Good day and thank you for standing by. Welcome to the Q3 2021 Interface, Inc. Earnings Conference Call. [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 third quarter 2021 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 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 risks and uncertainties associated with the ongoing COVID-19 pandemic and those described in our most recent annual report on Form 10-K 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 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. After our prepared remarks, we will open up the call for questions. Now, I would like to turn the call over to Dan Hendrix, Chairman and CEO.

Thank you, Christine. Good morning and thank you for joining us. The Interface team delivered strong results this quarter and I continue to be impressed by their dedication and commitment to delivering for our customers. We saw 12% year-over-year increase in net sales in the third quarter as customer demand continue to pickup in line with positive signs of a commercial recovery across most of our regions. We generated $29 million of cash from operating activities during the quarter and we repaid $30 million of debt to reach pre-pandemic leverage ratios. Building on the momentum we saw last quarter, orders were up 24% year-over-year, including a 34% increase in the Americas and a 12% increase in EAAA. Backlog was up 33% compared to a year ago, which is a record high for Interface, which should bode well for the fourth quarter. Despite the strong customer demand, we continue to manage through industry-wide supply chain issues. Like most of the other companies were facing some challenging headwinds, we have open jobs we are working to fill in our U.S. manufacturing facilities. We are experiencing raw material and freight inflation and we are still facing disruption from COVID-19. As a result, it’s been difficult to keep up with order demand in our manufacturing facilities and our gross profit margins were lower than we targeted in the quarter. To respond to this challenging operating environment, we are partially offsetting these impacts with pass-through price increases and freight surcharges. We are acting as quickly as we can, but there is a lag between raw material, freight and labor inflation and when price increases take effect. Additionally, with the recent announcement to close our plant in Thailand by the end of 2022, we are increasing productivity and lowering manufacturing costs across our global manufacturing footprint.…

Thank you, Dan and good morning everyone. Third quarter sales totaled $312.7 million, up 12.2% from the prior year period, with increases across all product lines. Organic growth, which excludes the impact of currency translation, was up 11.3%. Sales in the Americas were up 23.7%, driven by a release of pent-up demand in a strongly recovering commercial market. In EAAA, net sales were relatively flat as certain markets like Eastern Europe, China, Southeast Asia and India faced new waves of COVID resulting in government lockdowns. Orders, however, were up in both regions as America saw orders up 34% year-over-year and EAAA’s orders were up 12% year-over-year. Currency fluctuations had an approximately $1.9 million of positive impact on EAAA’s third quarter net sales due to strengthening of various foreign currencies against the U.S. dollar. Third quarter adjusted gross profit margin was 34.5%, which was a solid outcome in the face of the global supply chain crisis in our company and almost every other global company had to navigate through during the quarter. Adjusted SG&A expense for the third quarter was $77.5 million compared to $75.5 million in the same quarter last year. And as a percentage of net sales, adjusted SG&A was 24.8% this quarter compared to 27.1% in the same period last year. As you will note, we are continuing to tighten up the company’s cost structure and we are paying particular attention to gaining greater efficiencies in our SG&A. Third quarter adjusted operating income was $30.2 million, up 7.4% compared to $28.1 million in the third quarter last year. Third quarter 2021 adjusted net income was $16.9 million or $0.29 per diluted share and adjusted EBITDA was $42 million for the quarter. During the third quarter, in line with our prior announcement, we recorded a $3.8 million restructuring charge…

Thank you, Bruce. I again want to thank the entire Interface team for a strong, strong quarter and one that was filled with significant milestones. As hope everyone can see, we continue to strengthen the company by broadening our product lines, increasing our leadership position in vertical segments like education and healthcare, leading in design and, of course, leading in sustainability. The positive momentum that we see in the business is encouraging. And despite the global supply chain issues to navigate through, which are not unique to Interface, we remain very optimistic about the future. With that, I’ll open it up for questions. Operator?

[Operator Instructions] Your first question comes from Kathryn Thompson of TRG.

Hey, good morning. This is actually Brian Biros on for Kathryn. Thank you for taking my questions. I guess to start, can you touch on how volume and price trended across the two segments in the quarter?

Sure, Brian. This is Bruce Hausmann. Good morning. A lot of the volume that you saw on the top line was more volume-based. We had some pricing activity. You might remember that we did some pricing activity in Q1. We did more pricing activity in Q2 and we’re going to – and we did more pricing activity in Q3, and we will do some more of the rest of this year. Some of that’s coming on pricing on our products as well as we’re adding some freight surcharges to offset the increased costs that we’re seeing in the freight line.

Maybe then in the EAAA segment, I guess, sales were flat. So I assume pricing was up, so that implies volume down. Any like magnitude of those two that you could share?

Yes. That was most – the orders were up 12% in EAAA. That was most – the reason why the billings were flat was mostly attributable to the new waves of COVID that we saw in Eastern Europe, China, Southeast Asia and India. And what we saw in EAAA in particular, was we saw – we had orders in hand, we had inventory ready to ship. And the customer just couldn’t accept the product because the job site was either delayed due to COVID lockdown or it was delayed due to the job site needing other materials that were – had supply chain issues that they need to bring in first before they could bring in the flooring products. So actually, on balance, the EAAA region had a very strong quarter and all those orders will ship as soon as those job sites reopen up and those COVID lockdowns ease. It was just – it’s just really a timing thing between the quarters.

