Good day, ladies and gentlemen, and welcome to the Q1 2018 Interface Earning's 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 be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Christine Needles, Global Corporate Communications. Ma'am, you may begin.

Thank you, Ashley. Good morning, and welcome to Interface's conference call regarding first quarter 2018 results, hosted by Jay Gould, President and CEO; and Bruce Hausmann, Vice President and CFO. 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 31, 2017, which has been filed with the Securities and Exchange Commission. We direct all listeners to that document. 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. Lastly, 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 Jay Gould, CEO.

Good morning. Once again, I'd like to begin by thanking our Interface teams around the world for delivering a very solid first quarter, consistent with our expectations. We remain focused on our priorities and are working together globally to ensure that our value creation strategy is working in the marketplace. So, let's jump right into our first quarter results. We delivered solid performance down the P&L with first quarter GAAP net sales growth of 8.8% year-over-year. Our LVT business continues to gain traction with our customers, driving growth alongside our core carpet tile business. If you remember, it was this time last year that we had just launched our first LVT line in the Americas, with launches in Europe and APAC throughout 2017. Now, with a full year of selling in our largest market behind us, we're seeing promising growth in our resilient business with additional designs and innovation on the horizon for the back half of 2018. We are also delighted with the growth we are see in our core carpet tile business and the way that our customers are using carpet tile and LVT together as a modular system to design beautiful floors and positive spaces across the segments that we serve. Organic sales which adjust for the impact of foreign currency fluctuations and also for the exit of our FLOR store, specialty retail stores was up a solid 6.6% year-over-year. Turning to orders, our first quarter organic orders were up 12% year-over-year. Our first quarter revenue and order trends were consistent with the pace that we anticipated. As expected, orders were influenced by a large strategic customer and a deal that we negotiated late last year. We're now starting to see our order book translate to the P&L. This will help revenue growth in quarters two and three. For the second quarter, we are targeting net sales growth in the range of 9% to 11%. As anticipated, our first quarter gross margin of 38.9% was down slightly year-over-year, due to higher input prices as well as the exiting of the FLOR specialty retail. As planned, we held our SG&A expenses flat as a percentage of sales over the prior year. With dollars up versus last year, as we made the planned investments in our growth related strategies, the pace of SG&A spend is in line with our anticipated annual run rate. The outcome of all this was solid EPS growth. We delivered EPS of $0.25 compared to last year's Q1 GAAP EPS of $0.13. That's a 19% increase versus a, that's a 19% increase. Regarding our capital allocation, we continue to execute against our previously announced $100 million share repurchase program. In the first quarter, we completed an additional $14.5 million of stock repurchases. Now, I'd like to turn the call over to Bruce for a full review of the financial details of the first quarter. Bruce, the call is yours.

Thanks, Jay, and good morning, everyone. As a reminder, organic sales, organic sales growth and organic order growth adjusts to exclude the impact of foreign currency fluctuations and exiting FLOR specialty retail. Let's dive into first quarter 2018 results. First quarter GAAP net sales were $241 million, up 8.8% over the prior-year period on broad based growth and positive currency impacts, offset partially by exit of FLOR specialty retail. Organic sales were up 6.6% year-over-year. And taking a closer look at our regional net sales in Q1, net sales in the Americas region grew 5% compared to Q1 last year with solid performance across the business and continued momentum in LVT. Growth in the U.S. business was also enhanced by continued momentum in our Interface Services business and strong growth in Latin America. In local currency, net sales in EMEA was up 4% year-over-year, while in U.S. dollars EMEA's net sales were up 19% year-over-year as we benefited from currency tailwinds. Asia Pacific net sales were up 16% compared to Q1 last year, with both China and India having double-digit growth. In terms of our global market segmentation, core office saw double-digit growth over the same period last year and we continue to see increases in non-office segments particularly retail, government, and healthcare. Q1 organic orders were up 12% year-over-year, gross margin was 38.9% for the first quarter, which reflects an anticipated decrease of 80 basis points over the prior-year period driven by higher input costs as well as exiting FLOR specialty retail. SG&A expenses were $71 million, which was flat and on plan at 29.3% of sales. First quarter operating income margin was 9.6% compared to 7.1% in Q1 of 2017. And excluding last year's restructuring and asset impairment charges, adjusted operating income margin was 10.4% in Q1 of…

