David Foshee - Vice President Daniel T. Hendrix - Chairman, President & Chief Executive Officer Patrick C. Lynch - Senior Vice President & Chief Financial Officer.

Brandon Rollé - Longbow Research LLC Mike Wood - Macquarie Securities Kathryn Ingram Thompson - Thompson Research Group LLC Matthew Scott McCall - BB&T Capital Markets John Baugh - Stifel, Nicolaus & Co., Inc. Keith Hughes - SunTrust Robinson Humphrey, Inc..

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. . 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. An archived version of this conference call will also be available through that website.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 re-recorded or re-broadcasted without Interface's expressed 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.

Our operating income was up 300 basis points, and our net income and earnings per share were up 75% on 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 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 of last year, driving us to 39.8%, which is an all-time record for Interface and pretty rarified air for our industry as a whole. This demonstrates how far we've 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 increased incentive-based compensation resulting from our improved performance and pulling forward into the fourth quarter some market initiatives 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 exiting the year with $76 million on the balance sheet.

Our balance sheet is the healthiest it's been in decades, which gives 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 slowdown was a result of project delays, not cancellations. In February, order activities 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 trending in our favor, we expect foreign currency impacts to continue to subside and our new product introductions and marketing initiatives should take hold and improve demand.

We also believe macro-economic data, while still somewhat shaky in parts of the world, points to continued recovery in our key markets, particularly in the U.S., the U.K., and Australia.

With the earnings powers we've created through our enhanced operational efficiency, greatly expanded 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 phenomenal operational performance driving an 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 have seen throughout 2015.

Higher selling prices, improved product mix, lower raw material prices and a full realization of 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 outpaced by a very solid 19% increase in the non-corporate office markets. Leading the way in the non-office segments was a very strong quarter for retail, which nearly doubled its sales, and over 20% growth in education.

Unfortunately, these gains were offset by negative currency impacts, 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 the 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 Floor business.

While its sales experienced a slight decline of only 2%, Floor 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 turnaround 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 in 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 a decline 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 order 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 versus 2015. SG&A expense increased in the quarter 28.6% of sales versus 23.8% of sales for the fourth quarter of 2014.

As in the third quarter, 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 the pulling forward of a few fourth quarter items and 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 the 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 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 have 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. And our first question comes from the line of Brandon Rollé from Longbow Research. Your line is now open..

Hi. Good morning. This is Brandon Rollé on for David MacGregor. 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 mix dynamics in each. Thank you very much..

Education, healthcare..

Yeah, yeah. Well, I mean, 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, and then hospitality, and I do believe we have an upside 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-12 this 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 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 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-some years so I've seen a lot. I will tell you, we just had our European sales meeting and our Americas 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 about what's coming in the next 30 days, 60 days, 90 days, and the good thing is we're not seeing projects cancelled. But they are being delayed, and that's that renovation cycle. If you 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 Architecture Billings Index, it's still hanging around 50% which is a good sign..

Great.

Can you give us some more about the marketing initiatives that you pulled forward into the fourth quarter? And 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 absolute SG&A dollars be lower in 2016 versus 2015?.

Well, 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 were 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. We're going to continue to monitor that. We've been pretty judicious in the past and currently have certainly slowed internal spending associated with that.

But we'll see how the next couple of months plays out and then make some determinations from there in terms of what the cost plan looks like. But we'll try to continue to drive that down into the 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 taking the questions today. My first is on gross margins.

Could you break out the impact from lower raw materials, price, some of the lean manufacturer and process initiatives you've been working on for the better part of 12 months to 18 months, and volumes? So if we could have just a better understanding of to what degree each of those buckets contributed to gross margins?.

Sure. In the quarter we were pretty successful on price as we had been through the balance of 2015. We were pretty effective in pretty aggressive price increases across a lot of geographies. So we contributed about 250 basis points, 300 basis points to the gross margin expansion in the quarter related to price.

Just a little bit under 200 basis points related to raw material 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, versus last year, so those are the major components in Q4..

Okay.

And pulling the string once again on the raw materials tailwind, could you remind us what the total net benefit was on a dollars basis or a basis-point basis tailwind? 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 the 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, appreciated that. But when you look at the – if you look at all of 2015, Q2, Q3 was incredibly 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 doing in 2015 versus something that's more fundamental, and then 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 of the order decline during the quarter. We did see an uptick here in the last couple of weeks in February.