Got it. Has that – those lockdowns, have they continued into Q4? Or how has that trended sequentially?

Yes. I mean I’m sure you’ve seen in the newspaper, Russia, for example, had increased case counts and Germany has had increased case counts. And so there is just there are different wave – for example, in Q3, Malaysia had their borders closed entirely. We couldn’t ship any product into Malaysia. And so it just ebbs and flows and it goes week by week. I think the good news is that we’re getting the orders, we’re getting the business. We know we’re taking share and it’s just a matter of when the job sites can open and we can actually get the product to the customer to put down on the floor.

Got it. And then maybe thinking a little bigger picture, I guess, into next year. How would you characterize the biggest bottlenecks currently, I guess, maybe the biggest change sequentially from last quarter to this quarter and how this kind of play out into next year?

Yes. I mean I think the biggest thing that’s mind for next year as we’re thinking about inflation and we’re thinking about price increases. And we’re being very assertive with our price increases around passing the inflationary costs that we’re seeing on to our customers because we have to. And we’re going to certainly see – we saw that in Q3. We will certainly see that in Q4, as you saw from our guide. And I think that we may see some of that in the first half of next year as well. I’m sure you heard the Fed talk this week about short-term inflation that some of the stuff should normalize in 2022, but it’s the question of timing. And we don’t know if that’s going to be Q1, Q2 or Q3. And so we’re just navigating through it. We’re making sure that things like, for example, freight surcharges are things that we can do now and that we can change later and so if the freight cost ease in into next year

Yes. One of the biggest things that we’re fighting is labor, actually, in the United States. We are trying to hire a lot of people in our La Grange facility.

Yes, just my question is [indiscernible] labor. And I guess, do you think that gets any better at all into ‘22 or just...

Yes. We’re starting to hire people. We’re trying to hire 100 people in La Grange.

Good luck. I will pass it on. Thanks.

Thanks.

Thanks, Brian.

Your next question comes from the line of Keith Hughes of Truist.

Thank you. A question on the fourth quarter revenue guidance, how do you think that’s going to break out between the two regions in terms of their contribution to growth?

Yes. I think it will be fairly evenly mixed, Keith. I think both regions are really well positioned to have strong growth in Q4 and frankly, strong growth into the next year.

Yes. We have backlog record highs in both regions, actually.

True.

And talking about early next year, some of the raw material inflation that you and others have been talking about supply chain disruption. Do you think that’s going to continue into the at least early parts of ‘22?

I think from – yarn is our biggest raw material input. I’m hoping that peaks and I’m hoping freight actually peaks as well. Container charges have gone up significantly, as you know. I’m hoping that, that peaks in the first quarter.

We’ve had inflation and cost, obviously. Have you had any issues getting materials across the world, some of the main ingredients to make in carbon?

Keith, we’ve been really fortunate in that regard. The short answer is no. We had no production issues due to not having the raw materials that we did to create our products, which is great. And just a shout out to our operators, they have really been looking ahead and making sure that they navigate through to get them draws that they need. The big bottleneck, and we mentioned this to Brian on the earlier questions, has really been labor in our U.S. manufacturing facilities where we have quite a few open jobs that we’d like to fill that would increase our capacity.

Okay. Final question on LVT, and a lot of port congestion obviously. Did you miss sale – LVT sales in the quarter due to not being able to get it off the ship?

No, we had a pretty good inventory position going into it, and we have been very fortunate on our supply chain.

Yes. That’s a great example where we have been striking the balance of making sure we invest in the right amount of working capital to make sure that we have enough product on hand to meet customer demand.

Okay. Thank you.

Your next question comes from Samuel Darkatsh of R&J.

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

Hi Sam.

Good.

A couple of questions. One, a clarification question, when – as you see your inputs and labor constraints today, when do you imagine that your price cost will turn neutral based on pricing actions that you have already announced and what have you? What’s the timing? Is it 1Q, 2Q when do you expect to get price cost neutrality?

My sense is Q2. We are chasing raw material input costs. And I am hoping that they are peaking as I just said. In Q2, if we can actually see some kind of at least flattening of raw material price increases in freight than Q2, we should get it.

Got it. And then Bruce, can you quantify what the pricing rollover effect on sales would be for ‘22 sales over ‘21 sales, since you have been raising prices as the year progresses. Obviously, there is going to be a favorable rollover. What – how much growth would you get next year from that pricing rollover?

As an interesting question, Sam, we are working through our AOP right now around pricing and how much of that will flow through to next year. It should be meaningful because of all the pricing activity that we are doing here in the back half. We should get some pretty good flow.

Yes. Sam, usually, when we have price increases like this inflationary, people actually tend to go down market on that. And so you don’t really see the growth in the top line because they are actually changing the mix. So, that’s really hard to quantify what that would be.

