Ladies and gentlemen, thank you for standing by. And welcome to the Q1 2020 Interface, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Christine Needles, Director, Corporate Communications. Thank you. Please go ahead, ma’am.

Good morning and welcome to Interface’s conference call regarding first quarter 2020 results, hosted by Dan Hendrix, Chairman and CEO; and Bruce Hausmann, Vice President and 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 the Securities Act of 1933 as amended and the Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995. 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 associated with the ongoing COVID-19 pandemic, including interruptions to our manufacturing operations and reduced demand for our products, economic conditions in the commercial interiors industry, and risks related to lawsuits, investigations and similar legal proceedings that we are subject to from time to time, 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 29, 2019, 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 also refer to certain non-GAAP measures. The most comparable GAAP measures, as well as a reconciliation of the non-GAAP measures to the most comparable GAAP measures is contained in the company’s earnings release and Form 8-K furnished with the SEC today, which explains why Interface believes presentations of these non-GAAP measures provides useful information to investors, as well as any additional material purposes for which Interface uses these non-GAAP measures, each of which can be accessed in the Investor Relations section of the company’s website, www.interface.com. 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. Now, I’d like to turn the call over to Dan Hendrix, Chairman and CEO.

Thank you, Christine. Good morning and thanks for joining our call today. Hope that everyone and their families are safe and well. And before we jump into our first quarter results, I want to give you some context related to current business conditions and how we’re navigating through the COVID-19 pandemic. The health and safety of our employees is our first and foremost concern as we work to ensure the strength and stability of our business. We’ve experienced minor disruptions in operations over the past few months. But I’m pleased to say that our primary manufacturing facilities are fully operational. We talk a lot in Interface about our purpose, leading industry to love the world. We’re seeing here in action as our teams step up to provide to our customers and support our communities. Around the world, many of us continue to work remotely as we align with local requirements. In our factories, especially, we adapted our working environments to reduce transmission risk, while continuing operations. That includes carefully following procedures for social distancing, increased cleaning and best practices that allow us to keep our plants running and meet our customer commitments. Our carpet tile manufacturing is well-positioned to serve customers around the world with extensive capabilities that we can flex to mitigate interruptions, as they may occur. I’m proud of the agility and ingenuity of our selling organization, as they found new invaluable ways to connect with our customers. In fact, with reduced travel and remote working, we’ve been able to connect with designers and specifiers more frequently. We haven’t taken anything lightly in terms of the business impact of the pandemic. Our management team acted swiftly to align our cost structure with declining demand to protect the foundation of our company. We’ve taken steps to reduce costs to…

Thank you, Dan, and good morning, everyone. We had a strong start to the year, but began to see impacts of the COVID-19 pandemic as the first quarter progressed, and government orders were issued around the globe. Our global operations experienced a wide spectrum of local government directive, from geographies where social distancing and other measures were required, but construction was still considered essential, to full shelter-in-place lockdowns, where commerce was essentially stopped at the government explicit direction. The more severe the lockdown, the more severe we saw a precipitous decline in revenue. Fortunately, we’re mostly seeing customers delay projects and not cancel them. Our backlog is up approximately $45 million from where it was at the end of 2019. That said, at a minimum, there will be pressure on second quarter earnings as April orders were down approximately 32%, and this phenomenon was fairly broad based with orders down approximately 37% in the Americas, 28% in EMEA, and 28% in Asia-Pac. Sources of optimism for us are the growing backlog, as customer base is mostly delaying orders and not cancelling them and find the stabilization in our recent 4 week moving average sequential order trends. In fact, we’re even starting to see sequential order trends turn up in geographies were lockdown and restrictions and ease like Australia, China and Germany. We particularly see resilience in our rubber business, nora is benefiting from a strong pipeline of large healthcare, education and life sciences projects that continue to be supported in major markets. With that context in mind, here is more information on our first quarter results. And as a reminder, fiscal 2020 is a 53 week year for Interface, and the first quarter of 2020 had 14 weeks versus 13 weeks in the first quarter of 2019. Net sales in…

