets scary is when the architect designer say that project get canceled and they take it off their board. We haven't seen the cancellations that Patrick alluded to that we saw in '09. We haven't seen any of that going on. And the sales force just says they've been delaying the projects. And it actually started in December, this delay, that we hadn't seen much of that last year.

Great. Thanks for the color and good luck.

Thank you.

(Operator Instructions). And our next question comes from the line of Keith Hughes from SunTrust. Your line is now open.

Thank you. The fourth quarter of 2014 through the first three quarters of 2015, your Americas growth was well above the industry numbers and it seems to have turned around, as we hit the tough comps here in the fourth quarter. Do you have any sort of feel within commercial carpeting in the Americas what's going on? Why did you do so well? Why does it seem to have turned around here in the fourth quarter?

Yeah, I think last year we had a lot of momentum going into the year and I think our products have been really good and we've been adding salespeople as well. I think we had a single focus on the carpet tile market and converting that to carpet sell. I just think the fourth quarter we saw a pause, and I'm not -- I'm asking the question, you know, what's going on in the marketplace, and we're not seeing any new competitive threats out there. So I just think there's actually been a pause in the commercial market that hopefully is going to start coming through now, actually.

Okay. As you canvas your order book as you were discussing earlier, any noticeable inflections within the submarkets, office, education, healthcare, things like that?

Well, I think we --, if you look at where I think we're going to have some growth and we that's going to be greater than market, I think in education, we're banking a pretty good year in education this year, and that's our second biggest market, and then hospitality in the United States, we're banking on that as well. Just by taking share of what's out there from a soft floor covering standpoint. And hopefully the office market will rebound and we'll start getting the orders in the office market. But those are the three markets, pretty much globally that we're banking on.

Okay. Thank you.

And I'm not showing any further questions. I would now like to turn call back to Dan Hendrix for any -- CEO, for any further remarks.

Well, thank you for listening to our call and I look forward to talking to you in April.

Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now all disconnect. Everyone, have a great day.