That has given us a little bit of confidence coupled with the canvassing of the sales force in terms of 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 where there were cancellations and projects coming off the board and architects and design firms were considerably slashing costs and head count reductions and so forth. That's not the environment that we're currently experiencing.

Certainly there is a pause with the uncertainty and certainly the global equity markets that have certainly shaken everyone's confidence here a bit. But we do feel better over the last couple of weeks, and do feel that confidence is coupled with the conversations that we've been having with the sales force..

Okay. Great..

Yeah. Kathryn, I would add to that, that seasonality-wise the first quarter is typically our slowest quarter. And so you see a pattern from the seasonality standpoint. And 2015 actually broke that pattern and we continue to drive through after the fourth quarter.

But if you look 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 at the start of the year, and I am encouraged by the last two weeks in February..

So you don't think the non-res cycle is over, right?.

I might just want to comment real quickly too also on the 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%, a November comp of up 10%, in 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 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 my 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 than they can actually get done, and if you look at the new construction data in commercial it's pointing 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 (23:28) filling in for Steve. I just want to touch on SG&A. Just because sales were so robust this past year in 2015, you added 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. A lot of our SG&A spend is somewhat variable. So, yeah, 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, you're in a position today where as long as I've covered 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. I think my stock's cheap actually, and if we have a lot of cash on our balance sheet and a lot of obvious liquidity 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 questions, I know there have been a couple of them already, but are you thinking about it from a standpoint of targeting a percent of sales? How do we think about it because the top-line's, I think I'm hearing, kind of flattish or something like that, all in? If that's the case, are we targeting a percent of sales? I know you've talked about 26% in the past.

Is it that plus or minus? How do we look at it?.

That's right, Matt. I think we're going to monitor the top-line.

I think it's a little early here in 2016 to make too dramatic a call, but we certainly have cooled some of the spend initiatives and we're going to try to target the 26%-ish range for the full year on SG&A, and continue to try to expand margins 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 on 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 talked about for a while now and I don't know if this is on schedule or ahead of schedule.

I know that the raws help, 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 mean, I think – well, this is 2016, I think....

Yeah..

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. I think 40% 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 is that a quarterly run rate? How do we think about 40%?.

Well, I mean, I think probably again it would be in our seasonally back half of the year we would see probably the highest gross margin levels, but I think hopefully for the year 2016 we'll be north of the 38.3% that we did. There might be a 50-basis-point, 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 it's 31.5% this year? And....

Yeah, I think that's a fair – yeah, low 30%s 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. Is there a, I don't know, a ceiling or a debt to EBITDA or a debt-to-cap turn 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 anything around 2.5 to be honest with you, John. I mean, we're under – we're at 1 or less than 1 right now. But I think historically we've said 2 is sort of our comfort zone, but to lever your balance sheet and make it work for you, I think 2.5 is a pretty good number in this environment..

Great. And then, you mentioned pricing....

And we have – and, John, and we also have light covenants in 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 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 product offerings..

Okay. And my last question was just maybe for you, Dan, about project delays, and you said you just canvassed your sales force. And you mentioned obviously the choppy markets and I guess the last few weeks have been better on the financial markets and all of a sudden orders are better.

I don't know if that's correlated, but I'm just curious as to when an order is delayed or a project is delayed, how easy is that for the end-user? 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 days, 60 days, 90 days or greater than 90 days.

And we track that progression, and when you have a refurbishment project they can decide that they're going to delay that project and not pull the trigger on it, so that project gets pushed out. When it gets scary is when the architect designers say that project got cancelled and they take it off their board.

We haven't seen the cancellations that Patrick alluded to that we saw in 2009. We haven't seen any of that going on. And the sales force just says they've been delaying the projects, and that actually started in December, this delay that we hadn't seen much of that last year..

Great. Thanks for that color, and good luck..

Thank you..

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

Thank you. Thinking about the fourth quarter of 2014 through the first three quarters of 2015, America's 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 carpet 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?.

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. And I think we had a single focus on the carpet tile market and in converting that to carpet tile.

I just think the fourth quarter we saw a pause and I'm not – I'm asking the question, 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 canvass your order book as you were discussing earlier, any noticeable inflections within the submarkets, office versus education, healthcare, things like that?.

Well, I think if you look at where I think we're going to have some growth that's going to be greater than market, I think in education we're banking on a pretty good year in education this year. 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 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 the call back to Dan Hendrix, 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..