We are continuing to focus on the execution of our strategic agenda to become the world's most valuable interior products and services company. As we close out the first quarter and move into the second quarter, we are reaffirming our outlook for 2018. We are targeting to achieve 3% to 5% organic sales growth, gross profit margin of 39.0% to 39.5%, SG&A expenses that are flat as a percentage of net sales, and an effective tax rate of 26% to 27%. Interest and other expenses are projected to be $2 million to $3 million higher than last year, and capital expenditures are projected to be $50 million to $60 million. Based on the historic seasonality, current forecast and prior year comparables, we continue to expect our strongest operating income growth in the second and third quarters of this year, with softer operating income growth in the first and fourth quarters. And so with that, I'll open the call for questions. Ashley?

Thank you. Our first question comes from Kathryn Thompson of Thompson Research. Your line is open.

Hi. Thank you for taking my question today. For the large customer order that you discussed in the prepared commentary, is this for a one-time event or a part of a larger initiative that would play out through the year and possibly beyond that?

Well, it's certainly part of our broader strategic initiative on behalf of that customer, although we're seeing major resets of their stores during the second and third quarter, which will have primary P&L impact.

Okay. And appreciate the color on orders, so two things with that, follow-ups on that. First, any color on the first few weeks of this quarter in terms of order trends? And then also the make up of LVT versus carpet tile for orders that – the 12% order growth? Thanks.

Yes, Kathryn. We've seen that order strength continue here in the early weeks of the second quarter. And it's really balanced 50-50 between carpet tile and LVT. So, we are very pleased with the kind of robustness of demand right now.

And then finally, inflation has been a theme for pretty much this entire earnings season, particularly in building products and materials. Could you give your thoughts on a little bit more specificity of inflation impact in the quarter? Why you think that $10 million in inflation cost for the full year is still intact? And what you are doing and what you have done to help combat inflation in your core raw materials?

I think that's a great question, Kathryn. And it's really how we distinguish ourselves from any of our competitors, is that because of our use of recycled materials, we are less impacted by some of the inflationary pressures than some of our competitors. So, we are seeing that recycled products are not -- input costs are not increasing at the same rate as virgin. So, it's our long-term strategy to get off of virgin products. So, we are seeing less input cost pressure I think than some of our primary competitors. That said, the outlook for the year, we originally said it will be $8 million to $12 million. We are still feeling that's the right range. Might be on the higher end of that. We are protecting ourselves for that with the combination of our pricing and our productivity initiatives. We still feel confident that we can offset the input cost inflation and still achieve our 39.0% to 39.5% gross margin target. However, we might be on the lower end of that. So, that's how we are modeling business right now.

Okay. Thank you so much.

Thanks, Kathryn.

Our next question comes from Michael Wood of Nomura. Your line is open.

Hi. Good morning. Congratulations on the orders. First question I wanted to ask about some details on LVT. I'm curious what you are seeing in terms of the more high design offerings that you rolled out later last year versus performance in some of the earlier designs, the more practical ones that you had at the beginning of your offering, and any trends in gross profit margins in LVT that you can update us on?

Yes, Mike, thanks for your question. Well, if you look at our revenue, I mean still the traditional designs, the more simplistic designs are driving the revenue because they got into the specification process early. But, the market reaction to our new designs have been very encouraging. And we are starting to see a lot more sampling done at those higher designs. So, I think we'll see that through the P&L in the second and third quarters. Margins continue to be strong in LVT. We are still in, starting with a 4 on gross margins, so that is solid. We are still hedging a little bit as we continue to roll out globally that we are moving into some more competitive markets, but it was margin accretive for the first quarter.

Okay, that's great to hear. And any update on some of your advance manufacturing, the Troup County initiatives and ERP rollout that you are expecting to do?