Thank you, Bruce. As you’ve heard, we’ve effectively maintained margins in the first quarter and have acted quickly protect underlying fundamentals of the business. However, as Bruce mentioned, we are seeing significant declines in demand as we move through Q2 in varying degrees around the world depending on the severity of the pandemic. There are some bright spots of order intake activity and our backlog is elevated. We expect a uniquely challenging environment in the second and third quarters, because of that combined with a significant level of uncertainty in the market in general, we are withdrawing our 2020 guidance. As described earlier, we’ve adjusted our cost structure and have taken significant steps to align our business with declining demand. We anticipate our cost reduction initiatives to result in total year SG&A expenses of approximately $320 million to $330 million. We’ve also moderated our capital spending and anticipate $45 million to $50 million of capital spending, including planned investments in backing and testing technology in the Americas. Going forward, our maintenance CapEx run rate should be around $20 million annually. We will continue to right size our spending as this year unfolds. Our fundamentals are strong, that is our culture, we will continue to invest in our Climate Take Back mission, including the launch of industry leading carbon negative products later this year. This is an exciting innovation that allows us to continue to partner closely with our customers to reduce our carbon footprints and address climate change. This is a win-win for the planet in our business, as we would also be reducing manufacturing costs with this investment. COVID-19 will change the office and other real estate design needs. Temporarily, longer-term, we’re in a seismic shift. We have already begun working with our customers to develop flooring solutions, they’re…

Thank you. [Operator Instructions] Your first question comes from Kathryn Thompson of Thompson Research. Your line is open.

Hi, thank you for taking my questions today. First, there are many changes you made in response to COVID-19. Could you talk about any changes that may end up being semi-permanent? This is a trend that we’ve seen with so many companies that have been forced to be nimble to adjust. But then, when the dust settles, there’s realization that some of the changes may be more permanent, but also may be enhancing in terms of how the company operates going forward. Thank you.

Yeah. Hey, Kathryn. We’re looking at how to redesign Interface. I think every company is looking at how to redesign Interface. A lot of these costs will, obviously, be permanent reductions. I can’t give you a number. The variable comp part will not, that will bounce back. But we’re looking at the whole organization about how the new world is going to act. And my goal is always to try and drive SG&A down to – 30% is too high, my goal is to drive it close to 27%.

And I’d just add to that, Dan. Morning, Kathryn. Some of these changes are going to be permanent for our customers, which we view as an opportunity to bring new products and help them in new ways to design their office in this new environment that we’re in. So, interestingly enough, we view COVID-19 – obviously, there’s a lot of headwinds and a lot of challenges that the business and the global economy is going through, but I think we can make some hay out of this for the business.

Yeah, so do I. That’s right. I think it displays actually the Interface’s strength, Kathryn, that we’ve always been a very innovative company. And we tend to – we love change as a company. And I think we’ll adapt better than most to this new world.

Okay, perfect. I appreciate the color you gave on write-down in your prepared commentary. Could you flesh out a little bit more, because you really gave two buckets of [fall in] [ph] equity value and Asia. But is there any relation to nora and just kind of the timing and the magnitude we get, fleshing out the components of that write-down? Thank you.

Yeah. Kathryn, this is Bruce. Interestingly enough, as we mentioned in our prepared remarks, nora is incredibly resilient through environment like this. You have to think about goodwill. It’s sort of like a bucket of water, where all of the goodwill since inception of the company is combined into one bucket. Now, then we do allocate it among regions. We allocate it among Americas, EMEA and Asia-Pac. And, there is some fairly – I’m sure you’re conversant with this. There is some fairly technical accounting literature that governs this. So you have to go through your steps. And since we saw the COVID-19 fairly early in our business in Q1 with Asia, and some [triggering] [ph] stuff happening on – particularly in China, that made us be a little bit proactive around that analysis. And so, we worked really closely with our external auditors and we took a really hard look at the accounting literature that governs it, went through our quantitative analysis. And as a result of that, we followed the literature and we did take that – we did take that goodwill impairment charge, but I just want to make sure that you’re aware it’s a noncash charge that hit that, comes off the balance sheet.

Okay. And then, a final question for the day, really more focused on your U.S. business. We’ve heard, really kind of confirming what you said about healthcare, education and the other categories, seeing some good demand. There’s actually, given backlogs, at least some of your [inputs] [ph] in the industry, have a little bit of a hard time meeting demand, which seems completely counterintuitive to employment numbers. I wanted to see, are you seeing a similar trend in your business, particularly for your Georgia operations? And maybe flesh out just what you’re seeing in terms of the ability to meet demand, given the realities you’ve faced in the marketplace?

We have a very flexible plant in Georgia. Obviously, we only have one plant that’s in Troup, County. We haven’t had really any issues with shutdowns. Some of our competitors have had issues with shutdowns, particularly in the United States. So we can definitely ramp up to meet demand. You can imagine some of the markets have been hit the hardest. New York City, Boston have been hit really hard. In our East business and our West Coast business, we can’t ship it in West Coast, but our orders are really good. So we don’t really have a problem meeting demand and fulfilling our backlog. It’s a matter of cities opening up where we can actually do commerce and ship.

