Interface, Inc. (NASDAQ:TILE) Q1 2024 Earnings Call Transcript May 3, 2024
Interface, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the First Quarter 2024 Interface, Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions]. And finally, I would like to advise all participants that this call is being recorded. Thank you. I’d now like to welcome Christine Needles, Corporate Communications, to begin the conference. Christine, over to you.
Christine Needles: Good morning, and welcome to Interface’s conference call regarding first quarter 2024 results, hosted by Laurel Hurd, CEO; and Bruce Hausmann, CFO. During today’s conference call, any management comments regarding Interface’s business, which are not historical information, are forward-looking statements within the meaning of Federal Securities Laws. Forward-looking statements include statements regarding the intent, belief, or current expectations of our management team as well as the assumptions on which such statements are based. Any forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could cause actual results to differ materially from any such statements, including risks and uncertainties described in our most recent annual report on Form 10-K filed with the SEC.
The company assumes no responsibility to update forward-looking statements. Management’s remarks during this call also refer to certain non-GAAP measures. Reconciliations of the non-GAAP measures to the most comparable GAAP measures and explanations for their use are contained in the company’s earnings release and Form 8-K furnished with the SEC today. Lastly, this call is being recorded and broadcasted for Interface. It contains copyrighted material and may not be rerecorded or rebroadcasted without Interface’s expressed permission. Your participation on the call confirms your consent to the company’s taping and broadcasting of it. After our prepared remarks, we will open up the call for questions. Now I will turn the call over to Laurel Hurd, CEO.
Laurel Hurd: Thank you, Christine and good morning, everyone. To start our call, I’m going to thank the entire Interface team for a very strong quarter. Thanks to their efforts and the support of our customers and partners, we achieved robust performance in the first quarter, fueled by comprehensive strength across the Americas. These strong results reinforce the fact that our One Interface strategy is working and yielding tangible results. With that backdrop in mind, I’d like to take a few minutes to update you on our progress. As a reminder, our strategy is focused on reducing complexity, driving continuous improvement, and globalizing our core functions to support our world-class selling team. After a successful pilot in 2023, our territories throughout the U.S. have transitioned to combine Nora and interface selling teams, and we continue to see tremendous synergies between the two.
During the first quarter, the One Interface selling team drove strong order growth, outpacing our expectations in a challenging macro environment. This collaborative and consolidated approach aligns consensus and maximizes coverage to win business together. Reducing complexity is a core tenet of our strategy. We are continuing to simplify how we work across the enterprise and around the globe in everything we do, in every functional area and importantly, in how we provide the best products and services in the industry to our customers. We are also on track with operational improvements in manufacturing, including investments in new automation and robotic solutions, which will drive improved margins. We’re adding robotics to some of the more manual parts of our carpet tile manufacturing process in the U.S., which is better for our workforce in these hard-to-fill labor-intensive roles.
These robotic solutions will drive labor efficiencies and reduce raw material waste. We’re in the preliminary stages of implementation, which will roll out in phases over the next 24 months. We are being prudent with our investments and as we see the desired results, we will continue to assess and invest in efficiency opportunities. Bruce and I recently visited our facilities in Germany, the Netherlands, and Australia. In Germany, we witnessed firsthand our automation investments that work in our Nora rubber manufacturing facility. By automating the rubber press and cutting processes, we enhance employee safety and increased production throughput. In Australia, we met with several customers across corporate office, education, hospitality, and health care and also visited an event at our showroom where we showcased new products and interacted with over 80 customers.
It was great to spend time in the field, seeing how our strategy and innovation are playing out. There’s a lot of great work being done leading to encouraging progress in the horizon. Earlier this month, Interface rolled out a fresh new brand attitude Made For More, which showcases the best of interface and encompasses our belief that our flooring is made with purpose and without compromise, meaning that our customers get beautiful design, quality, performance, innovation, and sustainability with all of our products all the time. We don’t ask our customers to sacrifice design for performance or quality for sustainability. We are the preferred partner for flooring and design projects because we provide high design, sustainability-focused products across all of our brands and categories to our customers, which significantly differentiates us in the marketplace.
We’ve introduced Made For More around the globe at the same time, and it’s another example of our One Interface strategy in action. We look forward to Clerkenwell Design Week in May and NeoCon in June, where we will showcase several exciting new product launches. Turning to our first quarter results, net sales came in at the high end of our expectations, driven by the Americas. We continue to see notable strength in education with billings up double digits. Our K-12 business was particularly strong, driven by increased demand for our expanded open air collection. Expanding our offering of carpet tile designs at more accessible price points allows us to connect with our customers’ needs while ultimately driving increased carpet and LVT sales.