So, our ERP implementation down to the factory floor in the United States is scheduled for the first quarter of next year. So, you got a whole year of kind of planning to get done there. It's on track, I feel good about it. We are actually implementing the pretty much system that we did in Europe, which will ultimately allow us to move to one instance instead of three instances of our ERP system. That's over the next three or four years granted. The productivity initiatives down in LaGrange are right on track; feel really good about them. We are still expecting to harvest our $10 million of productivity benefit there this year.

Okay. Finally, can I just ask about any emphasis that you are planning for your new product launches this year in terms of how they fit into some of your strategic initiatives? And where we might expect the direction or focus to go when you launch your new set of products this year?

Yes, great question. We have got really exciting product line that we're going to launch at NeoCon. One of the things, Mike, that we have been doing over the last few years is, with our product launches, we are designing across price points. So, you can go from price category – what we call price category two, which is around $16 a square yard up to $30 a square yard, and we've got designs which allow us to kind of value engineer ourselves. That has been tremendously well received in the market and we're seeing nice growth in those lower price point categories, still at acceptable margins. So I think we have got the balance in our innovation system appropriately focused.

Okay. Thank you very much.

Thanks, Mike.

Our next question comes from Keith Hughes of SunTrust. Your line is open.

Thank you. Just wanted to dig into your comments on double-digit growth in office. How does that compare to what you saw in the second half of last year? And what would you attribute the strength to?

Really since the summertime of last year, we have seen companies releasing their capital budgets, particularly in the U.S. And so, it's really this broad brush approach to renovation I think that's driving that, Keith. And I don't want to just say only in the U.S., we had 9% order growth, almost 10% order growth in Europe in the first quarter. So, we are starting to see renovation budgets in Europe also being released. The difference between this year and last year is people are releasing their capital budgets earlier in the year.

Okay. Second question, how much did raw material inflation hurt you in the first quarter in dollars?

About between $2.0 million and $2.5 million.

So, if you are going to be at the high end of the range, would we expect to see something in that range for every quarter for the remainder of this year? Is that how you view it?

Yes, I think roughly, Mike – Keith, that's about right.

And Keith, remember for inflation, we are sort of thinking $8 million to $12 million for the year. Certainly, there's a lot of noise out there around inflation, so that's why Jay mentioned earlier, if you were to ask what our crystal ball says now, we're a little sort of thinking maybe on the higher end of that range for the total year.

For the input cost...

Exactly. Which is why when we say 39.0% to 39.5% GP, our best guesstimate is probably going to be on the softer -- on the lower ended that range.

We would be in that range in the second quarter. And we have pretty good visibility as we enter a quarter. So I'm expecting 30 basis points to 50 basis points improvement year-over-year for the second quarter.

Yes.

So, that would imply for the second – for the back half of the year, you should see some pretty meaningful improvement year-over-year. Does that come from pricing? Or what's going to drive it?

It's really a combination of productivity and pricing. We are feeling really good about our productivity funnel. We are always a little cautious on pricing to see if it is going to hit. So, we use pricing constantly as a dial. And we're reading what's going on in the market and adjusting how we quote bid, how we quote jobs.

Okay. Thank you.

Thanks, Keith.

And our next question comes from Matt McCall of Seaport Global. Your line is open.

Thanks. Good morning, everybody.

Good morning, Matt.

Good morning, Matt.

So maybe first on the inflation front. I think you are addressed kind of the oil derivatives. What about, there is a lot of concern there about transportation. Can you address your risks there? And you said your training towards the high end of that range, it's that just because of what's going on with -- is it any specific input, is it nylon, is it PVC, is it all of the above?

Well, first of all, we are not as highly influenced on transportation issues as some of our competitors because we use transportation as just a pass along to our customers. So we -- those costs get directly passed through the P&L. We are being more cautious on input cost inflation primarily because we have seen oil tick up to $75. So, we are not seeing it hit yet, but we are being a little cautious for the back half.

Okay. So maybe jump over to SG&A. Just wanted to know about the seasonal patterns you expect there, Q1 was a little higher than we had expected. You reiterated your Q1 or your full-year outlook. Is there anything we should know about the seasonal pattern given what you saw in Q4, what you did in Q1?

