Good morning, ladies and gentlemen, thank you for standing by. And welcome to the Q2 2020 Interface, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Christine Needles, Corporate Communications. Please go ahead.

Good morning and welcome to Interface’s conference call regarding second 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, and our subsequent quarterly report on Form 10-Q for the period ended April 5 2020, which have been filed with the Security and Exchange Commission. We direct all listeners to those documents. 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.

Good morning and thank you for joining us on the call. I hope that everyone is staying safe and well. As anticipated, our sales in the second quarter were significantly impacted by the ongoing global pandemic, down 27% in Q2 versus last year. That being said, I'm proud of the team's agility across the globe and our swift actions to reduce spending and protect cash flow, while still positioning us to be the leader in our space over the medium and long term. We've been able to hold gross margins at a healthy level and reduce SG&A expenses to deliver adjusted operating income of $27 million in the second quarter. We generated strong cash flow from operations of $48 million in the quarter, ending the quarter with $331 million of liquidity. We also recently amended our credit facility to provide enhanced financial covenant flexibility through the end of Q1 2022. We have maintained our sales organization and continue to invest in product innovation to drive share gains and long-term growth. We remain steadfastly committed to our purpose and climate mission and are on track to deliver our first ever carbon-negative carpet tile this year. Before I share more about our innovation and sales initiatives, let me first turn the call over to Bruce to discuss our second quarter results in more detail. Bruce?

Thank you, Dan, and good morning, everyone. Before I get into details of Q2, I want to provide some insight into what we're seeing so far in Q3, as we continue to navigate through the impacts of COVID-19 and what it's having on our business. As mentioned in last quarter's call, the more severe the lockdown, the more severe we see a decline in revenue. So while there are a few bright spots geographically, where certain countries appear to have gained greater control of the virus and the associated economic activity is more stabilized, the overall pressure on sales and orders is continuing as we enter the third quarter. The lockdowns of course are occurring around the globe and we're seeing this in our order trends. For the month of April, orders were down 32% year-over-year. For the month of May, orders were down 35%. And for the month of June, orders were down 29%. So the good news is the decline has stabilized but we're also not seeing a turn yet that puts us back into positive year-over-year growth territory. As we enter Q3 for the month of July, orders were down 24% and the trend continues to be fairly broad-based as orders were down 28% in Americas, 23% in EMEA and 14% in Asia-Pac. We anticipate this order trend will put pressure on sales and operating income in Q3 similar to the way it did in Q2. With that context in mind here's more detail about the Q2 results. Net sales in Q2 2020 were down 27% versus the prior year period. Sales in our Americas business declined 28% in the second quarter. The steepest declines were concentrated in carpet tile with resilient flooring largely flat in the quarter. EMEA sales were down 23% in local currency and…

Thanks, Bruce. As I mentioned earlier, we have exciting product innovations in the works and remain focused on driving growth in our business. Our carbon-negative carpet tile is a huge win for the environment that will also expand our market opportunity in carpet tile with a new non-PVC and bio-based backing offering. We also recently announced that Interface LVT products now include 39% pre-consumer recycled content, demonstrating our commitment to applying our sustainability expertise through the resilient flooring category. We most recently previewed our new Open Air carpet tile collection, which pairs classic patterns and neutral colors to offer more options for larger-footprint spaces and is developed to fit any budget. At NeoCon virtual events this year, we won the 2020 HiP award in the Hospitality: Flooring category for our guest rooms product. And our product designer Kari Pei won the manufacturing leader category. Beyond products, we are actively developing key markets and channels expanding our overall market opportunities. We continue to see significant opportunity in non-office segments. Nora increased our presence in healthcare, education and transportation and we believe there is a great opportunity to expand in these markets and develop a more meaningful presence in other key segments. We are helping our customers adapt to their spaces for the current working environment by illustrating how our flooring can help create boundaries or zones, support physical distancing and prop movement through a variety of spaces. And we are partnering with architects and designers to develop flooring solutions that meet future built space design needs. Our floor brand has a proven omni-channel approach with a successful online presence and a highly effective synergy program with our commercial business capitalizing on the resi commercial design trend. We are expanding our presence in the dealer direct market increasing access to the underdeveloped…

Thank you. [Operator Instructions] And your first question comes from the line of Kathryn Thompson with Thompson Research Group. Please go ahead.