Do you anticipate that mix degradation occurring now, though, I would think that you have a somewhat or at least more inelastic demand backdrop or at least activity backdrop than normal, no or maybe I am wrong?

Yes. Well, we introduced Open Air, which is the dealer product program that’s at a lower price, same margin but lower price. And we are seeing a lot of growth in that. So, it’s really hard to figure out what kind of price increase will impact sales next year due to that.

Got it. My last question, and thanks for bearing with me. So, the SG&A cut in 3Q and 4Q versus your original expectations. Can you be a bit more specific in terms of where that came from? How much of that was discretionary versus maybe structural and what a realistic SG&A footprint looks like next year based – if we assume kind of mid-single digit growth?

Yes. Sam, we are just continuing to take a hard look at the cost structure of the company globally. And we have been doing a lot of work around spans and layers, looking at the – for example, the number of direct reports that each manager or Director has to her or him and also looking at where work is done, whether it’s done locally or regionally or in corporate. And we are trying to make sure that we get the mix right so that we meet customer demands while also being the most efficient that we can be globally and leveraging our SG&A. We are just – this is an area that I just want to emphasize. We are really proud of the management team that we have done great work and great strides at bringing our SG&A as a percentage of revenue down and it continues to be a real focus for us. Regarding the guide for next year, we will – so we will when we release our Q4 earnings, we will be able to provide more guidance around all of our metrics, quite frankly, some revenue growth, our GP and in our SG&A run rates and our tax rates. But for now, I think that you can sort of think about a lot of the reductions that we are making are permanent reductions to the cost structure that flow through.

Yes. One of the things that we are really focused on Sam is getting it to 26%.

So, the $80 million run rate do you think is a workable number over the near to intermediate-term?

Yes. We are focused more on SG&A as a percentage of revenue. So, between the next 15 months to, call it, 18 months, we are focused on getting it down to 26% over time, so.

Or lower.

Thank you. Thank you, both.

Your next question comes from David MacGregor of Longbow Research.

Yes. Good morning everyone. I wonder if I could just start off by asking you to remind us on your fiber costs, your yarn costs. What percentage is recycled versus virgin fiber? I know you have got a very high percentage of recycled fiber, but could you just remind us on the proportions.

Yes, it’s about half, David.

Okay. And what’s happening with recycled fiber costs?

That is going up less than virgin for sure. A lot less.

Yes. So, is that fairly – would it be fair to characterize it as relatively stable or inflation maybe just not hit it yet?

Well, inflation in yarn actually is labor and freight as well and now energy, if you are manufacturing in Europe. So, the input costs were pretty stable, but the process costs are not.

Okay. Maybe just a couple of the sort of qualitative points you made on – in your prepared remarks. You talked about the European CQuest Bio product. Congratulations on that. I know that’s a big milestone in the industry. How differentiated are you on that? Are you unique in that sense, or are there any of your competitors that have also left the bitumen behind and moved on to a bio-backed product?

We are very unique in that. I would say that Tarkett has a bio-based product as well in Europe. That’s one of our biggest competitors there, but we are very unique in that.

One of the unique things is that every product that goes out the door now is a bio-based product. So, the bitumen has gone away entirely on every carpet tile that goes out the door in our manufacturing plant, which is a huge accomplishment.

And Tarkett is not at that place.

Right. Is the market – in your spec writing, is the market really specking that product now? Are they leaning pretty hard into that, or is this something where you think you are just out in front and it will have future benefit?

It’s starting to show up in specs particularly in the United States.

Congratulations on that progress. With regard to the dealer market initiative here in the United States, can you just you talked about the fact that you are seeing strength in K-12, in healthcare. But I have always thought that dealer market as being maybe more of an office market, but maybe you could just help us understand just what the growth drivers are behind your share growth there. Is it you are adding a number of dealers? Is there sort of in the distribution line that’s helping this?

Yes. It’s pretty simple, David. We are focused on the dealer. We are acting like they are a customer now and not like they are an enemy. And we are having a lot of success in that market. And the dealers are very segmented by the way.

In what sense?

No. They focus on healthcare, education and the office market.

Right. So, is it still largely on office market at this point?

That’s half our business.

Within the dealer channel?

No, it’s segmented. Dealers – everybody has installed product and dealers installed it.

Okay. Maybe I can follow-up with you offline on that. And then just – you talked about earlier on about the demand recovery you are seeing commercial market recovery occurring. I guess how much of the growth in the backlog numbers or in the order growth numbers you cited here would be related to the dealer market versus your spec business?

It’s – that’s really hard to actually quantify that, because 80% of our business goes through the dealer market. We just know we are focused on the dealer, and we are winning discretionary business out of the dealer. But to quantify it would be very difficult.

Okay. Alright. Gentlemen, thanks very much.

Thanks.

At this time, there are no further questions. I will now turn the conference over to Dan Hendrix for closing remarks.

Well, thank you for listening to our call. And I am just going to say at Go Braves. Talk to you next quarter.

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