Hello, and welcome to the Q2 2023 Interface, Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Christine Needles. Please go ahead. Christine, please go ahead. [Technical Difficulty] My apologies for the technical difficulties. I will now turn the conference over to Christine Needles. Please go ahead.

Good morning, and welcome to Interface's conference call regarding second quarter 2023 results hosted by Laurel Hurd, 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 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 re-recorded 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 will turn the call over to Laurel Hurd, CEO.

Thank you, Christine, and good morning, everyone. Once again, I want to thank the Interface team for delivering a solid quarter. It was in line with our guidance and expectations on strong execution around the globe. Currency-neutral net sales were down 5% year-over-year as we anticipated compared to a strong prior year comp that was up 23%. Overall, given ongoing macro challenges, we're pleased with Q2's net sales results and the steady customer demand that we saw throughout the quarter. We are executing well on our segment diversification strategy to help insulate and strengthen us even further from unpredictable market dynamics in the corporate office segment. Education has grown to 18% of our global billings over the last 12 months, and we anticipate this trend to continue as US schools tap into remaining funds in the $122 billion American Rescue Plan legislation and tackle critical refurbishment and new construction projects across our primary geographies. Education is seasonally stronger in Q2, so we'll provide a bit more detail on the segment, and it was a bright spot for us this quarter. We saw increased activity in sales in the quarter across several of our larger markets, including the US, UK and Germany. The school administration invested in refurbishment and maintenance projects during summer break, driving global sales in this segment up 7% year-over-year on top of 20% growth last year. We're differentiated in education because of our reputation for high-quality flooring, overall product performance, and the breadth of our services, support and product warranties. And especially in higher education, many customers have their own sustainability goals and seek out our low carbon footprint flooring to help achieve them. In both K through 12 and Higher Ed, our products stand up to the wear and tear of high-traffic areas and provide design…

Thank you, Laurel, and good morning, everyone. Second quarter net sales totaled $329.6 million, a decrease of 4.9% versus last year's strong second quarter, which was up 23%. FX-neutral net sales declined 4.7% year-over-year. Net sales in the Americas were down 3% year-over-year on a very strong prior year comp that was up 32%. In EAAA, net sales were down 8% on a prior year comp that was up 12%. On an FX-neutral basis, EMEA was down 5%, Asia was down 31% and Australia was up 4% year-over-year. Given the challenging year-over-year comps, we were pleased with Q2's net sales results and the steady customer demand that we saw throughout the quarter. Second quarter adjusted gross profit margin was 33.9%, which was stronger than our guide of 33%, but a decrease of 39 basis points from the prior year period due to lower fixed cost absorption, partially offset by higher pricing and favorable product mix. For the first time in many quarters, we saw deflation in our raw material purchases as the overall rates we pay for Q2's raw material purchases decreased 2% year-over-year. That compares to 9% year-over-year inflation that we incurred in Q1's raw material purchases. As we move into the second half of 2023, we expect further year-over-year raw material deflation. Adjusted SG&A expenses were $83.9 million or 25.5% of net sales in the second quarter compared to $80.4 million or 23.2% of net sales in the second quarter of last year. The increase was primarily due to inflation. Second quarter adjusted operating income was $27.9 million, down 28% versus adjusted operating income of $38.5 million in the second quarter last year. The decrease was mostly due to lower net sales volume. Second quarter adjusted EPS was $0.25 versus $0.36 in the second quarter last year. Adjusted…

Thank you, Bruce. As we look ahead, we expect a strong second half with continued market share gains and strong cash generation. I continue to be impressed with our team's expertise and capabilities to execute our strategy as we position Interface for growth and drive value for our shareholders. We look forward to sharing our ongoing progress on our next call. Thank you.

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

Hey. Good morning, everyone. This is actually Brian Biros on for Catherine. Thank you for taking my questions. To start on the gross profit outlook for the full year, I believe it was lowered last quarter and then looks like it was raised this quarter. So can you just touch further on kind of the moving pieces there? Kind of remind us what initially brought it down? And then what's changed to raise it back up again? Thank you.