Hi. Thank you for taking my questions today. I appreciate the color you gave in the prepared commentary. I would appreciate just digging a little bit deeper and clarifying differences by end market and region and in particular what types of projects are advancing slowing or perhaps halted in the near-term? Thank you.

Yes, it's a mixed bag around the world to be honest with you. We're seeing the European markets some of them starting to recover. I mean the theme through the whole thing is we've seen some stabilization around the world. The office market is hit the hardest. The other segments are actually performing pretty well. Half our business is office and half of it's non-office and resegmented. So we're going to focus on education healthcare and office as well and we're also going to go down a little bit in price points to go after the dealer market particularly in three regions. So it's stabilizing and we're going to take advantage of it and go after it. I think we have the best selling system in the world and we're just going to go after business.

Okay. Thank you. Are you seeing any meaningful changes to shipping rates given the reduction in oil prices? Are there any changes in shipping rates just due also to changes in global demand trends?

Yes. From a freight standpoint, we haven't seen any big freight reductions. Now I guess oil from that standpoint, but we don't make money on freight so we really don't have an impact on freight. I don't know Bruce if you have any detail on that.

Kathryn, this is Bruce. Good morning. We are seeing a deflationary environment towards the back half with our input costs. As you know freight is not a big component of our input costs, but the rest of the stuff we'll get some pickup in the back half. We should get some pickup next year as well.

Right. So 90% of our raw material inputs are oil-based so yes, we will see some benefit from that.

Yes.

Okay. And then my final question for today. So many companies are having to make major adjustments that have had in general a positive impact on margins at least in the near term. What structural changes do you anticipate not going away even with an improvement in volumes? And which ones do you think will transition back to kind of “normal”?

Kathryn, we're right-sizing this business to demand and we're going to focus on products. We're going to focus on innovation and our selling system and we're going to right-size the business to what we see out there stabilizing today around 25%. Hopefully, we've hit the bottom and we're going to go back the other way. So we're going to right-size SG&A to meet demand.

And Kathryn, this is Bruce. One [Technical Difficulty] business, of course, is that if you think about our manufacturing environment, it's about 30% fixed, 70% variable which gives us a lot of flexibility around the globe to flex our cost structure. And I just want to give a shout out to our manufacturing teams and the fantastic job they did throughout the quarter at navigating through the environment. Our production was down and we brought finished goods inventory down $30 million throughout the quarter. So you may notice our inventory is down $8 million and so some of that was some raw materials that we brought in but the team just did a great job at navigating through the environment and really flexing through with the variable cost structure of the business.

Yes, I like our margin profile and the gross profit line. We've done a great job at managing that.

Great. Thank you very much.

And your next question comes from the line of David MacGregor with Longbow Research. Please go ahead.

Yes. Good morning everyone. Maybe just to pick up on that last point you talked about the increase of the gross margin profile. Is there any way you can bridge that 170 basis points for us? I'm sure a lot of it is just productivity associated with the lower volume, but I'm just wondering price and anything else that might be in there.

Well, I will tell you having production down 37% and only having 170 basis points degradation in the margin that shows you that our margin profile is pretty bearable. We're able to meet demand with that, so.

Sure.

I think that's going to stead well for us in the future that margin profile and our manufacturing folks -- and Bruce said it have done a great job in adjusting to the production levels.

Yes. And David I would just add -- this is Bruce -- that our selling organization has done a great job at holding price in the environment.

Yes. For sure, for sure.

And so between the holding price with the net of what our product demands through innovation and through design and our leadership position has done really well accompanied with our manufacturing environment that has a large variable component to it.

And so I guess you mentioned deflation in the second half. How would deflation in raw materials and production inputs have impacted the second quarter gross margins?

We did have a pickup in the second quarter, it wasn't a large one on input costs. As you can imagine, we buy the raw materials and then we manufacture it, it goes into inventory and then it eventually flows through P&L. We'll see more of the pickup in the back half of this year.

Yes, pricing is that a quarter places on our yarn inputs.

Yes.

We adjust it per quarter.