Corporate office was down low single digits in the first quarter, which we viewed as a positive outcome given the volatility in that segment. Our renovation business remains strong, as the trends for people returning to office continues, and we grew share in the U.S. carpet tile market in the quarter. As expected, retail sales were soft in the first quarter due to ongoing headwinds in the sector. However, we are beginning to see increased demand, and we expect stronger retail sales beginning in Q2, which is reflected in our updated guidance. While first quarter sales were down 2% year-over-year, adjusted gross profit margin increased by 528 basis points year-over-year. Our selling organization continues to successfully execute holding price and driving favorable mix.
Gross profit margin also benefited from raw material deflation in the quarter. Turning to orders, total company orders were strong in the quarter, up 5% year-over-year. Orders were up 7% in the Americas and up 3% in EAAA. Strength in EMEA and Asia was partially offset by softer orders in Australia, which had tough comps. Our backlog was strong as we finished Q1, up 19% year-to-date. We remain focused on commercial productivity and aligning our sales teams to the fastest-growing geographic markets and segments. Before I turn the call over to Bruce, I want to talk about a recent update to our sustainability strategy, which marks a pivotal point in our climate journey. Beginning in 2025, we will redirect investments from carbon offset purchases into initiatives that will both reduce our carbon footprint and accelerate our growth, including low-carbon innovation and circular solutions.
We have proven over the past three decades that we can significantly reduce our carbon footprint while growing our business. With our most recent figures showing an 82% reduction in our global carpet carbon footprint from when we started the journey back in 1996 to 2023. We remain committed to helping our customers achieve their sustainability goals, and this change will enable us to continue to thoughtfully invest in differentiated innovation, accelerating development of more sustainable solutions that our customers will love. In summary, I’m pleased with our strong first quarter results and I’m more confident than ever that our strategy is working and yielding tangible results. With that, I will turn it over to Bruce to go through the financials.
Bruce?
Bruce Hausmann: Well, thank you, Laurel and good morning, everyone. First quarter net sales totaled $289.7 million, a decrease of 2% versus the first quarter of 2023. First quarter FX-neutral net sales in the Americas were up 0.5% year-over-year. We saw strength in education, offset by softness in the retail sector, driven mostly by project deferrals. FX-neutral net sales in EAAA were down 5.1%, driven by a softer macro environment. First quarter adjusted gross profit margin was 38.6%, an increase of 528 basis points from prior year’s first quarter, primarily due to strong execution from our selling organization to hold price, favorable product mix, and raw material input cost deflation. Adjusted SG&A expenses were $86.2 million in the first quarter compared to $83.2 million in the first quarter of 2023.
The increase was primarily due to inflation. First quarter adjusted operating income was $25.5 million compared to adjusted operating income of $15.2 million in the first quarter of 2023. The increase was due to higher gross profit margins in the quarter. First quarter adjusted EPS was $0.24 versus $0.07 in the first quarter of 2023. Adjusted EBITDA was $38.8 million, versus $26.3 million in the first quarter of 2023. We generated $12.6 million of cash from operating activities in the first quarter and liquidity totaled $388 million, which consisted of $90 million of cash and $298 million of revolver capacity. In line with our capital allocation strategy, we repaid $24.8 million of debt in the first quarter resulting in net debt or total debt less cash on hand of $302 million at the end of the quarter.
Our leverage ratio was 1.7 times, calculated as net debt divided by LTM adjusted EBITDA. We remain focused on paying down debt, which continues to strengthen our balance sheet and positions us to capitalize on future growth opportunities as they arise. Capital expenditures were $4 million in the first quarter of 2024 compared to $5.7 million in the first quarter of 2023. And as we look to 2024, while the macroeconomic environment remains dynamic, we continue to be encouraged by improving trends. We are increasing our full year net sales estimate, and we continue to expect gross profit margin expansion this year. As Laurel mentioned earlier, we now expect higher retail segment sales, which generally have lower gross profit margins compared to our more premium product offerings.
This sequential change in mix is reflected in our adjusted gross profit margin guide. And with that backdrop in mind, we have updated our full year 2024 guidance, and we are anticipating the following; for second quarter of fiscal 2024, net sales of $335 million to $345 million, adjusted gross profit margin of approximately 34.5%, adjusted SG&A expenses of approximately $86 million, adjusted interest and other expenses of approximately $8 million, fully diluted weighted average share count of approximately 58.8 million shares. And for the full year of 2024, net sales of $1.29 billion to $1.31 billion. Adjusted gross profit margin of approximately 35.5% to 36%, adjusted SG&A expenses of approximately 26% of net sales, adjusted interest and other expenses of approximately $30 million, and adjusted effective tax rate for the full year of approximately 28%, and capital expenditures of approximately $42 million.
Now I’ll turn the call back to Laurel for concluding remarks.
Laurel Hurd: Thank you, Bruce. Interface delivered a strong start to 2024. Despite the dynamic global market, we continue to see positive trends in our business. We remain focused on executing our strategy and driving sustainable growth to increase value for our shareholders. With that, I’ll open it up to questions. Operator?
Operator: [Operator Instructions]. And your first question comes from the line of Kathryn Thompson from Thompson Research Group. Your line is open.
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