Well, we're seeing roughly 27% of gross -- net sales, so roughly $280 million for the year. We are making investments in our growth initiatives earlier in the year. One of the things I saw on the first quarter, we actually did spend a little bit more SG&A than I anticipated because we filled jobs more quickly. I talked about we were in the process of doubling the amount of frontline sales manager we had in the U.S. and we got these jobs filled more quickly than I anticipated. That's a good thing actually. It demonstrates that Interface is still an attractive place for people to work. And so, I'm actually encouraged with the early results of our sales transformation plan. We've had no regrettable losses and the initiatives seem to be, based on the order intake, the initiatives seem to be yielding the kind of results that we were expecting.

Okay, all right. Okay. So, the large order you referenced, is there a situation where you could have some gross margin pressure there, not only because it's a large order, maybe comes with better pricing to the customer, but also because I know you have that 90-day lock for (23:54), but it sounds like this is going to stretch out a little long? Do you have accelerators in that contract? How does that work? Is there any risk to gross margins is what I'm getting at.

Well, there is some gross margin pressure with that big job, yes. It's dilutive to the overall average. However, there is no input cost inflation risk on that because we have already acquired all the raw material required to make it. So, there is going to be no risk factor associated with that.

Okay. All right. Thank you, Jay.

Yes. Appreciate it, Matt.

And our next question comes from David MacGregor of Longbow Research. Your line is open.

Yes. Good morning everyone. Good quarter. Congratulations.

Thank you. I sound boring on these calls because I'm just reiterating what we thought the year was going to look like. But I guess, that's a good thing.

Yes. It sounds like it. Can you just unbundle the 6.6% organic growth between LVT and carpet tile?

Yes. So, on the revenue side, it was about 80%/20% LVT to carpet tile. Now, I did say earlier in the call that orders were 50%/50%. So, we definitely saw a dramatic increase in the order activity in the latter part of the first quarter.

Okay. Just thinking about kind of win rates, I mean, the investment thesis going into the LVT business in the first place was going to increase your ability to close on the business you were pitching because you had this sort of extra surface that you could provide into jobs that were incorporating both surfaces. Can you just talk about your win rate experience now that you are few quarters into the LVT business and how does that help to kind of the average – to the average ticket or the price of the – the average revenue per job, I guess, is where I'm driving at?

Yes, well...

Your win rate drops I guess.

Yes, our win rate has increased. I think that's a really good insight from you. And I'd say that because our market share, we are gaining market share. All of our indications are that, in our key markets, we've gained market share. I hate to sound trite, but getting into this, we really felt like it's like selling fries with the hamburger. It's a nice add-on sale and what we saw in about half the jobs that we compete on include hard surface as well as soft surface. And so by offering a hard surface, we were able to meet the expectation of having one supplier that could provide both. And so, that hypothesis has really proven out to be true, David.

Congratulations on the progress there. Last question for me is just with regard to, given all the raw material inflation that seems to be on people's minds these days, the pricing power in America versus pricing power in Europe and Asia PAC. Could you just talk about how you perceive that and how we should think about that going forward?

Well, there is no question we do have pricing power and we do sell at a premium to the market. We are constantly monitoring that price gap versus competitors. We have seen growth across all of our category pricing, but particularly categories two and three that are growing nicely. Europe, we probably have a little bit less pricing power than we have in the U.S. However, the business is again growing across all the price points there. And with 9% -- one of the real exciting parts about the first quarter is seeing 9% or 10% order growth in Europe. It has been a long time since we have seen that kind of robust environment there. So, we are encouraged for Europe as we look at the full year.

Okay. Congratulations on all quarters. Thank you.

Thank you very much.

We do have a question from the line of Kathryn Thompson of Thompson Research. Your line is open.

Thank you. Just a quick follow-up question on the productivity gains and inflation. So, roughly $10 million in inflation for the year. You're planning to realize $10 million or $20 million in terms of productivity gains in fiscal 2018?

Well, the combination of pricing and productivity, we are anticipating to yield about $20 million.

Okay. So it's pricing and productivity?

Yes.

Okay. Thank you very much.

Yes. You're welcome, Kathryn.

And I am showing no further questions at this time. I'd like to turn the call back to Jay for closing remarks.

Well, thank you again for your support in the first quarter. We look forward to having a conversation during the course of the year. Thanks again.