Yeah. And, Kathryn, this is Bruce, I will just add to that. One of the strengths that I’ve noticed in Interface through this whole process is just the flexibility of our plants globally, to flex up and down, based on demand. We’ve seen that around the world. We’ve seen that in Australia. We’ve seen that in China. We’ve seen that here in the U.S. And I just want to thank our colleagues, who are probably listening to this call right now, their amazing capabilities at flexing up and down as needed. So the other thing I would add too and we mentioned this in the prepared remarks, the more severe the lockdown, the more severe or the more difficult it’s been to get product to the customers. But when the lockdown ease, we’re able to get that product out, because the customer is able to take delivery of it.

All right, we haven’t had any supply-chain issues with our suppliers at all.

Correct. Yeah.

So we’re very fortunate with our supply-chain.

And that’s true as well, Kathryn, with LVT and rubber. So we’ve been fortunate, not to have those disruptions.

Okay. Thank you, very much and good luck.

Thank you.

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

Good morning, and thanks for all the information on April. First, can you update us on whether or not in this scenario that you’re currently looking at with the April order trends, whether or not you envision reaching any covenant limits, and whether or not you’ve had any preliminary discussions with lenders on getting those waived?

Yeah, Mike. This is Bruce. We have no indication of tripping any covenants in Q2. We’re obviously keeping a close eye on it to see what the implications are for Q3 and Q4. We’ve had really good open dialogue with our banking group, and we remain incredibly supportive. We have over a 20-year relationship with them. And their feedback to us, and say, let us know we’re here to support you if we need to go back. If things get worse in Q3 and Q4, we need to go back and have some discussions, please let us know we want to continue supporting Interface.

Yeah, and just to keep [tatting versus we’re not tatting this] [ph]. But the thing that gives our bank a lot of solace is that we have a lot of liquidity. We have $309 million of liquidity. And so we don’t go back to the bank to pass the liquidity.

I’ll just add a little bit more to that, Dan. So we’ve done a really good job at acting quickly and taking costs out of the business in the right areas. So that, I think it’s their feedback to us has been, it gives us comfort that you’ve got a really solid management team that that’s being proactive and making the right – and basically controlling your own destiny.

Thanks for that. And Dan, I recall historically, demand volatility would cause some pretty major manufacturing inefficiencies given the changeovers that have to occur. Can you talk about how manufacturing is different now in terms of handling that demand volatility given the Troup County initiatives that you’ve worked on? I just love to hear what’s changed and what you’d expect for decremental shorter-term?

Well, we created a long-term, the long run plant and the short run plant. We’ve actually modernized Troup County, I would say, no way, when production went down 25% and you throw out the Bentley broadloom business, I think we saw 200 basis points in segregation in the gross profit line. But our mix is different today. LVT is a big part of the mix. That’s how our gross profit margins then we have in the carpet tile business. To me that the nora rubber business is high margin business as well, it’s got a pretty good demand stream. So I’m pretty confident that our gross profit line is going to hold up in a really good way for us.

Great. Finally, you mentioned you’re seeing some delays but no cancellations in backlog. From just your historical work dealing with that, the cancellations typically occur upfront? Or is there still potential that the delayed work could get canceled? Thank you.

Yeah, I would say that when they order – when they enter the order, it’s a contract, it’s a purchase order that goes with it. And they have a project they want to finish. And I would say that the – from a finishing project standpoint, historically, they finished the refurbishment project or they finished the new build out. So I don’t anticipate a lot of cancellations related to our business. We’d never have seen that. I don’t think we’re going to see at this time either.

All right. Thanks. Good luck.

Thanks, Mike.

Your next question comes from John Baugh of Stifel. Your line is open.

Thank you. Good morning, and hope you all are well. Let’s say, let’s start with the pre-virus, and I understand that it’s different in Asia versus Americas and timing, but trying to get a sense that you looked at Q1. Where your carpet tile business was tracking a pre-virus impact and how much that impacted the quarter thereafter, of course, you’ve got an extra week in there? So I assume as some kind of high-single-digit benefit, if I were trying to adjust apples to apples?

