Good day, and welcome to the Interface Incorporated Third Quarter 2022 Earnings Conference Call. Please note, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

At this time, I will turn the conference over to Christine Needles, Corporate Communications. Ms. Needles, you may begin your conference..

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 the risks and uncertainties described in our most recent annual report on Form 10-K, and quarterly report on Form 10-Q 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 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. After our prepared remarks, we will open up the call for questions. Now, I will turn the call over to Laurel Hurd, CEO..

Thank you, Christine, and good morning everyone. We delivered another strong quarter, with growth on both the top and bottom line. Our team continues to do a great job navigating a challenging environment, including sustained inflationary pressure and currency headwinds.

While we saw persistent input cost inflation in the quarter, we offset most of it, through continued strong execution and pricing and productivity gains. SG&A management also continues to be a strong focus. And through our disciplined efforts, we delivered adjusted SG&A at 24.2% of net sales.

Our diversification strategy is working, resulting in customer wins, across multiple market segments. Looking at year-to-date trends, Corporate Office is up 14%, Education is up 12% and Healthcare is up 4%.

We're confident that we will continue to see growth across these market segments, with our strong differentiators, design leadership, and by focusing on customer service excellence. We're seeing strong demand for our carbon-neutral and carbon-negative products across our customer base.

As a reminder, as we headed into the back half, we were lapping tougher comps, as we saw a release of pent-up COVID demand in Q3 and Q4 of 2021. Overall, currency-neutral orders were down 4% in Q3 this year, with the Americas down 5% and EAAA down 3%.

Even with order rates down year-over-year on the tough comps, we entered Q4 with momentum, and a strong backlog that is up 7% since the beginning of the year. We are watching order rates closely and have an experienced management team that is prepared to respond to changing market dynamics as needed.

As we enter Q4 and focus on finishing the year strong, we are confident in our long-term strategy and we are well positioned to take share. We're seeing momentum in Corporate Office as organizations bring their employees back to the office and test hybrid approaches.

Companies are also looking to change their spaces to accommodate these new ways of working, which represents opportunities for us to help them solve their design challenges. And companies across all industries and regions are looking to reduce their own carbon footprint.

Interface continues to have an important competitive advantage to support these customer objectives. We're the first and only global foreign company third-party certified as a carbon-neutral enterprise, across our entire business, products and value chain. This is a huge accomplishment for a global manufacturer of our scale and size.

We're also one of the few manufacturers of our size, with third-party verified science-based targets. Additionally, this quarter the US administration announced its federal by Clean initiative, which will help to prioritize lower carbon materials in federal procurement and federally funded projects.

This represents another opportunity for Interface to gain share, across our entire range of carpet tile, LVT and Nora rubber flooring. The global Interface team continues to innovate in both operations and product development. During the quarter, I visited our operations in Australia, and our LPT supplier in South Korea.

I continue to be impressed with the team's work and their commitment and dedication to Interface and our vision. I also spent time with many of our sales leaders, regional sales teams and customers during the quarter.

My interactions were incredibly positive, reaffirming that strong partnerships Interface has with our customers, and how our products align with the specs they need as well as our carbon-neutral and carbon-negative products, make it an easier decision to include us in their projects. And with that I will turn it over to Bruce. .

Thank you, Laurel and good morning, everyone. Third quarter net sales totaled $328 million, an increase of 4.8% versus last year, driven by a balanced contribution from AMS, which is a 10.3% FX neutral; and EAAA that was up 11.7% FX neutral versus the third quarter last year.

At the total company level, FX-neutral net sales growth was up 10.9% year-over-year. Third quarter adjusted gross profit margin was 33.7%, a decrease of only 75 basis points from the prior year period. As Lauren mentioned, we largely offset significant input cost inflation through global pricing and productivity initiatives.

While adjusted gross profit margins are below historical levels and the expectations we have for the business over the long-term, we also want to recognize that our teams have done a fantastic work in offsetting a significant portion of the inflation that the business has incurred, which is at the highest level that even our most senior operators can ever remember.

As we move into Q4, we've unfortunately seen very little relief in its persistent inflation with the exception of some relief on ocean freight, which means we will continue to work on offsetting inflation through pricing and productivity, which is incorporated into our full year guide.

Adjusted SG&A expense for the third quarter was $79.2 million or 24.2% of net sales compared to $77.5 million or 24.8% of net sales in the same period last year. Managing and optimizing SG&A continues to be a strong focus globally and we're proud of the work that our team has done to improve this area materially, through global cost discipline.

Third quarter adjusted operating income was $31.2 million, up 3.5% versus adjusted operating income of $30.2 million in the third quarter last year. Fully diluted earnings per share, was $0.24 up 26.3% versus $0.19 in the third quarter last year. And fully diluted adjusted earnings per share, was $0.30 up 3.4% versus $0.29 in Q3 last year.