Hey, Brian. Good morning. This is Bruce Hausmann. Well, I'm just delighted to tell you that we're finally seeing a more stable supply chain environment and an improving supply chain environment. When we entered the year, there was still a lot of uncertainty around where inflation and where raw material supply was going to go as we entered into 2023 and then as we entered into Q2, they -- it started to stabilize some more, but you might remember that raw materials were up 9% year-over-year, last quarter -- or I'm sorry, in Q1. And then in Q2, we just continued to see more stabilization and for the first time in many, many quarters, now we're seeing deflation in our raw materials where raw materials were down 2% year-over-year. So basically, this is just sort of updating our guide and our visibility as things continue to improve as we move through the year.

Yeah, so it sounds like it's most of the raw materials movement is the main driver. Is that right?

Raw materials is a big piece of it. We're also continuing to initiate and see effects of our productivity initiatives. Now to be fair, that is offset by some -- by less fixed cost absorption. So there are some puts and takes in the number.

Got it. And maybe just can you also touch on if are you seeing any pricing pressure or kind of just increased competition across the business in this kind of lower growth environment here. On the one hand, it's going to be becoming increasingly competitive out there, but you also have premium products that might be seeing better trends than the lower end products that probably see a lot more price pressure. So just interested to hear what you guys are seeing out there?

Yeah, Brian, I'll take that. It's Laurel. I would say that we're pretty pleased that our pricing is holding up in the market. When we look at the US market, as an example, we believe we gained share in the quarter. So we feel good about that as well as year-to-date. And as you said, our premium products continue to sell well, and we're launching more and more new products, not only at the premium end, but also at the more approachable price point so we continue to capture jobs across the spectrum. But we're seeing price hold up pretty well. It's competitive out there for sure. We're not losing jobs, but we're pleased with the progress that we're seeing right now.

Thanks. I’ll pass along.

Your next question comes from the line of David MacGregor with Longbow Research. Your line is open.

Yes. Good morning, everyone. And, Laurel, nice quarter, actually. I mean, given where you guys thought you'd be this quarter, the results actually turned out relatively well. So congratulations there. Can you update us on One Interface? Just where are you on this? Are there major inflection points in terms of the visible results of this program that we should anticipate in the second half, or does that maybe occur more in 2024? Where do you think you're making maybe a little more progress than you thought you would? Where, on the other hand, maybe you're lagging a little bit behind, but, as much detail as you can on One Interface would be a big help? Thank you.

Yes, that's great. Thanks for the question, David. Look, I think we're making really good progress. I'd say we're tracking as planned. I'm pleased as we announced that we now have our Chief Supply Chain Officer in place, who's going to help us a lot to continue to enhance our gross margins. So I feel really good about that. Bill is a great addition to the team. He joined us on Monday. He spent his first day down in LaGrange with the team there and really digging in. So I think that we will start to see having a meaningful impact as he really works with the team to drive our productivity initiatives. So I'm excited about that. We also, I would say, we're focused on more new products faster with more meaningful impact in the market across the globe. So the things we're tracking are speed to market and the impact of our new products. So I think you're going to continue to see that. I'd say we're just getting started there, but I feel really good about the early progress in that front. And then from a marketing perspective, our global marketing leadership team has been finalized, and the team was actually in town this week working through both capabilities where we're really building. We talked about our digital capabilities, which we're strengthening and pushing that around the world, while at the same time, being really efficient, so we have more impact with more efficiency from our marketing initiatives. So I think we'll see really sequential improvement as we continue to balance investing for growth in our strongest, most profitable markets, number one being the US, and we're continuing to invest there on the selling side, while we really drive for efficiencies on the back end.

And with respect to the question of the visibility around results and the cadence of that visibility, how should we be thinking about this? I mean I realize you provide guidance for the balance of the year here, but just thinking about this maybe on a slightly longer-term profile, when do we really see the inflection?

I think you'll see -- I would call it sequential improvement both in gross margin progress up and SG&A leverage down. So we'll see improvement as we continue to move forward. I don't expect to see a big bang inflection. Again, we're being really thoughtful as we monitor our investments and push some on the selling side up in the US, while at the same time, we really moderate the back end of the business. So I think it will be -- you'd think about it as sequential progress and improvement while we're driving growth. So continuing to drive growth on the top-line while we improve the margins, both gross profit up and SG&A down.

Okay. Great. Thanks for that and good luck with things there. Just within the order backlog right now, the order book, can you just talk about what you're seeing near term in terms of just shifting patterns within the US orders? And are you seeing growth in the low carbon, I would expect versus maybe some negative movements elsewhere in the product mix? If you can just talk about what you're seeing there?