Yeah, John. This is Bruce. When we started the year, January, February, we were – we started off super strong, very, very strong year. And as you mentioned, we saw some virus stuff going on in China in early Q1. But if you think about it, Europe and Americas, it was a great start of the year. And so we’re really started setting in, in slowing things down was really in later March, which is why we’re – we provided so much commentary about Q2 is we wanted you to have the heads up that there will be pressure on Q2, because that’s when all the lockdown to came in place. And – I look at this, we have so many supportive customers, there’s so much activity out there. It seems to me the biggest indicator is how severe is the lockdown? And then when does the lockdown ease. And that’s one of the biggest indicators to me if when the business comes back and in the pace of the business.

Yeah, we’re back in again. We’re seeing that in markets where they’re easing the lockdown. We’re seeing the return of business. I wouldn’t say the normal levels, but it’s bouncing to starting to move. Yeah.

Moving back. Yeah, exactly. That gives me a lot of encouragement. Yeah.

Okay. And maybe help us that you mentioned $45 million backlog. So what is that? And that’s a March 31, I assume, what is that percentage change year-over-year, and then maybe square that up with the commentary around – what’s transpired in orders in April, and then we’ve seen a really ugly ABI indication, which is, I guess, an early indication of what future orders might be. And I’m just trying to get a sense where you think the orders are around the business, actually bought them and going to improve from here forward. It sounded like that’s the case the last few weeks or you expect some sort of out month or quarter impact from ABI coming off? Thank you.

John, this is Bruce. Just a few points and I’ll hand it off to Dan for more color. The $45 million is actually as of the end of April, pardon me. So if you look at our – how much our backlog is up at the end of April. That’s the number. And I think that the point we’re trying to make there is that again, [but risking being imperative] [ph], when the lockdowns happen the customers aren’t able to take the product, but when they ease, we’re able to they get the product out. So we’re seeing a lot of pent-up activity that we’re able to deliver on once things ease, head on.

Yeah, that’s great.

I don’t know if you have any commentary on the ABI and stuff.

No. I’m not going to manage this down right now. I mean, no one else is working right now.

What is that percentage, Bruce, with a $45 million?

What is that $45 million as a percentage of total backlog?

Yeah.

Yeah, I mean, I guess it’s probably around 25-ish with that.

Yeah, I think with 200…

…end of the year.

Okay.

And then that gives us a hedge, obviously when – John, when the markets open up, that gives us a hedge that we can shift into the second quarter, to some extent.

Got it. And then my last question is simply around free cash flow for the year, you’ve obviously won’t through the first quarter which is, I believe, historically being used quarter. How obviously is contingent on where orders and revenue and earnings and all those things. But I’m just going to try to get a sense for the latter 9 months at 2020 whether you think you’ll be a cash user or neutral or maybe generate cash?

Yeah, John, this is Bruce. So one of the key headlines I want to reiterate is that we are vigilantly managing cash. We’re looking at it twice a week. And we’re looking at our uses of cash. We’re looking at liquidity. And we’re looking at opportunities to free up working capital. And I’m sure you saw that in our Q1 results, we freed up, nor which is normally a big use of cash quarter for us. We did a nice job of managing working capital, for example, freeing up $32 million in working capital on accounts receivable, which we’re watching very closely as well as inventory. So we think that we’re going to be generative cash this year. And we’re going to do that in a variety of ways. We’re going to do that by managing our expense, our expenses and our revenue reality. And we’re going to do that by looking – continuing to look for working capital opportunities. And we’re going to control our own destiny, we want as we go through this.

Great. Thanks for that color and good luck.

Thanks, John.

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

Thank you. I’m looking at second maybe third quarter, given revenues at what kind of decrementals on EBITDA or either margin, are you expecting to see?

So – hey, Keith, that’s a really good question. We were trying to given the indication around the pressure around Q2 with orders, I’ll just reiterate the numbers with total company orders down at the end of April of 32%. It really depends on how quickly these lockdown ease. And imagine we’ve got that backlog that once the customer could take product, they’ll be able to – we can – that’s revenue that comes right out of the gate. And as the lockdown to ease, in certain geographies, we’re already seeing our order start to pick up. So it really depends on how all that plays out. And I’ll just get back to controlling our own destiny, if that is not coming to fruition. We’ve already taken $80 million of costs out of the business. And we’ll just have – we’re going to keep an eye on it.

And we’ll continue to right size it.

And we will continue to right size it, based on where the top-line is going.

The one thing that I do like, Keith, is I like our manufacturing profile that we can flex it down or up particularly on carpet tile business to maintain a good margin level. So I like where we are on that part of it.