Third quarter's adjusted EBITDA was $42.9 million and the company generated $27.6 million of cash from operations in the third quarter. Liquidity at the end of the quarter remained strong, at $351.8 million comprised of $79.4 million of cash and $272.4 million of borrowing capacity on our revolver.

Inventory was $319.1 million, up 24% year-over-year primarily due to raw material inflation. Our balance sheet remains strong. Net debt or total debt minus cash on hand was $442 million at the end of the third quarter.

In the last 12 months, our adjusted EBITDA was $187.6 million and our net leverage ratio was 2.4 times calculated as net debt divided by adjusted EBITDA. We continue to have confidence in our strong balance sheet and our capital structure. On October 14, shortly after our third quarter closed, we signed an amendment to our existing credit facility.

You might recall that our existing credit facility was set to mature in November of 2025. This October 14 amendment extends the term of our credit facility, through October of 2027.

Closing this amendment in a tough credit environment, is a testament to the strength of our company and the strong support of our syndicated banking group and we want to thank them for their support. Full details of the amendment are available in the 8-K that we filed on October 17.

Capital expenditures were $4.2 million in this year's third quarter compared to $5.3 million in last year's third quarter. During the quarter, we repurchased $8.9 million of Interface common stock in accordance with our balanced capital allocation strategy and our previously announced share repurchase program.

We remain focused on investing in the business, paying down debt and returning excess cash to our shareholders through a dividend and opportunistic share repurchases. Now turning to our outlook.

For the full fiscal year 2022, we anticipate the following; net sales of $1.285 billion to $1.305 billion; adjusted gross profit margin of approximately 34.5%; adjusted SG&A expenses that are approximately $319 million; adjusted interest and other expenses of approximately $31 million; an adjusted effective tax rate that is approximately 28%; capital expenditures of approximately $25 million; and we are also anticipating fully diluted weighted average share count for the fourth quarter of approximately 58.4 million shares, and for the full fiscal year 2022 of approximately 58.9 million shares.

While we expect currency-neutral net sales growth to continue in Q4 given demand trends and a strong backlog, the year-over-year comparison will not be as robust as recent quarters for two main reasons. First, we are comping against a strong Q4 2021 that benefited significantly from the release of pent-up COVID demand.

And second, we are anticipating approximately 600 basis points of FX headwinds on the top line in Q4 given continued US dollar strength.

Despite a challenging environment, we are confident in our ability to deliver a strong year and execute on our value creation strategy by leveraging our strong financial foundation our strong brand and our highly differentiated products. With that, I'll turn the call back to Laurel for concluding remarks. .

Thank you, Bruce. We are also proud to have published our 2021 ESG report titled Design with Purpose highlighting our significant milestones and achievements. In addition to further reducing our environmental impact in 2021 we also advanced our DEI initiative and implemented global strategies to support employee health and well-being.

The efforts we made in 2021 set the stage for a strong 2022 and we will continue that momentum as we march towards 2023. Overall, we delivered solid third quarter results and navigated well in a challenging inflationary and dynamic geopolitical environment. Importantly, we demonstrated that we continue to deliver for our customers.

We remain focused on our strategy and disciplined execution in this volatile market and we are ready to finish out the year strong. I'm proud of how our team continues to execute in a challenging environment. And with, that I'll open it up for questions.

Operator?.

[Operator Instructions] Your first question comes from the line of David MacGregor with Longbow Research. .

Yes. Good morning, everyone. .

Hi, David..

Yes. Good morning. I wanted to ask you about the order detail that you provided on the call. Thanks for the breakdown between North America and EAAA.

Can you talk about just the cadence of orders through the quarter? Did you see orders kind of accelerating or decelerating through the quarter? And if anything you can say about October that would be helpful as well?.

Sure. If I think about orders we really have to look market-by-market. And the Americas really was leveling out of orders so no deceleration happening really there. Europe actually we did see some slowing throughout the quarter. In Australia, we actually saw a pickup in the quarter.

And then in Asia, I would say the China lockdowns were more persistent than we anticipated. So overall, it really depends market-by-market, but pretty steady sequentially when we look from quarter-over-quarter. And then October we're encouraged about what we see in October.

We're watching it closely but we see some nice order momentum in October and honestly feel really good about the long-term trends and the durability of our business. .

Great. Okay. Thank you for that. And then I guess I wanted to ask about gross margins as well because you talked about the cost pressures and they're evident everywhere these days. I mean pretty much every earnings call these days people are talking cost inflation.

But it seems like you may be having some trouble passing that through, and I just wanted to ask you about the extent to which maybe that's a function of competitive pressure or whether it's just a lag associated with being so heavily concentrated on specified deals and the amount of time that it takes to negotiate those deals and complete them.

Costs move on you – you don't have the ability to go back and reset pricing. You don't have escalators. Help me understand why we're not doing a little better on the price cost and the price pass-through on the inflation..