Yes. Maybe I'll step back and talk a little bit about our billings year-to-date and in the quarter because there's some really good news in there that I can unpack a little bit, and then we can shift to orders. So if I look at our corporate office, right, which is obviously a big piece of our business, and we look year-to-date at that market, we're actually up in the Americas. We're up in Australia. We're flat in Europe, and we're down in Asia. So we commented on Asia being -- continue to being challenged, which, as you've heard, the economic softness in China continues. So that's one thing. I'd say corporate office is pretty encouraging. We're not naive to the macro environment. We're staying close to it and we're cautious about that in the back half. But year-to-date, we feel pretty good at holding up well. And then if we look at -- excuse me, carpet tiles, our carpet tiles in the quarter, our billings were down mid-single digits globally, low single digits in the Americas, but year-to-date, our billings in carpet tile in the Americas are roughly flat in dollars. So again, we're pleased in our some of our largest end user segments in corporate office as well as in corporate area in our carpet tiles. Those categories are holding up pretty well for us. And then when we look at orders going forward, orders in the Americas last year were up 17%. So we had a tough comp in orders. So we've got steady demand in the Americas, and it's about where we expected it to be. If I look at Asia, that's one market we've continued to struggle with, but a little color on the orders a year [Technical Difficulty] first quarter, our orders we shared were down about 50% year-over-year. And this quarter, they're down about 8.5%. So we're seeing the order rate still tough, but better certainly than the trend was previously. It's just taking longer for us to convert those orders to billings as we're continuing to see project delays in the market. So that's an area that we continue to see some delays, and we're being cautious in the back half there.

Good progress. Last question for me, Bruce, you talked about raw materials up 9% in the first quarter and then down 2% in the second quarter. Is there any way you can help us with the modeling with the second half, how we should be thinking about the cadence into 3Q or 4Q?

Yeah. Around raw material specifically, David? Is that what you're asking about?

Yes.

Yeah. The way that we're thinking about it, obviously, there's a lot of moving pieces. We think that raw materials will be down mid-single digits in Q3 year-over-year, and similar kind of zone in Q4. So we think that, that will help us in the back half. And obviously, that helps us as we move into 2024.

Okay. Thanks, everyone.

Thanks, David.

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

Thank you. How much were units down in the second quarter?

So Keith, units were down roughly 10% in the second quarter year-over-year, and of course, pricing was up roughly 5%, and that's what got us to the -- what you see in the P&L with a negative 5% growth.

Right. So your guidance for the second half implies revenue growth, low single-digit revenue growth for the half. What kind of unit -- what do you expect in units in that number?

Yeah. We're anticipating mid-single digits being down from a volume perspective in the back half, and then pricing will be up. And then that leaves us, if you look at sort of the midpoint of our guide, it will leave us roughly flattish in the back half.

Right. Is -- and I guess my question is we look by geography, how have been the leaders in that number and who have been the laggards in I guess, specifically unit?

Around price volume. Yeah, Americas has been actually -- has been stronger around units. For example, if you look at Americas, our volume was down 7% only, versus in the rest of the world, it was down roughly 15%. So where we're seeing the volume line has been more -- has been more prominent outside the US while Americas has been stronger.

Okay. And I assume you're going to start lapping some price increases from last year. Let me ask it this way. When do you think your last move in price in response to the raw material inflation?

So it kind of -- it feathers in is the answer, because we did pricing throughout the year last year. And so we are getting the wraparound effect of that for sure in the first half of this year, and we'll get some of that in the back half. But Keith, we -- as we look at all of our various markets, where we need to continue taking price, we'll continue taking price. And there will be opportunities to do some of that in certain markets in the back half.

Okay, great. Thank you very much.

Thanks, Keith.

There are no further questions at this time. I will turn the call to Laurel Hurd.

Great. Thank you, and thanks for the questions and your engagement this morning. Before we end the call, I wanted to thank the entire Interface team for their continued dedication and efforts. And I also want to congratulate the team for being recognized as one of Time’s 100 Most Influential Companies for our carbon neutral and carbon-negative carpet tiles. It's another example of the strength of our sustainability leadership, driving differentiation in the market. So that was exciting news. And with that, I just want to thank you all for listening, and have a great day.

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.