I'm sorry can you repeat that? You cut out on me.

So, one of our biggest raw material inputs is yarn and our supply contracts adjust quarterly to pricing so we'll see a bigger impact in the second half.

Got it. And then I guess secondly you mentioned going after the dealer market and pursuing a lower price point. Are you taking equal products in the market like equal weight product to the market with a lower price point or are you going to a lower price point with a lower-weight product? And then just talk about the different costs of service or the different costs of going to market with a dealer versus the spec market?

We have our products based in Category one, two, three, four, and five. The dealer markets of Category two product, which we price it and we manufacture it to fit that market and keep our margins, so it's not a different system we go into from a product standpoint. We're just going to have more Category two products. We're going to use our existing selling organization to sell in that market and focus on the dealer. It's basically treating the dealer like a customer and going after that business.

Okay. So you're not taking like-for-like product down market. You're just going to emphasize a lower-weight product within your line structure.

Correct. Right.

All right. It’s good. That's what I had. Thanks very much. Good luck.

Great. Thank you.

And your next question comes from the line of Keith Hughes with Truist. Please go ahead.

Thank you. I think you had said in the prepared comments resilient flooring was flat in the quarter. Is that correct?

Yes. The resilient was relatively flat. And so there was heavier pressure on the carpet tile while resilient hung in there pretty strongly.

And so within that resilient, how did Nora compare with the LVT goods?

Nora has been our strongest category. Nora has held in amazingly strongly throughout the entire pandemic and has done extremely well. And in certain pockets of the Nora business you would never know that the COVID-19 pandemic is even happening.

Yes. I would say, Nora is a big bright spot for us and I think the second half is going to be pretty good for Nora.

Why is it doing so much better than particularly carpet at this point?

Because it's focused on healthcare, which obviously -- and education, which both of those are doing very well and transportation. So they're segmented differently from the office.

So I assume by your comments it was up in the quarter and it was positive in the quarter?

Yes.

Okay. And then on the SG&A spending, you talked about like $4 million of government-supported SG&A on the $71 million you reported. What other costs are going to be coming back as you we go into the third quarter?

So Keith, this is Bruce. So as you pointed out it was a combination of furloughs and then the government-supported programs that gave us a pickup in Q2 and we don't anticipate as much of that in Q3. And of course if sales volume changes we have additional variable SG&A costs that come back. And then I would just sort of say, there's just general seasonality around marketing and promotional programs.

Yes. I'd also say, we're going to introduce our carbon-negative products Embodied Beauty in the third quarter and we're going to make a big splash with that. So we're going to invest in this backing system that I think is going to give us a big advantage.

Are you looking at capacity reductions particularly in carpet tile given how weak that business is?

Well, I think it's stabilized. I mean, we were down 37% of production. So I think we're going to look at -- hopefully our capacity will go back up and we'll get some leverage there in the second half of the year.

Yeah. Keith one of the beauties of the whole business that we're -- and we're seeing it right on the income statement is the flexibility of the manufacturing environment to flex up and down, as well as the geographic presence that we have. Having manufacturing on four continents really helps us from a competitive standpoint.

Right. And we're open for business around the world.

Okay. Thank you.

[Operator Instructions] And your next question comes from the line of Samuel Darkatsh with Raymond James. Please go ahead.

Good morning, Dan. Good morning, Bruce. How are you?

Hi, Sam. Good. How are you?

I’m well. Thank you. I hope you and your families are doing well, and staying safe as well. A few questions if I might, the sales down 27% in the quarter. Do you have a sense of what volumes were versus pricing like-for-like and/or mix?

Sam this is Bruce. It was mostly volume that was down not price. Yeah, our price held.

So price was essentially flat year-on-year?

Yeah. Yeah, it was.

Okay. And then I don't want to hold you to guidance per se, but would there be a reason to think why gross margins wouldn't hang in there at the 38% range over the next couple quarters or so? And what are the puts and takes there as we look at our models prospectively?