Yes, I'll start that and then maybe turn it to Bruce. I would say this. I think in some markets we're seeing really nice pricing double-digit pricing. And in others it's a little bit lower. I will say we're continuing to chase on the cost side, especially in Europe with the energy prices continuing to escalate.

So that's a place that I would say we're continuing to chase. And as you're saying our orders get locked in and so that's the market I think we've chased the most.

Bruce do you want to add to that?.

David, I love your question. And our management team and our operators around the world are probably chuckling because you sound like me. I'm going to give you two different pieces of information. On the one hand, our gross margin was down 75 basis points year-over-year in the quarter, which we're not happy with.

On the flip side, we offset 1,500 basis points of input cost inflation. Had we not done that, instead of generating $31 million of operating income we would have had something in the range of more like 0 to $3 million.

So our operators have done a fantastic job at passing price on it's just the inflation has just been so persistent and so large that we're – and there is that lag that you mentioned. And so it's a tale of two different stories.

One is it's a tale of success that we've done a great job passing on costs to our customers and they've done a great job accepting that price. But we're not done yet and unfortunately the persistent inflation continues. As we mentioned in the prepared remarks, the only place we've seen relief on that is in ocean freight.

Everything else has just kind of kept coming. So it just – as good operators, we're going to continue to pass those costs onto our customers because we have to in order to preserve our margins..

Okay. Thanks very much and good luck..

[Operator Instructions] Your next question comes from the line of Kathryn Thompson with Thompson Research Group. .

Good morning. Thank you for taking my questions today. Just first on the supply chain are you running into any issues in terms of just access to products mainly in Europe just kind of given the situation there? And any other just broad clarification, where you stand with supply chain that could be transportation to actual raw materials? Thank you..

Yes I can take that. Hi, Kathryn. I would say this from an availability standpoint we're in really good shape. So we've secured what we need to on any of the raw materials that we were concerned about. And things have been flowing pretty well. It's really on the cost side that we've seen the pressure continue.

I don't know Bruce, if you have anything to add to that..

Yes it is exactly right. The supply has been there. And in fact in certain areas we've increased some supply Kathryn in order to ensure business continuity in case there's a so-called so cold winter in Europe. But it's just mainly about price right now. Supply chain in general from a flow standpoint has really loosened up which is fantastic.

And one more note in supply chain which is actually another positive thing. You might remember our absenteeism rates during COVID were pretty high in our plants and that has now returned back to pre-COVID levels. So we have the labor that we need to run our plants.

The only thing that we're just really dealing with is the inflationary impact around raws and some inflationary impact around labor..

Okay. And as far as any transportation how – from ports we're finding that rail is getting a little bit more challenging tracking guess what it is. But any other change in terms of just transportation of goods..

We've been in pretty good shape I would say. The container flow has been pretty good. So that's loosened up certainly from where it's been before. I don't think we're experiencing any challenges from an availability of transportation..

Okay. And then... .

And I would add. We have gotten really good at managing that. Because it was such a challenging time during COVID, so I think our operators are all over it. They built that muscle. So we haven't – that has not been something that's risen to a concern around getting stuff where we need to go by the promised date..

And Laurel, you've had a chance to get to know the network better. What are the greatest opportunities from your perspective or Interface based on your early days of getting to the company and the team better? If you can maybe focus on two or three of the top areas for growth from your perspective. Thank you..

Sure. And thanks for the question. It's been an awesome first six or seven months. This past quarter, especially, I got to spend time with our customers and our suppliers, our sales team and I just continue to be so impressed with the organization and the team and our brand strength.

I think one of our biggest opportunities we have a beautiful portfolio of premium brands across Interface, Nora rubber and floor.

And the teams are really starting to come together to sell the full portfolio across all carpet tile, LVT and rubber and selling those solutions together to really maximize the whole product offering that we have, rather than separate selling systems. So we're seeing some real continued strength in that and I think that's a real area of opportunity.

And the other is really design leadership and our products are just absolutely beautiful and continuing to lead in design. And taking that to Nora, where Nora as an example had been a real technical sale.

There's a lot of opportunity, the team has to drive design into Nora and again, then sell the full floor plate and really designing unique solutions with our concept design team, which is spectacular to really help our customers design for the future.

And then I think, continuing to really push our segmentation strategy, if you look back at the business, which was largely corporate office in the past, we're so much more diversified now.

And we have more and more opportunity to do that, with not only continuing with the whole of the Corporate Office, which is our clear strength, with hybrid work and de-densification of the office, but continuing to focus on Healthcare and Education. And again, selling the full portfolio in those markets, I think will be our biggest opportunity..

Okay. Great. Thank you..

Thank you, Kathryn..

There are no further questions at this time. I will now turn the call over to Laurel Hurd for any closing remarks. .

End of Q&A:.

Thank you. And I just want to say thank you to all of our associates for the great work they do every day. Thanks to our customers for their continued support. And thanks to all of our investors and appreciate you listening today..

Thank you for participating. You may disconnect at this time..