Yeah, Keith. This is Bruce again. So just to give you a number on that here about 70% of our costs in our carpet tile plants are variable. So as we’re able to and we have, as we mentioned earlier, a really nimble structure where the plants are demonstrating their ability to flex up and down depending on demand. And so that gives us a lot of – not oftentimes we talked about the SG&A line, but to Dan’s point, there’s a lot of flexing that goes on, on the cost of goods sold line, as 70% of those costs are variables in carpet tile plants, so.

Okay. Kind of switching to the April comment of 32% decline, is there a notable difference in the decline between carpet tile, nora, and LVT in the month?

LVT is actually growing, which is super encouraging. nora continues to stay strong, especially in those long-term specification contracts that continue to be supported around healthcare, life sciences, government jobs, which is great. The resiliency of both nora and LVT has been fantastic. I would say carpet tile has been the one that’s been – has been the softest, as you can probably imagine. And as you know, a good portion of our business there is made to order. So it’s not surprising. And that’s why we’re encouraged when the lockups ease that made-to-order business starts coming back.

It’s still down in the 30%s.

Yeah.

I’m sorry, I was on loss. You were saying LVT is up in April. Is nora up in April?

nora is slightly down in April.

I mean, that would imply your carpet tile business is off, I don’t know, 50%, 60%, something like that. Is that…?

No, it’s – no, it’s down in the 30s.

Yeah, Keith.

Okay.

Remember, that’s the core of this…

Okay. All right, I’ll talk to you about that offline. And, I guess, final question. You have given us the North America shipments. I assume that you’ve given us the numbers by region for the first quarter. It’s negative to North America, positive to some of the currency in Europe. All those include the extra week. Is that correct?

They do.

Okay. All right, thank you very much.

Thanks, Keith.

[Operator Instructions] The next question comes from David MacGregor of Longbow Research. Your line is open.

Yes. Good morning, everyone. Just a few questions for me. First of all, can we talk about raw materials this year? I know you use a lot of recycled fiber, but also, you’re purchasing commodities. I wonder if you could just give us some help on how we should think about your expected 2020 raw material cost line.

I anticipate our raw material cost coming down particularly with the yarn and our packing, anything tied to oil prices. There’s a delay when that happens. But we’re actually baking in pretty good raw material price increases going into the year. And I think we’ll get a benefit that we’ll see some raw material price increases this year. To the extent of it, depends on what oil prices do, what demand does.

So you’re saying a net decrease?

Yes, I anticipate that.

Okay. I mean, I don’t want to press this too much further, but can you give us any sense of magnitude around that? Do you expect it to be a substantial decrease or are we thinking something a little more incremental?

I would say incremental today. Depends – we have a pricing that’s tied to caprolactam, in the pricing of nylon, nylon 66. And so, the delay in that is about 3 months. And so, we’ll see the second half where that actually plays out. But I expect it not to be the [net get, but it won’t be insulated] [ph] either. It’s going to be a benefit to us.

Okay. What about production curtailments? How should we think about production curtailments through 2Q and 3Q, and potentially 4Q as well, I guess?

Well, we’re flexing the manufacturing to demand. I would say, like we’re on short time in a couple of our plants. We’re ramping up our America’s plant today to meet some of the demand as the markets open up. But to give you a percentage of what the curtailment is, we’re just meeting demand based on where we are around the world. Our China plant is back up and supplying the China market. Australia is on short shift, but now it’s actually ramping up as well. So it’s kind of hard to tell you around the world where that’s going to be. But we’re going to flex it to demand and we’re hoping that we’ll see a bounce back in – particularly in the third quarter.

Are you up and running in Europe?

Oh, yeah. Yes, we are.

Okay. I guess, just on Europe, I guess, what insights are you able to draw from your experience there over the last couple of months that might help you in terms of reopening here in North America?

Yeah, they’re just starting. The UK is just now considering opening up. Spain is now opening up, as well in Italy. We’re seeing a little bit of positive activity there. France is still very – not very much shutdown. So we don’t really have a really good insight into Europe yet, except we’re starting to see a little benefit in the UK and little benefit in Spain.

In Germany.

Yeah, and in Germany as well. Those are the markets. I will tell you, China, we’re starting to see that actually come back and that gives me a lot of encouragement as that market opens up.

Okay, right. Thanks a lot, Dan.

There are no further questions at this time. I will now turn the call to Mr. Hendrix for closing comments.

Well, thank you for listening to our call. And please, please be safe, you and your families and we’ll talk to you next time. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.