Yeah. Sam this is Bruce. So we think -- and that's why we provided a little bit of insight into what we're seeing so far into Q3. We think that Q3 will look a lot like Q2 based on the data that we have and so that's why we wanted to provide the order rates and where they're at, at the end of July. And we'll continue to navigate through this flex our variable cost structure similar to the way we did in Q2. We'll have a little bit more SG&A. We think our SG&A run rate is around $80 million a quarter. And so if you think about the top line, it'll probably be fairly in line with where we're seeing orders quarter-to-date we believe. GP will be we think similar to Q2 and SG&A will be in the $80 million-ish range.

Two more quick questions if I could. The commentary around finished goods inventory and production was very helpful. Thank you. I'm just making sure I understand how to reconcile the finished goods data with the production. So if finished goods are down $30 million, I think if my math holds that's roughly 15% down both sequentially and year-on-year with you saying production was down 37%. What's the difference between the finished goods being down 15% and the production being down 37%? What am I missing in the reconciliation there?

So Sam, this is Bruce. I'll kind of help you with the math and it's hard to see it because you just get the top-level numbers, so total inventory as you know was down $8 million. If you double-click down on that finished goods were down $30 million and that was 24%. So we did a really nice job at managing finished goods inventory. And the reason why, total inventory is only down $8 million is because we actually bought some raw materials because we wanted to make sure that we had supply chain continuity through the COVID-19 environment. So we did pre-purchase some raw materials to ensure that we could meet customer demands and that we would have the materials that we need to do the manufacturing that we need so that we didn't -- so we can get the product to the customer when they want it.

So then prospectively when we're looking at second half cash flows -- I think free cash flow was essentially a push in the first half. What do you anticipate for cash flows in the back half?

Yeah, Sam, we're going to continue -- so we had a really, really strong cash flow performance in Q2, generating $48 million of cash from operations and $35 million of free cash flow, and we anticipate a good strong cash flow in the back half as well. We're very focused on working capital, and of course the business normally does generate cash in the back half. So we believe that we'll certainly be very positive from an operating standpoint around cash flow. And we define free cash flow as operating cash minus CapEx. We will also be positive for the year around free cash flow. The company is generating a lot of cash and we're really pleased with all of our liquidity metrics.

Very helpful. Thank you, Bruce.

Thank you, Sam.

And your next question comes from the line of David MacGregor with Longbow Research. Please go ahead.

Yeah. Thanks for taking a follow-up. I guess, I just wanted to go back and maybe come at the question Keith was asking from a slightly different angle. I mean, you've got very large negative comps here in carpet tile, but your resilience flat to up, and so I guess I just want to understand what's happening in the marketplace and how you're responding to it. Is there a big change here in terms of the percentage of your business that's specified versus maybe getting an early start on that deal business that you had discussed earlier or are the specific contracts just really shifting to 100% resilient or a much higher percentage of resilient and people are really just backing away from specking in carpet tile into these projects? I'm just trying to get an understanding of why there was such a disparity between those two categories.

Well David, I think that the office market has really been hit the hardest with us and that's where our carpet tile business plays in a big way is in the office market. So I think the commercial office market is down and we're down with the commercial office market. I don't think there's been a big shift different with the resilient to carpet tile. I think it's the office market that's creating the problems for us.

So then talk about the non-office market the other 50% if you would. in terms of what you're seeing there in terms of the question I just asked I guess.

Well we're seeing that education has actually been pretty good. Hospitality believe it or not they're continuing to build the hotels out. Healthcare has been really good for us from that sort of standpoint.

Again I understand that. What I'm trying to get at is the difference between carpet tile and the resilient. I appreciate the commentary on the health of the category, but I'm just trying to get a sense of what's happening in that mix?

Well I think the resilient is still growing. LVT is growing faster than carpet tile for sure. But I still think carpet tile has a place in the office market.

Yes. David, this is Bruce. This might help. We don't see the mix shifting in those segments. We just see those segments being a little more heavily weighted towards the resilient product which is helping us in this environment and that's why it comes out in an environment like this when office is down so much and those segments are growing. Of course our mix shifts more towards the resilient side of the picture.

Right. Coming into this year what would office have represented as a percentage of your resilient business?

I don't think we have that data actually David.

Okay, all right. Thanks guys.

Thank you, David.

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Well thank you for listening to the call. I hope to talk to you next quarter as well and please be safe in this environment. Thank you.

This concludes today's conference call. You may now disconnect.